Transcript CHAPTER 24

24-1
CHAPTER 24
CONTROL THROUGH
STANDARD COSTS
.
24-2
CHAPTER 24
CONTROL THROUGH
STANDARD COSTS
Caution! This chapter is second only to
Chapter 15 (bonds) for the amount of grief
it causes most students in this course.
24-3
Nature of Standard Costs

Up to this point in the course, we
have been using actual costs.

This chapter considers standard
costs (i.e., what costs should be
under stated conditions).

The achievement of standard represents
a reasonable and acceptable level of
performance.

Standards for materials, labor, and
overhead are determined through
engineering studies and time and
motion studies.
24-4
Nature of Standard Costs
Based on carefully
predetermined amounts.
Standard
Costs are
Used for budgeting labor, material
and overhead requirements.
Benchmarks for
measuring performance.
Used for variance
analysis.
24-5
Nature of Standard Costs
Amount
Standard costs - what
Actual costs
costs should be under
stated conditions.
Direct
Material
Direct
Labor
Manufacturing
Overhead
Type of Product Cost
24-6
Standard Cost Variances
Amount
Standard cost variances amounts by which
actual costs differs from
standard costs.
Direct
Material
Direct
Labor
Manufacturing
Overhead
Type of Product Cost
24-7
Standard Cost Variances
Amount
The materials variance is
unfavorable because the actual
cost exceeds the standard cost.
Direct
Material
Direct
Labor
The overhead variance
is favorable because
the actual cost is less
than the standard cost.
Manufacturing
Overhead
Type of Product Cost
24-8
Standard Cost Variances
Amount
Managers focus on standard cost
variances, a practice known as
management by exception.
Direct
Material
Direct
Labor
Manufacturing
Overhead
Type of Product Cost
24-9
Standard Cost Variances
They point to causes of
problems and directions
for improvement.
They trigger investigations in
departments having
are variances
responsibility Why
for incurring
important to me?
the costs.
24-10
Setting Standard Costs
Should we use
practical standards
or ideal standards?
Engineer
24-11
Setting Standard Costs
Practical standards should be
set at levels that are currently
attainable with reasonable and
efficient effort.
Production
manager
24-12
Setting Standard Costs
I agree. Ideal standards, that are
based on perfection, are
unattainable and therefore
discouraging to most employees.
Human
Resources
Manager
24-13
Setting Standard Costs
This is your decision. I’m here to
advise you and account for the
resulting transactions.
Managerial
Accountant
24-14
Advantages of Standard Costs
Improved cost control
and performance
evaluation
More reasonable
and easier inventory
measurements
Possible reductions
in production costs
Better Information
for planning and
decision making
Advantages
Cost savings in
record-keeping
24-15
Disadvantages of Standard Costs
Emphasis on
negative
exceptions may
lower morale.
Disadvantages
Emphasis on negative
exceptions may
lead to under-reporting.
It may be difficult
to determine
which variances
are significant.
Use of Standard Costs in
Developing Budgets
Are standards the
same as budgets?
A standard is the
expected cost for one
unit.
A budget is the
expected cost for all
units.
24-16
24-17
Specifics
O.K., let’s get down
and dirty with some
specifics!
24-18
Types of Standard Costs
The total standard cost for one
unit of finished product is the
sum of:
Standard cost for direct materials
Standard cost for direct labor
Standard cost for manufacturing
overhead
necessary to produce one unit
of the product.
Setting Standards
Direct Materials
Price
Standards
Usage
Standards
Use competitive
bids for the quality
and quantity desired
Use product
design specifications
24-19
24-20
Standard Costs
Direct Materials
Standard cost for direct materials is
standard price for one unit of raw
material (pound, yard, etc.) multiplied
by the standard quantity of raw material
to produce one unit of product
24-21
Standard Costs
Direct Materials
The standard material cost for one unit of product is:
standard price for
one unit of material


×
standard quantity
of material
required for one
unit of product
Standard price is the amount that should be
paid for each unit of raw material.
Standard quantity is the amount
of raw material that should be
used to produce one unit of
finished product.
24-22
Standard Costs
863
Direct Materials Example
The High Point Furniture Company makes
top quality tables from sheets of plywood.

