Professional Documents
Culture Documents
STANDARD COST
SYSTEMS
McGraw-Hill/Irwin
24
Learning
Learning Objective
Objective
LO1
McGraw-Hill/Irwin
Standard
Standard Cost
Cost Systems
Systems
Based on carefully
predetermined amounts.
Standard
Costs are
McGraw-Hill/Irwin
Standard
Standard Cost
Cost Systems
Systems
Amount
Direct
Labor
Direct
Material
Manufacturing
Overhead
Standard
Standard Cost
Cost Systems
Systems
This variance is
favorable because
the actual cost
is less than the
standard cost.
Amount
Standard cost
Direct
Labor
Direct
Material
Manufacturing
Overhead
Variance
Variance Analysis
Analysis
Identify
questions
Receive
explanations
Conduct next
periods
operations
Analyze
variances
Begin
McGraw-Hill/Irwin
Take
corrective
actions
Prepare standard
cost performance
report
Learning
Learning Objective
Objective
To explain the difference
between setting ideal
standards and setting
reasonably achievable
standards.
LO2
McGraw-Hill/Irwin
Establishing
Establishing and
and Revising
Revising
Standard
Standard Costs
Costs
Should we use
normal standards
or ideal standards?
Engineer
McGraw-Hill/Irwin
Production
manager
Managerial
Accountant
The McGraw-Hill Companies, Inc.
Establishing
Establishing and
and Revising
Revising
Standard
Standard Costs
Costs
I agree. Ideal standards, that are
based on perfection, are
unattainable and therefore
discouraging to most employees.
Human
Resources
Manager
McGraw-Hill/Irwin
Use
Use of
of Standard
Standard Costs
Costs in
in
Developing
Developing Budgets
Budgets
McGraw-Hill/Irwin
A standard is the
expected cost for one
unit.
A budget is the
expected cost for all
units.
Direct
Direct Material
Material Standards
Standards
Price
Standards
Quantity
Standards
Use competitive
bids for the quality
and quantity desired.
Use product
design specifications.
McGraw-Hill/Irwin
Direct
Direct Material
Material Standards
Standards
The standard material cost for one unit of product is:
standard price for
one unit of material
McGraw-Hill/Irwin
standard quantity
of material
required for one
unit of product
Direct
Direct Labor
Labor Standards
Standards
Rate
Standards
Time
Standards
Use wage
surveys and
labor contracts.
McGraw-Hill/Irwin
Setting
Setting Direct
Direct Labor
Labor Standards
Standards
The standard labor cost for one unit of product is:
standard wage rate
for one hour
McGraw-Hill/Irwin
standard number
of labor hours
for one unit
of product
Manufacturing
Manufacturing Overhead
Overhead Standards
Standards
Rate
Standards
Activity
Standards
McGraw-Hill/Irwin
Manufacturing
Manufacturing Overhead
Overhead Standards
Standards
The standard overhead cost for one unit of product is:
standard variable
overhead rate for
one unit of
activity
standard number
of activity units
for one unit of
product
McGraw-Hill/Irwin
A
A General
General Model
Model for
for
Variance
Variance Analysis
Analysis
Standard Cost Variances
Price Variance
Quantity Variance
McGraw-Hill/Irwin
A
A General
General Model
Model for
for
Variance
Variance Analysis
Analysis
Actual Quantity
Actual Price
Actual Quantity
Standard Price
Price Variance
Standard Quantity
Standard Price
Quantity Variance
McGraw-Hill/Irwin
A
A General
General Model
Model for
for
Variance
Variance Analysis
Analysis
Actual Quantity
Actual Price
Actual Quantity
Standard Price
Price Variance
Standard Quantity
Standard Price
Quantity Variance
McGraw-Hill/Irwin
Learning
Learning Objective
Objective
LO3
McGraw-Hill/Irwin
Material
Material Price
Price and
and Quantity
Quantity
Variances
Variances
Actual Quantity
Actual Price
Actual Quantity
Standard Price
Price Variance
Materials
price
variance
AQ(AP
- SP)
Labor rate variance
AQ =Variable
Actual overhead
Quantity
AP = spending
Actual Price
variance
McGraw-Hill/Irwin
Standard Quantity
Standard Price
Quantity Variance
Materials
quantity
variance
SP(AQ
- SQ)
Labor efficiency variance
SP
= Standard
Price
Variable
overhead
SQ
= Standard
Quantity
efficiency
variance
Standard
Standard Costs
Costs and
and Variance
Variance
Analysis:
Analysis: An
An Illustration
Illustration
Zippy
Hanson
Hanson Inc.
