Post on 31-Mar-2015
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Standard Costing and Variance Analysis
UAA – ACCT 202 Principles of Managerial Accounting
Dr. Fred Barbee
PlanningPlanning
DecisionMaking
DecisionMaking
Organizing & DirectingOrganizing & Directing
ControllingControlling
EvaluatingEvaluating
The Work of Management
Establish Standards
Measure Actual
Compare Actual/Std.
Take Action
Revise?
The Control Process
Standard Costs
Standard Costs are
Predetermined Used for planning labor, material, and overhead
requirements
Benchmarks for measuring performance.
Used to simplify the accounting system.
Standard Costs
DirectMaterial
Managers focus on quantities and coststhat exceed standards, a practice known as
management by exception.
Type of Product Cost
Am
ou
nt
DirectLabor
ManufacturingOverhead
Standard
Accountants, engineers, personnel administrators, and production managers combine efforts to set standards
based on experience and expectations.
Setting Standard Costs
Setting Standard Costs
Should we usepractical standardsor ideal standards?
Engineer ManagerialAccountant
Setting Standard CostsPractical standards should be set at levels that are currently attainable with reasonable and
efficient effort.
Productionmanager
Setting Standard CostsI agree. Ideal standards,
based on perfection,are unattainable and
discourage mostemployees.
Human ResourcesManager
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
Actual
Normal
Standard
Manufacturing Costs
Actual
Actual
Standard
DL
Actual
Actual
Standard
MOH
Actual
Budgeted
Standard
Cost System DM
Setting DM Standards
PriceStandards
Final, deliveredcost of materials,net of discounts.
QuantityStandards
Use product design specifications.
Setting DL Standards
RateStandards
Use wage surveys and
labor contracts.
TimeStandards
Use time and motion studies for
each labor operation.
Setting VOH Standards
RateStandards
The rate is the variable portion of the
predetermined overhead rate.
ActivityStandards
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 VariancesC
ost
Standard
This variance is unfavorablebecause the actual cost
exceeds the standard cost.
A standard cost variance is the amount by whichan actual cost differs from 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
The 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.
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 $5.70
Freight, by Truck .40
Receiving & Handling .10
Less Discount (20,000 yard lots) (.20)
Standard Price Per Yard $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 2.8 Yds
Allowance for Waste 0.6 Yds
Allowance for Rejects 0.1 Yds
Standard Quantity/Jogging Suit 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 $13
Average fringe benefits 4
Average employment taxes 1
Standard rate per DL hour $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 1.4 Hrs
Allowance for breaks & cleanup 0.1 Hrs
Allowance for setup and downtime 0.3 Hrs
Allowance for rejects 0.2 Hrs
Standard Hours Per Jogging Suit 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
Direct Materials
Direct Labor
Variable Overhead
Standard Cost Per Unit
Quantity
3.5 Yds.
2.0 Hrs.
2.0 Hrs.
Price
$6/Yd.
18/Hr.
4/Hr.
Cost
$21
36
8
$65
A General Model For Variance AnalysisVariable Production Costs
AQ x AP AQ x SP SQ x SP
Total Variance
Variance Variance
DM Price Variance
DL Rate Variance
VOH Spending Var.
DM Quantity Var.
DL Efficiency Var.
VOH Efficiency Var.
DM Price Variances . . .
DM Quantity Variances . . .