Transcript No Slide Title

Standard Costing and
Variance Analysis
UAA – ACCT 202
Principles of Managerial Accounting
Dr. Fred Barbee
The Work of Management
Planning
Evaluating
Decision
Making
Controlling
Organizing &
Directing
The Control Process
Establish
Standards
Measure
Actual
Revise?
Take Action
Compare
Actual/Std.
Standard Costs
Predetermined
Used for planning labor,
material, and overhead
requirements
Benchmarks for
measuring performance.
Standard
Costs are
Used to simplify the
accounting system.
Standard Costs
Amount
Managers focus on quantities and costs
that exceed standards, a practice known as
management by exception.
Standard
Direct
Labor
Direct
Material
Manufacturing
Overhead
Type of Product Cost
Setting Standard Costs
Accountants, engineers, personnel
administrators, and production managers
combine efforts to set standards based on
experience and expectations.
Setting Standard Costs
Should we use
practical standards
or ideal standards?
Engineer
Managerial
Accountant
Setting Standard Costs
Practical standards should be
set at levels that are currently
attainable with reasonable and
efficient effort.
Production
manager
Setting Standard Costs
I agree. Ideal standards,
based on perfection,
are unattainable and
discourage most
employees.
Human Resources
Manager
A Standard is . . .
 A benchmark
or “norm” for
measuring performance.
 They
are “expected” levels of
performance.
 They
are monetary measures to
which actual costs are compared.
Standard Costs . . .


Are realistically predetermined costs for

Direct materials

Direct labor

Factory overhead
They are typically expressed as cost per
unit of finished product.
Why Standard Costs?

They are useful in preparing operating
budgets.

They make it easier to pinpoint
production costs that must be controlled.

They are useful in evaluating
performance of managers and workers.
Why Standard Costs?

They help in setting realistic prices.

They simplify accounting procedures for
inventories and product costing.
Cost Assignment Approaches
Manufacturing Costs
Cost System
DM
DL
MOH
Actual
Actual
Actual
Actual
Normal
Actual
Actual
Budgeted
Standard
Standard
Standard
Standard
Setting DM Standards
Price
Standards
Final, delivered
cost of materials,
net of discounts.
Quantity
Standards
Use product
design specifications.
Setting DL Standards
Rate
Standards
Time
Standards
Use wage
surveys and
labor contracts.
Use time and
motion studies for
each labor operation.
Setting VOH Standards
Rate
Standards
Activity
Standards
The rate is the
variable portion of the
predetermined overhead
rate.
The activity is the
base used to calculate
the predetermined
overhead.
Standards vs. Budgets
Are standards the
same as budgets?
A budget is set for
total costs.
A standard is a per
unit cost.
Standards are often
used when
preparing budgets.
Standard Cost Variances
A standard cost variance is the amount by which
an actual cost differs from the standard cost.
Cost
Standard
This variance is unfavorable
because the actual cost
exceeds the standard cost.
HOTS, Inc.

To illustrate the use of standard
costs, consider Herman O Thompson
Sports, Inc. (HOTS, Inc.), a
manufacturer of a popular jogging
suit. The company wishes to have
standard costs developed for the suit
in terms of Direct Material, Direct
Labor and Manufacturing Overhead.
Determining Standard Cost
Quantity Decision – the
amount of input to be used for a
standard unit of output.
 The
Pricing Decision – the
amount that should be paid for
the quantity of the input to be
used.
 The
Standard DM Price/Unit

The standard price per unit for DM
should be the final, delivered cost of
materials.

Specified quantity of materials,

Quantity discounts,

Transportation (freight) costs,

Receiving and handling costs,

Seasonal availability (if any).
Standard DM Price/Unit

A material known as crylon is used in the
jogging suits. The standard price for a
yard of crylon is determined as follows:
Purchase Price, Grade A Crylon
Freight, by Truck
Receiving & Handling
Less Discount (20,000 yard lots)
Standard Price Per Yard
$5.70
.40
.10
(.20)
$6.00
Standard DM Quantity/Unit

The amount of materials that should go
into each finished unit of product

Engineered (bill of materials) requirements,

Expected spoilage of RM,

Unavoidable waste,

DM in scrapped WIP (Rejects).
Standard DM Quantity/Unit

The standard quantity of crylon that goes
into one jogging suit is computed as
follows:
Bill of Materials Requirement
Allowance for Waste
Allowance for Rejects
Standard Quantity/Jogging Suit
2.8 Yds
0.6 Yds
0.1 Yds
3.5 Yds
Standard DM Quantity/Unit

Once the price and standard quantities
have been set, the standard cost of
materials (crylon) for one unit of finished
product can be computed.
3.5 Yards per jogging suit x $6.00
per yard = $21.00
Standard Rate For DL Hour

The standard rate per hour for DL should
include all costs associated with DL
workers:

Hourly wage rates

Expected labor mix

Fringe benefits

Employment taxes
Standard DL Rate Per Hour

The standard rate per hour for the
expected mix is determined by using
average wage rates, fringe benefits, and
employment taxes for the labor mix.
Average wage rate per hour
Average fringe benefits
Average employment taxes
Standard rate per DL hour
$13
4
1
$18.
Standard Hours Per Unit

Engineered labor time per unit.

Allowance for breaks, personal needs,
and cleanup.

Allowance for setup and other machine
downtime.

Allowance for rejects.
Standard DL Hours Per Unit

The standard hours determined to
produce a jogging suit is determined as
follows:
Basic labor time per unit
Allowance for breaks & cleanup
Allowance for setup and downtime
Allowance for rejects
Standard Hours Per Jogging Suit
1.4 Hrs
0.1 Hrs
0.3 Hrs
0.2 Hrs
2.0 Hrs
Standard DL Costs

Once the time and rate standards have
been set, the standard cost of labor for
one unit of product can be computed.
2.0 Hrs per Jogging Suit x $18 per
Hour = $36 per Suit
Variable OH Standards

Standards exist for VOH and are
typically expressed in terms of “rate”
and “hours.”

The rate is the variable portion of the POR

The hours represent the base used to apply
overhead to products.
Variable OH Standards

HOTS, Inc. applies MOH costs to
products on the basis of DL hours.

The variable portion of the POR is $4 per
DL hour.

Using this rate, the standard cost of
variable overhead for one unit of product
is (2 DL Hours x $4 per Hour = $8 per
suit).
Standard Cost Card

After standards have been set for DM,
DL and MOH, a standard cost card can
be prepared.

The cost card indicates what the final,
manufactured cost should be for a unit of
product.
HOTS, Inc.
Standard Cost Card For Jogging Suits
Quantity
Price
Direct Materials
3.5 Yds.
$6/Yd.
$21
Direct Labor
2.0 Hrs.
18/Hr.
36
Variable Overhead
2.0 Hrs.
4/Hr.
8
Standard Cost Per Unit
Cost
$65
A General Model For Variance Analysis
Variable Production Costs
AQ x AP
AQ x SP
SQ x SP
DM Price Variance
DL Rate Variance
DM Quantity Var.
DL Efficiency Var.
VOH Spending Var.
VOH Efficiency Var.
Variance
Variance
Total Variance
DM Price Variances . . .
DM Quantity Variances . . .