Inc. has
has the
the following
following material
material standard
standard to
to
manufacture
manufacture one
one Zippy:
Zippy:
1.5
1.5 pounds
pounds per
per Zippy
Zippy at
at $4.00
$4.00 per
per pound
pound
Records
Records last
last week
week show
show 1,700
1,700 pounds
pounds of
of material
material
were
were purchased
purchased on
on May
May 10
10 at
at aa total
total cost
cost of
of
$6,630.
$6,630. The
The material
material was
was used
used to
to make
make 1,000
1,000
Zippies
Zippies that
that were
were completed
completed on
on May
May 15.
15.
McGraw-Hill/Irwin
Material
Material Variances
Variances
Question
Question 11
Zippy
The
The actual
actual price
price per
per pound
pound paid
paid for
for
the
the material
material was
was
a.
a.
b.
b.
c.
c.
d.
d.
$4.00
$4.00 per
per pound.
pound.
$4.10
$4.10 per
per pound.
pound.
$3.90
$3.90 per
per pound.
pound.
$6.63
$6.63 per
per pound.
pound.
McGraw-Hill/Irwin
Material
Material Variances
Variances
Question
Question 11
Zippy
The
The actual
actual price
price per
per pound
pound paid
paid for
for
the
the material
material was
was
a.
a.
b.
b.
c.
c.
d.
d.
$4.00
$4.00 per
per pound.
pound.
$4.10
$4.10 per
per pound.
pound.
$3.90
$3.90 per
per pound.
pound.
$6.63
$6.63 per
per pound.
pound.
McGraw-Hill/Irwin
Material
Material Variances
Variances
Question
Question 22
Zippy
Hansons
Hansons material
material price
price variance
variance (MPV)
(MPV)
for
for the
the week
week was
was
a.
a.
b.
b.
c.
c.
d.
d.
$170
$170 unfavorable.
unfavorable.
$170
$170 favorable.
favorable.
$800
$800 unfavorable.
unfavorable.
$800
$800 favorable.
favorable.
McGraw-Hill/Irwin
Material
Material Variances
Variances
Question
Question 22
Zippy
Hansons
Hansons material
material price
price variance
variance (MPV)
(MPV)
for
for the
the week
week was
was
a.
a.
b.
b.
c.
c.
d.
d.
$170
$170 unfavorable.
unfavorable.
$170
$170 favorable.
favorable.
MPV = AQ(AP - SP)
$800
unfavorable.
$800 unfavorable.
MPV = 1,700 lbs. ($3.90 - 4.00)
$800
$800 favorable.
favorable.MPV = $170 favorable
McGraw-Hill/Irwin
Material
Material Variances
Variances
Question
Question 33
Zippy
The
The standard
standard quantity
quantity of
of material
material that
that
should
should have
have been
been used
used to
to produce
produce
1,000
1,000 Zippies
Zippies is
is
a.
a.
b.
b.
c.
c.
d.
d.
1,700
1,700 pounds.
pounds.
1,500
1,500 pounds.
pounds.
2,550
2,550 pounds.
pounds.
2,000
2,000 pounds.
pounds.
McGraw-Hill/Irwin
Material
Material Variances
Variances
Question
Question 33
Zippy
The
The standard
standard quantity
quantity of
of material
material that
that
should
should have
have been
been used
used to
to produce
produce
1,000
1,000 Zippies
Zippies is
is
a.
a.
b.
b.
c.
c.
d.
d.
