Post on 28-Mar-2015
transcript
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Standard Costing & Variance Analysis
Week 9
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Managing Production
Control of Costs within manufacturing is vital
To keep product costs to a minimum
To monitor the production process To gauge efficiency To provide a basis for
improvement
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Standard Costs
Most suitable in organisations
With common or repetitive operations
Where inputs required to produce outputs can be accurately measured
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What are “Standard Costs”?
All costs attached to products are based on standard or predetermined amounts
Standard Costs are established before production begins
Provides management with goals to attain (planning) basis for comparison with actual results
(control) Standard Costs are costs per unit Standard Costs are also known as planned
costs, predicted costs and scheduled costs.
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What things can be “Standard”?
All expected inputs to and outputs from the production process
Direct Labour Direct Materials also Variable Overheads Fixed Overheads
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Cost Control Assists management in production of a unit of usable
product at the lowest possible cost at predetermined quality standards
making periodic comparisons of actual costs with standard costs to
measure performance correct inefficiencies
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Types of Standards Ideal Standard Usually this standard cannot be attained and
leads to unfavourable variances as it assumes
minimum prices for all costs optimal usage 100% manufacturing capacity
Attainable Standard Can be met because it recognizes
good overall price but not necessarily the lowest price for all costs
direct labour is not 100% efficient normal spoilage will occur manufacturers do not operate at 100% capacity
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Establishing Standards
Variety of Methods: Past Experience Best Prices Available Current Wage Rates Anticipated Improvements Expected Market Variations
Opportunity to re-evaluate production
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So what do you do, then?
Establish inputs for planned output
Attach standards to all inputs Start Production Monitor Actual Outcomes Compare Standards to Actuals
(Variance Analysis) Take corrective action if necessary
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Acme Wall Blocks LtdStandard Costs
Production run of batch of 1,200 wall blocks
Standard Price of concrete 25p per Kg
Standard Use of concrete 1,200 Kg Standard Cost of Labour £6.00 per
hour Standard Time to make batch 60
hours
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Acme Wall Blocks LtdActual Costs
Actual Figures
Actual Price of concrete 30p per Kg Actual Use of concrete900 Kg Actual Cost of Labour £5.00 per hour Actual Time to make batch 68 hours of
which 10 idle
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Standard v Actual Cost of production
Standard Cost of production Materials 1,200 X 25p 300 Labour 60 X £6.00 360 Total 660
Actual Cost of production Materials 900 X 30p 270 Labour 68 X £5.00 340 Total 610
Variance (660 - 610) 50 Favourable
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Materials Variances
Total Materials Variance
(Standard Price X Standard Use) - (Actual Price X Actual Use) =
(0.25 X 1,200) X (0.30 X 900) = 30(F)
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Materials Sub-Variances Price Variance
(Std Price - Act Price) X Act Use = (0.25 - 0.30) X 900 = 45 (A)
Usage Variance
(Std Use - Act Use) X Std Price = (1,200 - 900) X 0.25 = 75 (F)
Summary Price Variance 45 (A) Usage Variance 75 (F) 30 (F)
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Labour Variances
Total Labour Variance
(Standard Rate X Standard Hours) - (Actual Rate X Actual Hours) =
(6.00 X 60) - (5.00 X 68) = 20 (F)
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Labour Sub-Variances Wage Rate Variance
(Std rate - Act Rate) X Act Hours = (6.00 - 5.00) X 68 = 68 (F)
Labour Efficiency Variance
(Std Hours - Act Hours) X Std Rate = (60 - 68) X 6.00 = 48 (A)
Summary Wage Rate Variance 68 (F) Labour Efficiency Variance 48 (A) 20 (F)
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Labour Efficiency Sub - Variances
Idle Time Variance (Idle Hours X Std Rate) = 10 X 6 = 60 (A)
Productive Efficiency Variance (Std Hours - Productive Hours) X Std Rate = (60 - 58) X 6.00 = 12 (F)
Summary Idle Time Variance 60 (A)
Productive Efficiency Variance 12 (F) 48 (A)
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Point to Note Variances are hierarchical Total Product Variance is sum of Primary sub-variances
Labour, materials, etc Each of these variances can be
reduced to sub-variances The sum of sub-variances of any
given variance = that variance
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Very Nice, but what does it tell us?
We can compare what we expect with what actually happens
We can investigate “below the surface” A “total” variance is constructed of
sub-variances Total variances can mask inefficiencies Materials variance may be favourable
but Good purchasing may be ruined by Excessive waste
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Analysis of Acme Wall Blocks
Materials Materials Prices have risen –
why? Less waste in Usage – why? Has better quality material been
purchased creating less wastage? Is workforce being more careful? Were standards wrong? Can we get similar quality
materials elsewhere cheaper?
