std cstg.ppt

8/14/2019 Std cstg.ppt

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Cost Accounting

Standard Costing andVariance Analysis


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Objectives1. Explain how standard costs are developed.

2. Calculate and interpret variances for direct

material.

3. Calculate and interpret variances for directlabor.

4. Calculate and interpret variances formanufacturing overhead.

5. Discuss how the management byexception approach is applied toinvestigation of standard cost variances.


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Standard Costs

A predetermined calculation of how much costsshould be under specified working conditions.

1. Standard costrefers to expected costs underanticipated conditions.

2. Standard cost systems allow for comparison

of standard versus actual costs.3. Differences are referred to as standard cost

variances.4. Variances should be investigated if

significant.
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Standard Costs and Budgets

1. Standard cost is the standard cost of asingle unit.

2. Budgeted cost is the cost, at standard,of the total number of budgetedunits.


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Development of Standard

Costs

1. Standard costs are developed in avariety of ways:

a. Specified by formulas.

b. Developed from price lists providedby suppliers.

c. Determined by time and motionstudies conducted by industrialengineers.

d. Developed from analyses of pastdata.


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Ideal Versus Attainable

Standards

Two schools of thought:

1. Ideal standards(perfection standards):developed under the assumption that noobstacles to the production process willbe encountered.

2. Attainable Standards: developed underthe assumption that there will beoccasional problems in the productionprocess.
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Techniques of Standard

costingAscertainment of Standard cost

Comparison with actual cost andmeasurement of variance.

Analysis of variance and find out thecauses.

Location of responsibility and correctiveaction.


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Need for standards Cost control

Pricing decision

Performance appraisal

Cost awareness

Management by objective


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A General Approach To

Variance Analysis

1. Direct material: materials price andmaterials quantity variance.

2. Direct labor: labor rate (price) and laborefficiency (quantity) variance.

3. Overhead: overhead volume variance

and controllable overhead variance.


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Material Cost Variances

1. Differences between standard andactual material costs:

a. Material price variance.

b. Material quantity variance.


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Material Price Variance

1. Material price variance:(APSP) x AQp

2. (AP) = actual price per unit of material.

3. (SP) = standard price per unit of directmaterial.

3. (AQp) = actual quantity of material

purchased.4. Actual price > standard price:

unfavorable.

5. Actual price < standard price: favorable.


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Material Quantity Variance

1. Material quantity variance: (AQuSQ)SP

2. (AQu) = actual quantity of material used.

3. (SQ) = standard quantity of materialallowed.

4. (SP) = standard price of material.

5. Actual quantity > standard quantity:unfavorable.

6. Actual quantity < standard quantity:

favorable.


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You Get What You Measure


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Direct Labor Variances

1. Differences between standard and actualdirect labor costs:

a. Labor rate (price) variance.

b. Labor efficiency (quantity) variance.


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Labor Rate Variance

1. Labor rate (price) variance: (ARSR)AH

2. (AR) = actual wage rate (price).

3. (SR) = standard wage rate (price).

4. (AH) = actual number(quantity) labor hours.

5. Actual rate > standard rate: unfavorable.

6. Actual rate < standard rate: favorable.


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Labor Efficiency Variance

1. Labor efficiency (quantity) variance:(AHSH)SR

2. (AH) = actual number of hours worked.

3. (SH) = standard number of hours worked.

4. (SR) = standard labor wage rate.

5. Actual hours > standard hours:unfavorable.

6. Actual hours < standard hours: favorable.


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Overhead Variances

1. Differences between overhead applied toinventory at actual overhead costs:

a. Controllable overhead variance.

b. Overhead volume variance.


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Controllable Overhead

Variance

1. Actual overhead ($$) - flexible budget levelof overhead ($) for actual volume of

production.

2. Referred to as controllable becausemanagers are expected to control costs.

3. Actual > budget: unfavorable.4. Actual < budget, then the variance is

favorable.


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Overhead Volume Variance1. Overhead volume variance: flexible budget

level of overhead for actual level of

production - overhead applied to productionusing standard overhead rate.

2. This variance is solely the result of a

different number of units being producedthan planned in the static budget.

3. Usefulness is limited.

C l l ti Th Fi i l


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Calculating The Financial

Impact Of Operating At More or

Less Than Planned Capacity1. Operating at less than planned capacity

results in an unfavorable variance equal to

the number of units (less than planned) xthe marginal cost per unit.

2. Operating at more than planned capacity

results in a favorable variance equal to thenumber of units (more than planned) x themarginal cost per unit.


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Comprehensive Example:

Darrington Ice CreamStandard Costs Per Unit:

Item Qty. x Price = Total

Direct Materials: .8 gal. 2.50 = $2.00

Direct Labor: .125 hrs. 12.00= $1.50

Mfg. Overhead: $ .75

Total Cost Per Unit (Standard) $4.00


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Comprehensive Example:

Darrington Ice Cream


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Material Variances1. Material price variance:(APSP) x AQp :

($2.72 - $2.50) x 810,000 = $178,200

unfavorable.2. Material quantity variance: (AQuSQ)SP:

(809,000800,000) x $2.50 = $22,500

unfavorable.