1,700
1,700 pounds.
1,500
1,500 pounds.
pounds.
2,550
2,550 pounds.
pounds.
2,000
2,000 pounds.
pounds.
McGraw-Hill/Irwin
Material
Material Variances
Variances
Question
Question 44
Zippy
Hansons
Hansons material
material quantity
quantity variance
variance (MQV)
(MQV)
for
for the
the week
week was
was
a.
a.
b.
b.
c.
c.
d.
d.
$170
$170 unfavorable.
unfavorable.
$170
$170 favorable.
favorable.
$800
$800 unfavorable.
unfavorable.
$800
$800 favorable.
favorable.
McGraw-Hill/Irwin
Material
Material Variances
Variances
Question
Question 44
Zippy
Hansons
Hansons material
material quantity
quantity variance
variance (MQV)
(MQV)
for
for the
the week
week was
was
a.
a.
b.
b.
c.
c.
d.
d.
$170
$170 favorable.
favorable.
$800
$800 unfavorable.
unfavorable.
$800
$800 favorable.
favorable.
McGraw-Hill/Irwin
Material
Material Variances
Variances
Summary
Summary
Zippy
Actual Quantity
Actual Price
Actual Quantity
Standard Price
Standard Quantity
Standard Price
1,700 lbs.
1,700 lbs.
1,500 lbs.
$ 6,800
$6,000
$6,630
Price variance
$170 favorable
McGraw-Hill/Irwin
Quantity variance
$800 unfavorable
Labor
Labor Rate
Rate and
and Efficiency
Efficiency
Variances
Variances
Lets turn
our
attention
to labor
variances.
McGraw-Hill/Irwin
Labor
Labor Rate
Rate and
and Efficiency
Efficiency
Variances
Variances
Actual Hours
Actual Rate
Actual Hours
Standard Rate
Rate Variance
Materials
price- SR)
variance
AH(AR
Labor rate variance
AH
= Actual
Hours
Variable
overhead
AR
= Actual
Rate
spending
variance
McGraw-Hill/Irwin
Standard Hours
Standard Rate
Efficiency Variance
Materials
quantity
variance
SR(AH
- SH)
Labor efficiency variance
SRVariable
= Standard
Rate
overhead
SHefficiency
= Standard
Hours
variance
Standard
Standard Costs
Costs and
and Variance
Variance
Analysis:
Analysis: An
An Illustration
Illustration
Zippy
Hanson
Hanson Inc.
Inc. has
has the
the following
following labor
labor
standard
standard to
to manufacture
manufacture one
one Zippy:
Zippy:
1.5
1.5 standard
standard hours
hours per
per Zippy
Zippy at
at $8.00
$8.00 per
per hour
hour
Payroll
Payroll records
records last
last week
week show
show 1,450
1,450
hours
hours were
were worked
worked at
at aa total
total labor
labor cost
cost
of
of $11,890
$11,890 to
to make
make 1,000
1,000 Zippies
Zippies that
that
were
were completed
completed on
on May
May 15.
15.
McGraw-Hill/Irwin
Labor
Labor Variances
Variances
Question
Question 11
Zippy
Hansons
Hansons actual
actual rate
rate (AR)
(AR) for
for labor
labor
for
for the
the week
week was
was
a.
a.
b.
b.
c.
c.
d.
d.
$8.20
$8.20 per
per hour.
hour.
$8.00
$8.00 per
per hour.
hour.
$7.80
$7.80 per
per hour.
hour.
$7.60
$7.60 per
per hour.
hour.
McGraw-Hill/Irwin
Labor
Labor Variances
Variances
Question
Question 11
Zippy
Hansons
Hansons actual
actual rate
rate (AR)
(AR) for
for labor
labor
for
for the
the week
week was
was
a.
a.
b.
b.
c.
c.
d.
d.
$8.20
$8.20 per
per hour.
hour.
$8.00
$8.00 per
per hour.
hour.
$7.80
$7.80 per
per hour.
hour.
$7.60
$7.60 per
per hour.
hour.