Standard price is the amount that should
be paid for each unit of raw material.
e.g.., each sheet of plywood should cost $6

Standard quantity is the amount of
material that should be used to produce
one unit of finished product.
e.g., each table should take 5 sheets
24-23
Standard Costs
Direct Materials Example

Standard price is the amount that should
be paid for each unit of raw material.
e.g.., each sheet of plywood should cost $6

Standard quantity is the amount of
material that should be used to produce
one unit of finished product.
e.g., each table should take 5 sheets
 Standard cost is standard price times
standard quantity for one unit of product
e.g., $6 X 5 sheets = $30
Setting Standards
Direct Labor
Rate
Standards
Efficiency
Standards
Use wage
surveys and
labor contracts
Use time and
motion studies for
each labor operation
24-24
24-25
Standard Costs
Direct Labor
Standard cost for direct labor is
standard wage rate for one hour of
labor multiplied by the standard
number of labor hours needed to
produce one unit of product.
24-26
Standard Costs
Direct Labor
The standard labor cost for one unit of product is:
standard wage rate
for one hour
×
standard number
of labor hours
for one unit
of product

Standard wage rate is the
amount that should be paid
for each hour of labor.

Standard number of hours
is the number of hours that
should be worked to produce
one unit of finished product.
24-27
Standard Costs
Direct Labor Example
The High Point Furniture Company’s
dining room tables are made by highly
skilled, hourly paid carpenters.

Standard wage rate is the amount that
should be paid for each hour of labor.
e.g.., each hour should cost $10

Standard number of hours is the number
of hours that should be worked to
produce one unit of finished product.
e.g., each table should take 2 hours
24-28
Standard Costs
Direct Labor Example

Standard wage rate is the amount that
should be paid for each hour of labor.
e.g.., each hour should cost $10

Standard number of hours is the number
of hours that should be worked to
produce one unit of finished product.
e.g., each table should take 2 hours
 Standard labor cost is standard wage
rate times standard number of hours for
one unit of finished product
e.g., $10 X 2 hours = $20
Setting Standards
Manufacturing Overhead
Standard
Rate
Select a standard
level of output and define
a basis for activity
24-29
24-30
Standard Costs
Manufacturing Overhead
A standard manufacturing overhead
rate is applied for each unit of activity.
.
Standard overhead
rate per unit
=
Total budgeted overhead cost
at the standard level of output
Standard level of output
If, however, the overhead rate is based on units of
input such as direct labor hours, the denominator is
based on the input labor hours.
The above calculation is really what?
24-31
Standard Costs
Manufacturing Overhead
Standard overhead
rate per unit
=
Total budgeted overhead cost
at the standard level of output
Standard level of output

Budgeted overhead cost is the
total amount of overhead cost
that should be incurred for the
year to produce at the standard
level of output.

Standard level of output is what
the activity level for the cost
driver should be for the year.
24-32
Standard Costs
Manufacturing Overhead Example
The High Point Furniture Company
applies overhead to tables based
on machine hours.
 Budgeted overhead cost is the amount of
overhead cost that should be incurred to
produce at the standard level of output.
e.g., total overhead cost = $100,000

Standard level of output is what the
activity level for the cost driver should be.
e.g., total labor hours should be 20,000
24-33
Standard Costs
Manufacturing Overhead Example

Budgeted overhead cost is the amount of
overhead cost that should be incurred to
produce at the standard level of output.
e.g., total overhead cost = $100,000

Standard level of output is what the
activity level for the cost driver should be.
e.g., total labor hours should be 20,000
Standard overhead
rate per unit
=
Total budgeted overhead cost
at the standard level of output
Standard level of output
24-34
Standard Costs
Manufacturing Overhead Example

Budgeted overhead cost is the amount of
overhead cost that should be incurred to
produce at the standard level of output.
e.g., total overhead cost = $100,000

Standard level of output is what the
activity level for the cost driver should be.
e.g., total labor hours should be 20,000
Standard overhead
rate per unit (i.e, hour) =
$100,000
20,000
= $5
24-35
Standard Costs
Manufacturing Overhead Example

Budgeted overhead cost is the amount of
overhead cost that should be incurred to
produce at the standard level of output.
e.g., total overhead cost = $100,000