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Labor Variances1. Labor rate (price) variance: (ARSR)AH:

($12.10 - $12.00) x 130,000 = $13,000

unfavorable.2. Labor efficiency (quantity) variance:

(AHSH)SR: (130,000125,000) x $12 =

$60,000 unfavorable.


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Overhead Variances1. Controllable overhead variance: Actual

overhead ($$) - flexible budget level of

overhead ($$) for actual volume ofproduction: $680,000 - $700,000 = $20,000unfavorable.

2. Overhead volume variance: flexible budgetlevel of overhead for actual level ofproduction - overhead applied to productionusing standard overhead rate: $700,000 -

$750,000 = $50,000 favorable.


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Investigation of Standard Cost

Variances1. Standard cost variances are not a definitive

sign of good or bad performance.

2. Variances are merely indicators of potentialproblems which must be investigated.

3. There are many plausible explanations for

them.


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Reason for difference between Actual

and Standard Performance Measurement Error

Out of date Standards

Inefficient Operations

Random or uncontrollable factors


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Limitation of Standards

Setting the Standards is a difficult task,requires technical skills.

Inaccurate Standards affect the morale of

the employees. Distinguishing controllable and

uncontrollable variance is difficult.

Not suitable for job type industry. Not practical for small concern and Industry

where frequent technological changes takes

place.


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Management By Exception1. Investigation of standard cost variances is

a costly activity

2. Management must decide which variancesto investigate.

3. Most managers practice management byexception.

4. What is exceptional? Usually an absolutedollar amount or a percentage dollaramount.


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Favorable Variances May Be

Unfavorable1. A favorable variance does not mean that

it should not be investigated.

2. Raw materials are good examples of thisphenomenon.

3. Consider inferior, low-priced materials.

4. A favorable price variance may result, butthere may also be substantially more scrapand rework, and thus a higher quantityvariance.

Can Process Improvements


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Can Process Improvements

Lead to Unfavorable

Variances?1. Process improvements frequently lead to

unfavorable variances.

2. Process improvements often lead toincreased productivity.

3. Therefore fewer hours may be required to

produce a unit of output.4. But actual hours will remain unchanged

unless the firm terminates the workers tobecame more productive.

Beware Evaluation in Terms of


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Beware-Evaluation in Terms of

Variances Can Lead To Excess

Production1. A department in front of another

(bottleneck) department should not produce

more than the bottleneck department canhandle.

2. If it cuts back, it will idle workers.

3. If it doesnt there will be excess work inprocess and a negative effect onshareholder value.


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Responsibility Accounting and

Variances1. Managers should be held responsible only

for costs they can control.

2. This is also true in the area of varianceanalysis.

3. A purchasing agent may be heldresponsible for direct material pricevariances, but certainly not direct materialquantity (usage) variances.


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Quick Review Question #11. What does an unfavorable overhead

volume variance mean?

a. Overhead costs are out of control.

b. Overhead costs are under control.

c. Production was greater than

anticipated.d. Production was less than

anticipated.


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Quick Review Answer #11. What does an unfavorable overhead

volume variance mean?

a. Overhead costs are out of control.

b. Overhead costs are under control.

c. Production was greater than

anticipated.d. Production was less than

anticipated.


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Quick Review Question #22. Standard material costs per unit are

$3.50. Actual costs per unit are $3.80

Actual quantity is 3,000. Standardquantity is 2,800. Material pricevariance is:

a. $900 favorable

b. $900 unfavorablec. $700 favorable

d. $700 unfavorable


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Quick Review Answer #22. Standard material costs per unit are


Actual quantity is 3,000. Standardquantity is 2,800. Material pricevariance is:

a. $900 favorable


d. $700 unfavorable


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Quick Review Question #32. Standard material costs per unit are


Actual quantity is 3,000. Standardquantity is 2,800. Material quantityvariance is:

a. $900 favorable


d. $700 unfavorable


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Quick Review Answer #32. Standard material costs per unit are


Actual quantity is 3,000. Standardquantity is 2,800. Material quantityvariance is:

a. $900 favorable


d. $700 unfavorable


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Quick Review Question #44. What does a favorable labor efficiency

variance mean?

a. Labor rates were higher than calledfor by standards.

b. Inexperienced labor was used,causing the rate to be lower than

standard.c. More labor was used than called

for by standards.

d. Less labor was used than called forby standards.


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Quick Review Answer #44. What does a favorable labor efficiency

variance mean?

a. Labor rates were higher than calledfor by standards.

b. Inexperienced labor was used,causing the rate to be lower than

standard.c. More labor was used than called

for by standards.

d. Less labor was used than called for

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