McGraw-Hill/Irwin
Labor
Labor Variances
Variances
Question
Question 22
Zippy
Hansons
Hansons labor
labor rate
rate variance
variance (LRV)
(LRV) for
for
the
the week
week was
was
a.
a.
b.
b.
c.
c.
d.
d.
$290
$290 unfavorable.
unfavorable.
$290
$290 favorable.
favorable.
$400
$400 unfavorable.
unfavorable.
$400
$400 favorable.
favorable.
McGraw-Hill/Irwin
Labor
Labor Variances
Variances
Question
Question 22
Zippy
Hansons
Hansons labor
labor rate
rate variance
variance (LRV)
(LRV) for
for
the
the week
week was
was
a.
a.
b.
b.
c.
c.
d.
d.
$290
$290 unfavorable.
unfavorable.
$290
LRV = AH(AR - SR)
$290 favorable.
favorable.
LRV = 1,450 hrs($8.20 - $8.00)
$400
unfavorable.
$400 unfavorable.
LRV = $290 unfavorable
$400
$400 favorable.
favorable.
McGraw-Hill/Irwin
Labor
Labor Variances
Variances
Question
Question 33
Zippy
The
The standard
standard hours
hours (SH)
(SH) of
of labor
labor that
that
should
should have
have been
been worked
worked to
to produce
produce
1,000
1,000 Zippies
Zippies is
is
a.
a.
b.
b.
c.
c.
d.
d.
1,550
1,550 hours.
hours.
1,500
1,500 hours.
hours.
1,700
1,700 hours.
hours.
1,800
1,800 hours.
hours.
McGraw-Hill/Irwin
Labor
Labor Variances
Variances
Question
Question 33
Zippy
The
The standard
standard hours
hours (SH)
(SH) of
of labor
labor that
that
should
should have
have been
been worked
worked to
to produce
produce
1,000
1,000 Zippies
Zippies is
is
a.
a.
b.
b.
c.
c.
d.
d.
1,550
1,550 hours.
1,500
1,500 hours.
hours.
1,700
1,700 hours.
hours.
1,800
1,800 hours.
hours.
McGraw-Hill/Irwin
Labor
Labor Variances
Variances
Question
Question 44
Zippy
Hansons
Hansons labor
labor efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was
was
a.
a.
b.
b.
c.
c.
d.
d.
$290
$290 unfavorable.
unfavorable.
$290
$290 favorable.
favorable.
$400
$400 unfavorable.
unfavorable.
$400
$400 favorable.
favorable.
McGraw-Hill/Irwin
Labor
Labor Variances
Variances
Question
Question 44
Zippy
Hansons
Hansons labor
labor efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was
was
a.
a.
b.
b.
c.
c.
d.
d.
$400
$400 unfavorable.
unfavorable.
$400
$400 favorable.
favorable.
McGraw-Hill/Irwin
Labor
Labor Variances
Variances
Summary
Summary
Zippy
Actual Hours
Actual Rate
Actual Hours
Standard Rate
Standard Hours
Standard Rate
1,450 hours
1,450 hours
1,500 hours
$11,890
$11,600
$12,000
Rate variance
$290 unfavorable
McGraw-Hill/Irwin
Efficiency variance
$400 favorable
Learning
Learning Objective
Objective
To compute overhead
variances and explain
the meaning of each.
LO4
McGraw-Hill/Irwin
Manufacturing
Manufacturing Overhead
Overhead Variances
Variances
Recall
Recall that
that overhead
overhead costs
costs are
are applied
applied to
to
products
products and
and services
services using
using aa
predetermined
predetermined overhead
overhead rate
rate (POHR):
(POHR):
Applied Overhead = POHR Standard Activity
POHR
McGraw-Hill/Irwin
Manufacturing
Manufacturing Overhead
Overhead Variances
Variances
Contains fixed
overhead that
remains constant as
activity changes.
Contains variable
overhead that
increases as
activity increases.
Overhead Rate
Function of activity level
chosen to determine rate.