Standard level of output is what the
activity level for the cost driver should be.
e.g., total labor hours should be 20,000
 Standard overhead cost is standard
overhead rate times number of activity
units for each unit of finished product
e.g., $5 X 2 labor hours = $10
24-36
Standard Costs
Summary of Examples
Standard Costs For One Table
Direct materials - $6 X 5 sheets $30
Direct labor -
$10 X 2 hours
20
Manufacturing overhead $5 X 2 labor hours
10
Total standard cost
$60
24-37
Computing Variances

Standard cost variance
Amount by which actual cost differs from
standard cost for the actual volume level
attained

Favorable variance
Actual cost is less than standard cost

Unfavorable variance
Actual cost is greater than standard cost
24-38
872
Computing Variances
Know how to calculate all six cost
variances and what causes each.
*
*
*
*
*
* For the actual volume level attained
24-39
Computing Variances
Let’s use what we
have learned to
calculate the six
standard cost
variances for a
different company,
starting with
direct materials.
24-40
Computing Variances
Materials Price Variance
Zippy
Hanson Inc. has the following material
standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Records last week show 1,700 pounds of
material were purchased in May at a
total cost of $6,630. The material was
used to make 1,000 Zippies in May.
Materials
Price
Variance
AP = $6,630 ÷ 1,700 lbs
AP = $3.90 per lb
MPV = (AP - SP) x AQ
MPV = ($3.90 - 4.00) x 1,700 lbs.
MPV = -$170 Favorable
24-41
Computing Variances
Materials Price Variance
Zippy
Hanson Inc. has the following material
standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Records last week show 1,700 pounds of
material were purchased in May at a
total cost of $6,630. The material was
used to make 1,000 Zippies in May.
Note that the
authors’ use of
+/- is counterintuitive
AP = $6,630 ÷ 1,700 lbs
AP = $3.90 per lb
MPV = (AP - SP) x AQ
MPV = ($3.90 - 4.00) x 1,700 lbs.
MPV = -$170 Favorable
24-42
Recording Variances
Materials Price Variance
GENERAL JOURNAL
1
Page:
Date
Description
5/10
Materials Inventory
Materials Price Variance
Accounts Payable
PR
Debit
Credit
6,800*
170
6,630
To record purchase of materials
at less than standard cost
* Materials inventory must always be debited for the
actual quantity X standard price
Price variance
islbs.
recorded
time of purchase.
1,700
X $4.00 =at$6,800
24-43
Computing Variances
Materials Usage Variance
Zippy
Hanson Inc. has the following material
standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Records last week show 1,700 pounds of
material were purchased in May at a
total cost of $6,630. The material was
used to make 1,000 Zippies in May.
Materials
Usage
Variance
SQ = 1,000 units × 1.5 lbs per unit
SQ = 1,500 lbs
MUV = (AQ - SQ) x SP
MUV = (1,700lbs - 1,500lbs) x $4.00
MUV = +$800 unfavorable
24-44
Recording Variances
Materials Usage Variance
GENERAL JOURNAL
Page:
Date
Description
PR
5/10
Work in Process Inventory
Materials Usage Variance
Materials Inventory
Debit
establish materials usage variance
* Materials inventory must always be relieved for the
1,700 lbs. X $4.00 = $6,800
Credit
6,000
800
To record use of materials and
actual quantity X standard price
1
6,800 *
24-45
Recording Variances
Materials Usage Variance
GENERAL JOURNAL
Page:
Date
Description
5/10
Work in Process Inventory
Materials Usage Variance
Materials Inventory
PR
Debit
1
Credit
6,000*
800
To record use of materials and
establish materials usage variance
Usage
variance
is recorded
at time
of use.
in Process
Inventory
must always
be debited
* Work
the standard
quantity
X standard
price be
Canfor
materials
price
and usage
variances
added
tounits
get a
total
materials
(1,000
X 1.5
lbs.)
X $4.00 = variance?
$6,000
6,800
24-46
Computing Variances
Now let’s calculate
standard cost
variances for
direct labor.
24-47
Computing Variances
Labor Rate Variance
Zippy
Hanson Inc. has the following labor
standard to manufacture one Zippy:
1.5 standard hours per Zippy at $6.00 per hour
Payroll records show 1,450 hours were
worked at a total labor cost of $8,990 to
make 1,000 Zippies.
Labor
Rate
Variance
AR = $8,990 ÷ 1450 hours
AR = $6.20 per hour
LRV = (AR - SR) X AH
LRV = ($6.20 - $6.00) X 1,450 hrs
LRV = +$290 unfavorable
24-48
Computing Variances
Labor Efficiency Variance
Zippy
Hanson Inc. has the following labor
standard to manufacture one Zippy:
1.5 standard hours per Zippy at $6.00 per hour
Payroll records show 1,450 hours were
worked at a total labor cost of $8,990 to
make 1,000 Zippies.
Labor
Efficiency
Variance
SH = 1,000 units × 1.5 hours per unit
SH = 1,500 hours
LEV = (AH - SH) X SR
LEV = (1,450 hrs - 1,500 hrs) X $6.00
LEV = -$300 favorable
24-49
Recording Variances
Labor Rate & Efficiency Variances
GENERAL JOURNAL
Page:
Date
Description
5/15
Work in Process Inventory
Labor Rate Variance
Labor Efficiency Variance
Payroll Summary
PR
Debit
1
Credit
9,000
290
300
8,990
To charge work in process for direct
labor and to establish variances
Note that unlike materials variances, both labor
variances are recorded at the same time. (i.e., when
the payroll summary account is cleared out.)
24-50
Recording Variances
Labor Rate & Efficiency Variances
GENERAL JOURNAL
Page:
Date
Description
5/15
Work in Process Inventory
Labor Rate Variance
Labor Efficiency Variance
Payroll Summary
To charge work in process for direct
PR
Debit
Credit
9,000 *
290
300
Source? 8,990
.
labor and to establish variances
*
1
Work in Process Inventory must always be debited
for the standard quantity X standard price
(1,000 units X 1.5 lbs.) X $6.00 = $9,000
24-51
Computing Variances
Now let’s calculate
standard cost
variances for
manufacturing
overhead.
24-52
Standard Overhead Rate