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Analysis of Acme Wall BlocksLabour
Labour is being paid less – why? Hired less skilled workers? If so, would expect decline in efficiency Certainly efficiency is down, but Re-analyse and find “productive”
efficiency has improved Decline due to enforced idle time. Why idle time – stock problems,
machine break down, production bottlenecks?
Investigate and correct
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Materials VariancesSummary
Total Variance (Std Use X Std Price) – (Act Use X
Act Price) Sub Variances Price Variance (Std Price – Act Price) X Act Use Usage Variance (Std Use – Act Use) X Std Price
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Labour VariancesSummary
Total Variance (Std Hrs X Std Rate) – (Act Hrs X Act Rate) Sub Variances Wage Rate (Std Rate – Act Rate) X Act Hours Efficiency (Std Hrs – Act Hrs) X Std Rate Efficiency Sub Variances Idle Time (Idle Hrs X Std Rate) note always adverse Productive Efficiency (Std Hrs – (Act Hrs – Idle Hrs)) X Std Rate
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The SchopenhauerAn example
Budgeted Output 600 units Actual Output 550 units [mention!!] Standards (PER UNIT) Material A 1.5 kg @ £2.00 per kg Material B 2.0 litres @ £5.00 per litres Labour 5 hours @ £8.50 per hour
Calculate materials and labour variances
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The SchopenhauerActual Data
Material A 1,100 kg costing £2,090 Material B 962.5 litres costing
£4,812.50 Labour 3,025 hours costing
£24,200 KEY POINT Need to compare standards at ACTUAL levels of output
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Therefore… Standard use and hours at output
level of 550 units
Material A 1.5 X 550 = 825 kgs Material B 2.0 X 550 = 1,110 litres Labour 5 X 550 = 2,750 hours
And find Actual Unit costs Material A 2,090/1,100 = £1.90 per kg Material B 4,812.5/962.5 = £5.00 per litre Labour 24,200/3025 = £8.00 per hour
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The SchopenhauerAnswer (a)
Material A Total Variance (Std Use X Std Price) – (Act Use
X Act Price) (825 X 2.00) – (1,100 X 1.90) =
440 (A)
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The SchopenhauerAnswer (b)
Material A Sub Variances Usage Variance (Std Use – Act Use) X Std Price = (825 – 1,100) X 2.00 = 550 (A) Price Variance (Std Price – Act Price) X Act Use = (2.00 – 1.90) X 1,100 = 110 (F) So, 550 (A) + 110 (F) = 440 (A)
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Material B & Labour Variances
Answers attached to handout
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Overhead VariancesFixed & Variable
We saw from Absorption costing that Overhead Absorption Rates are calculated in advance
As estimates on materials and labour can be wrong
So can the amount of overhead absorbed
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Variable Overhead Variances
Total Variance Sub-Variances
Expenditure Efficiency
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Scenario Product “X” has a Variable
Overhead Cost of 2 hours X £1.50 = £3.00 per unit
Actual Results = Labour 820 hours of which 60
were idle 400 units made Actual Variable O’head = £1,230
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Total Variance
Total Variance
400 units should incur (400 X £3)= 1,200 Actually incurred = 1,230 Variance
30(A)
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Sub Variances Expenditure Variance Difference between amount of
variable o’head which Should have been incurred in
the hours “productively” worked (ie total hours – idle hours) and
Actual amount of variable overhead incurred
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Sub Variances
Expenditure Variance Productive hours = 820 – 60 =
760 760 hours should cost (760 X 1.50) = 1,140 Actually Cost 1,230 Variance 90 (A)
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Sub Variances
Efficiency Variance (similar to labour efficiency) (Std hrs – Productive hrs) X Std
O’H rate Std hours = 400 units X 2 hrs each
= 800 So (800 – 760) X 1.50 = 60 (F)
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Sub Variances
Summary of Variable Overhead Variances
Expenditure 90 (A) Efficiency 60 (F) Total 30 (A)
Next Week Fixed O’H variances
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IMPORTANT Standard Costing & Variance Analysis is a
KEY element of the course Do read Dyson Chapter 18 in 6th Edition Chapter 16 in 5th Edition Also recommended Colin Drury any of Cost & Management Accounting Cost & Management Accounting (an
introduction) Management Accounting for Business
Decisions All on Level 5 ref 657