McGraw-Hill/Irwin
Manufacturing
Manufacturing Overhead
Overhead
Variances
Variances Example
Example
Zippy
2,000
1,000
3,000
1,500
4,000
2,000
$ 4,000
9,000
$ 13,000
$ 6,000
9,000
$ 15,000
$ 8,000
9,000
$ 17,000
Overhead
Overhead Variances
Variances
Question
Question 11
Zippy
The
The total
total overhead
overhead rate
rate for
for an
an estimated
estimated
activity
activity of
of 3,000
3,000 machine
machine hours
hours (MH)
(MH) is:
is:
a.
a. $5.00
$5.00 per
per machine
machine hour.
hour.
b.
b. $4.00
$4.00 per
per machine
machine hour.
hour.
c.
c. $3.00
$3.00 per
per machine
machine hour.
hour.
d.
d. $2.00
$2.00 per
per machine
machine hour.
hour.
McGraw-Hill/Irwin
Overhead
Overhead Variances
Variances
Question
Question 11
Zippy
The
The total
total overhead
overhead rate
rate for
for an
an estimated
estimated
activity
activity of
of 3,000
3,000 machine
machine hours
hours (MH)
(MH) is:
is:
$15,000 3,000 machine hours
a.
a. $5.00
$5.00 per
per machine
machine hour.
hour.
b.
b. $4.00
$4.00 per
per machine
machine hour.
hour.
c.
c. $3.00
$3.00 per
per machine
machine hour.
hour.
d.
d. $2.00
$2.00 per
per machine
machine hour.
hour.
McGraw-Hill/Irwin
Overhead
Overhead Variances
Variances
Question
Question 11
Zippy
The
The total
total overhead
overhead rate
rate for
for an
an estimated
estimated
activity
activity of
of 3,000
3,000 machine
machine hours
hours (MH)
(MH) is:
is:
$15,000 3,000 machine hours
The $5.00hour.
overhead rate contains
a.
a. $5.00
$5.00 per
per machine
machine
hour.
a variable portion:
b.
b. $4.00
$4.00 per
per machine
machine
hour.MH = $2.00 per MH
$6,000 hour.
3,000
and
a fixed portion:
c.
hour.
c. $3.00
$3.00 per
per machine
machine
hour.
$9,000 3,000 MH = $3.00 per MH
d.
d. $2.00
$2.00 per
per machine
machine hour.
hour.
McGraw-Hill/Irwin
Manufacturing
Manufacturing Overhead
Overhead Variances
Variances
Actual
Budgeted
Overhead at
Applied
Overhead at
Overhead
Actual Activity
Standard Hours
Spending
Variance
McGraw-Hill/Irwin
Volume
Variance
Manufacturing
Manufacturing Overhead
Overhead Variances
Variances
Actual
Budgeted
Overhead at
Applied
Overhead at
Overhead
Actual Activity
Standard Hours
Shows how economically
overhead services were
Spending
Volume
purchased
and how
efficiently
overhead
Variance
Variance
services were used.
Contains both fixed
and variable costs.
A controllable variance.
McGraw-Hill/Irwin
Manufacturing
Manufacturing Overhead
Overhead Variances
Variances
Actual
Budgeted
Overhead at
Applied
Overhead at
Overhead
Actual Activity
Standard Hours
Spending
Caused
by producing at
a levelVariance
other than that
used for computing the
standard overhead rate.
Volume
Variance
Manufacturing
Manufacturing Overhead
Overhead
Variances
Variances Example
Example
Zippy
Hansons
Hansons actual
actual production
production for
for the
the
period
period was
was 1,600
1,600 Zippies
Zippies resulting
resulting in
in 3,200
3,200
standard
standard machine
machine hours.
hours. Actual
Actual total
total
overhead
overhead cost
cost for
for the
the period
period was
was $15,450.
$15,450.
Compute
Compute the
the overhead
overhead spending
spending
and
and volume
volume variances.
variances.