Overhead is applied to goods produced
using a standard overhead rate.
Overhead rate is set prior to the start of
the period.
Standard overhead
rate per unit
=
Total budgeted overhead cost
at the standard level of output
Standard level of output
24-53
Standard Overhead Rate
Contains a fixed per
Contains a variable per
unit component which
unit component which
declines as activity
stays constant at all
level increases.
levels of activity.
Standard
Overhead Rate
per unit
Is a function of the projected volume
level chosen to determine the rate.
(i.e., standard level of output)
24-54
Overhead Variances
Budget Variance
Is calculated as the difference between total
actual overhead cost and budgeted amount
of overhead for the actual volume attained
Volume Variance
Is calculated as the difference between the
budgeted amount of overhead
for the actual volume level attained
and the applied overhead at the
standard level of output
24-55
Overhead Variances
Actual
Overhead
Budgeted
Overhead at
Actual Volume
Level Attained
Applied
Overhead at
Standard Level
of Output
Budget
Variance
Volume
Variance
AOH - BOH
BOH - Applied OH
AOH = Actual Overhead
BOH = Budgeted Overhead
24-56
Overhead Variances
Budgeted
Overhead at
Actual Volume
Level Attained
Actual
Overhead
Budget
Variance
Applied
Overhead at
Standard Level
of Output
Volume
Variance
Total Overhead Variance
24-57
Overhead Variances
Budgeted
Overhead at
Actual Volume
Level Attained
Actual
Overhead
Budget
Variance
Applied
Overhead at
Standard Level
of Output
Shows how economically
Volume
overhead
services were
Variance
purchased
and how
efficiently overhead
services were used.
Total Overhead Contains
Varianceboth fixed
and variable costs.
24-58
Overhead Variances
Actual
Overhead
Budgeted
Overhead at
Actual Volume
Level Attained
CausedBudget
by producing at
a levelVariance
other than that
used for computing the
standard overhead rate.
Applied
Overhead at
Standard Level
of Output
Volume
Variance
Contains only
fixedOverhead
costs.
Total
Variance
24-59
Overhead Variances
Flexible budgets, showing budgeted
amount of overhead for various
levels of activity, are used to analyze
overhead costs.
Hanson’s flexible
budget for overhead
24-60
Overhead Variances
Example
Zippy
Hanson, Inc. has the following flexible
budget for overhead:
Machine Hours
Zippies
Variable Overhead
Fixed Overhead
Total Overhead
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
Hanson applies overhead based on machine hour activity
and expects to produce 1,500 Zippies.
(i.e., a standard activity level of 3,000 machine hours)
24-61
Overhead Variances
Example
Machine Hours
Zippies
Zippy
2,000
1,000
3,000
1,500
4,000
2,000
Variable Overhead
$ 4,000
Fixed Overhead
9,000
TotalVariable
Overhead
$ 13,000
Overhead Rate
$6,000 ÷ 3,000 machine hours
= $2.00 per machine hour
(constant at all activity levels)
$ 6,000
9,000
$ 15,000
$ 8,000
9,000
$ 17,000
Fixed Overhead Rate
$9,000 ÷ 3,000 machine hours
= $3.00 per machine hour
(different at each activity level)
24-62
Overhead Variances
Example
Zippy
Hanson’s actual production for the
period was 1,600 Zippies resulting in
