Professional Documents
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MANAGEMENT ACCOUNTING
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2. DELA AUDINA
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3. SINTA OKTALIA
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4. RAHAYU
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FAKULTAS EKONOMI
UNIVERSITAS ANDALAS
STANDARD COSTING
Learning Objectives:
1. Tell how unit standards are set and why standard costing systems are adopted
2. State the purpose of a standard cost sheet
3. Describe the basic concepts underlying variance analysis, and explain when variances should be
investigated
4. Compute the materials and labor variances, and explain how they are used for control
5. Calculate the variable and fixed overhead variances, and give their definitions
6. Appendix: Prepare journal entries for material and labor variances, and show how to account
for overhead variances
STANDARD COSTING
Unit Standards
Cost control often means the difference between success and failure or between aboveaverage profits and lesser profits. Unit standards are the basis or foundation on which a flexible
budget is built. The unit standard cost for a particular input relies on quantity standards and
price standards. The quantity standards refer to the amount of input that should be used per unit
of output. The price standards refer to the amount that should be paid for the quantity of the
input to be used.
How Standards are Developed
In setting price standards, purchasing must consider discounts, freight, and quality;
personal, on the other hand, must consider payroll taxes, fringe benefits, and qualifications.
Accounting is responsible for recording the price standard and preparing reports that compare
actual performance to the standard.
Type of Standards
Standards are generally classified as either ideal or currently attainable. Ideal standards
demand maximum efficiency and can be achieved only if everything operates perfectly. No
machine breakdown, slack, or lack of skill (even momentary) are allowed. Currently attainable
standards can be achieved under efficient operating condition. Allowance is made for normal
breakdowns, interruptions, less than perfect skill, and so on. These standards are demanding but
achievable.
1. Why Standard Cost Systems are Adopted
Two reasons for adopting a standard cost system are frequently mentioned: to improve
planning and control and to facilitate product costing.
1) Planning and Control
Standard costing systems enhance planning and control and improve performance
measurement. Budgetary control systems compare actual cost with budgeted costs by
computing variances, the difference between the actual and planned costs for the actual
level of activity.
2) Product Costing
In a standard costing system, costs are assigned to products using quantity and price
standards for all three manufacturing costs: direct materials, direct labor, and overhead.
Standard costing systems also provide readily available unit cost information that can be
used for pricing decisions.
2. Standard Product Costs
Standard cost can also be used in service organizations. Although service organizations
can and to make use of standard costing, applications are more common in manufacturing
organizations. In manufacturing firms, the standard cost per unit is the sum of the standard costs
for direct materials, direct labor, and overhead. The standard cost sheet provides the details
underlying the standard unit cost. The standard cost sheet also reveals the quantity of each input
that should be used to produce one unit of output. The unit quantity standard can be used to
compute the total amount of inputs allowed for the actual output. A manager should be able to
compute the standard quantity of materials allowed (SQ) and the standard hours allowed (SH)
for the actual output.
How do managers determine whether variances are significant? How is the acceptable
range established? The acceptable range is the standard plus or minus an allowable deviation.
The top and bottom measures of the allowable deviation, and the lower control limit is the
standard minus the allowable deviation. Current practice sets the control limits subjectively;
based on past experience, intuition, and judgment, management determines the allowable
deviation from standard.
rate (SVOR). The actual variable overhead rate is simply actual variable overhead
divided by actual hours.
Comparison to the Price Variances of Materials and Labor
The variable overhead spending variance is similar but not identical to the price
variances of materials and labor; there are some conceptual differences. Variable
overhead is not a homogeneous inputit is made up of a large number of individual
items, such as indirect materials, indirect labor, electricity, maintenance, and so on. The
standard variable overhead rate represents the weighted cost per direct labor hour that
should be incurred for all variable overhead items. A variable overhead spending
variance can arise because prices for individual variable overhead items have increased
or decreased.
Responsibility for the Variable Overhead Spending Variance
Controllability is a prerequisite for assigning responsibility. Price changes of variable
overhead items are essentially beyond the control of supervisors.
2) Variable Overhead Efficiency Variance
Variable overhead is assumed to vary as the production volume changes. Thus, variable
overhead changes in proportion to changes in the direct labor hours used. The variable
overhead efficiency variance measures the change in variable overhead consumption
that occurs because of efficient (or inefficient) use of direct labor.
Responsibility for the Variable Overhead Efficiency Variance
The variable overhead efficiency variance is directly related to the direct labor
efficiency of usage variance.
3) Fixed Overhead Variances
Total Fixed Overhead Variance
The total fixed overhead variance is the difference between actual fixed overhead and
applied fixed overhead, when applied fixed overhead is obtained by multiplying the
standard fixed overhead rate times the standard hours allowed for the actual output.
To help managers understand why fixed overhead was underapplied, the total variance
can be broken into two variances: the fixed overhead spending variance and the fixed
overhead volume variance.
Fixed Overhead Spending Variance
The fixed overhead spending variance is defined as the difference between the actual
fixed overhead and the budgeted fixed overhead. The spending variance is favorable
because less was spent on fixed overhead items than was budgeted.
Responsibility for the Fixed Overhead Spending Variance
Fixed overhead is made up of a number of individual items such as salaries,
depreciation, taxes, and insurance. Many fixed overhead itemslong-run investments,
for instanceare not subject to change in the short run; consequently, fixed overhead
costs are often beyond the immediate control of management.