McGraw-Hill/Irwin
Manufacturing
Manufacturing Overhead
Overhead
Variances
Variances Example
Example
Actual
Overhead
$15,450
Zippy
Budgeted
Overhead at
Applied
Overhead at
Standard Hours
$9,000 fixed
+
$6,400 variable
Standard Hours
3,200 hrs.
McGraw-Hill/Irwin
Manufacturing
Manufacturing Overhead
Overhead
Variances
Variances Example
Example
Actual
Overhead
$15,450
$15,450
Budgeted
Overhead at
Applied
Overhead at
Standard Hours
$9,000 fixed
+
$6,400 variable
Standard Hours
3,200 hrs.
$15,400
Spending variance
$50 unfavorable
McGraw-Hill/Irwin
Zippy
$16,000
Volume variance
$600 favorable
Disposing
Disposing of
of Variances
Variances
Standard Cost Variances
Immaterial Amounts
Material Amounts
Close to
Cost of Goods Sold
Close by
apportioning to:
Work in Process
Finished Goods
Cost of Goods Sold
McGraw-Hill/Irwin
Advantages
Advantages of
of Standard
Standard Costs
Costs
Possible reductions
in production costs.
Advantages
Better information
for planning and
decision making.
Disadvantages
Disadvantages of
of Standard
Standard Costs
Costs
Emphasis on
negative
exceptions may
impact morale.
It may be difficult
to determine
which variances
are significant.
Disadvantages
Emphasis on negative
exceptions may
lead to under-reporting.
McGraw-Hill/Irwin
Learning
Learning Objective
Objective
LO5
McGraw-Hill/Irwin
Responsibility
Responsibility for
for
Material
Material Variances
Variances
I am not responsible for
this unfavorable material
quantity variance.
You purchased cheap
material, so my people
had to use more of it.
McGraw-Hill/Irwin
Production Manager
Responsibility
Responsibility for
for Labor
Labor Variances
Variances
I am not responsible for
the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
time to process it.
McGraw-Hill/Irwin
Production Manager
Responsibility
Responsibility for
for Labor
Labor Variances
Variances
Maybe I can attribute the labor
and material variances to personnel
for hiring the wrong people
and training them poorly.
McGraw-Hill/Irwin
Production Manager
Responsibility
Responsibility for
for Labor
Labor Variances
Variances
Using highly paid skilled workers to
perform unskilled tasks results in an
unfavorable rate variance.
High skill,
high rate
Low skill,
low rate
Production
Production managers
managers who
who make
make work
work assignments
assignments
are
are generally
generally responsible
responsible for
for rate
rate variances.
variances.
McGraw-Hill/Irwin
Responsibility
Responsibility for
for Labor
Labor Variances
Variances
Poorly
trained
workers
Poor
quality
materials
Unfavorable
Efficiency
Variance
Poor
supervision
of workers
McGraw-Hill/Irwin
Poorly
maintained
equipment
Summary
Summary of
of Variance
Variance Computations
Computations
and
and Manager
Manager Responsibilities
Responsibilities
Variance
Materials
Price variance
Quantity variance
Labor
Rate Variance
Efficiency variance
Overhead
Spending variance
Volume variance
McGraw-Hill/Irwin
Computation
Manager Responsible
AQ (SP AP)
SP (SQ AQ)
Purchasing agent
Production manager
AH (SR AR)
SR (SH AH)
Production manager
Production manager
JIT
JIT Systems
Systems and
and Variance
Variance Analysis
Analysis
JIT systems may reduce unfavorable variances.
Long-term agreements
with suppliers eliminate
price variances.
Well-trained flexible
work force reduces labor
efficiency variance.
Emphasis on quality
reduces material
quantity variances.
McGraw-Hill/Irwin
Ethics,
Ethics, Fraud,
Fraud, and
and
Corporate
Corporate Governance
Governance
For a company using standard costing systems,
the accuracy of the inventory and cost of goods
sold figures reported in the companys financial
statements is dependent on the reliability of the
standard cost numbers.
End
End of
of Chapter
Chapter 24
24
McGraw-Hill/Irwin