3,200 standard machine hours. Actual
total overhead cost for the period was
$15,450.
Compute the overhead budget and
volume variances.
24-63
Overhead Variances
Example
Actual
Overhead
$15,450
Budgeted
Overhead at
Actual Volume
Level Attained
$9,000 fixed
+
$6,400 variable
$2.00 per hr. × 3,200 hrs.
Zippy
Applied
Overhead at
Standard Level
of Output
3,200 hrs.
×
$5.00 per hr.
$2.00 per hr. variable
plus
$3.00 per hr. fixed
24-64
Overhead Variances
Example
Actual
Overhead
Budgeted
Overhead at
Actual Volume
Level Attained
$15,450
$9,000 fixed
Let’s
try a slightly
+
different approach for
getting the $15,400 of $6,400 variable
Budgeted
Overhead.
$15,450
$15,400
Budget variance
$50 unfavorable
Zippy
Applied
Overhead at
Standard Level
of Output
3,200 hrs.
×
$5.00 per hr.
$16,000
Volume variance
$600 favorable
24-65
Overhead Variances
Example
Hanson’s flexible budget for overhead
Machine Hours
Zippies
Variable Overhead
Fixed Overhead
Total Overhead
67%
2,000
1,000
100%
3,000
1,500
133%
4,000
2,000
$ 4,000
9,000
$ 13,000
$ 6,000
9,000
$ 15,000
$ 8,000
9,000
$ 17,000
Standard
activity
level
24-66
Overhead Variances
Example
Hanson’s flexible budget for overhead
Machine Hours
Zippies
Variable Overhead
Fixed Overhead
Total Overhead
67%
2,000
1,000
100%
3,000
1,500
107%
3,200
1,600
$ 4,000
9,000
$ 13,000
$ 6,000
9,000
$ 15,000
$ 6,400
9,000
$ 15,400
Standard
activity
level
Actual
volume
level
attained
BOH
24-67
Recording Overhead Variances
GENERAL JOURNAL
Page:
Date
Description
5/31
Manufacturing Overhead
Overhead Budget Variance
Overhead Volume Variance
PR
Debit
1
Credit
550
50
To record overhead variances and
close manufacturing overhead
Overhead account is closed and both variances
are recorded at end of period in the same entry.
600
24-68
Investigating Variances

The decision to investigate a variance is
based on:
Dollar amount of variance.
 Size of variance relative to cost incurred.
 Controllability of cost associated with
variance.

All of these relate to the “Management by
Exception” concept


Variances may be interdependent.
Performance reports contain variances
along with budgeted and actual cost data.
Variance Analysis and
Management
by
Exception
Well, sir, you should keep in
mindI what
myall
daddy
taught me:
Now that
know
about
"If it ain't broke, don't fix it” and
standard"Don't
cost variances,
how
sweat the small stuff."
do I apply that management
by exception concept?
24-69
Can you tell me
which variances to
investigate?
Amount
Variance Analysis and
Management by Exception
24-70
Direct
Direct Material
Manufacturing
Labor
Overhead
Type of Product Cost
Variance Analysis and
Management by Exception
Can you tell me
which variances to
investigate?
24-71
Possible guidelines are:
Dollar amount or
percentage of the
standard
Controllability of
the cost variance
24-72
Reporting Variances
24-73
Disposing of Variances

Variance may be closed entirely
to Cost of Goods Sold (normal
case for small variances) or

Variance may be closed by
prorating to Work in Process,
Finished Goods, and Cost of
Goods Sold based on relative
size of these accounts.
.
24-74
THE END