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14-1Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Standard Standard Costing: A Costing: A Managerial Managerial Control ToolControl Tool
1414
PowerPresentation® prepared by PowerPresentation® prepared by
David J. McConomy, Queen’s UniversityDavid J. McConomy, Queen’s University
14-2Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Learning ObjectivesLearning Objectives
Explain how unit standards are set and why standard cost systems are adopted.
Explain the purpose of a standard cost sheet.
Describe the basic concepts underlying variance analysis and explain when variances should be investigated.
14-3Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Learning Objectives Learning Objectives (continued)(continued)
Compute the materials and labour variances and explain how they are used for control.
Compute the variable and fixed overhead variances and explain their meaning.
Use variance analysis as an analytical tool for profitability analysis. (Appendix A)
14-4Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Learning Objectives Learning Objectives (continued)(continued)
Prepare journal entries for materials and labour variances and describe the accounting for overhead variances. (Appendix B)
14-5Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Unit Standard CostUnit Standard Cost
To determine the unit standard cost for a particular input, two decisions must be made:
1. How much of the input should be used per unit of output ? (Quantity decision)
2. How much should be paid for the quantity of the input to be used ? (Pricing decision)
14-6Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Types of StandardsTypes of Standards
Ideal Standards demand maximum efficiency and can be achieved only if everything operates perfectly.
Currently attainable standards can be achieved under efficient operating conditions.
14-7Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Sources for Quantitative StandardsSources for Quantitative Standards
1. Historical experience
2. Engineering studies
3. Input from operating personnel
14-8Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Factors for Price Standards - MaterialsFactors for Price Standards - Materials
1. Market forces
2. Quality
3. Discounts
4. Freight
14-9Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Factors for Price Standards - LabourFactors for Price Standards - Labour
1. Market forces
2. Trade unions
3. Payroll taxes
4. Qualifications
14-10Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Purposes of StandardsPurposes of Standards
To improve planning and control
To facilitate product costing
14-11Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Cost Assignment ApproachesCost Assignment Approaches
Manufacturing Costs
Direct Direct
Materials labour Overhead
Actual costing system Actual Actual Actual
Normal costing system Actual Actual Budgeted
Standard costing system Standard Standard Standard
14-12Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
A Standard Cost SheetA Standard Cost Sheet
Standard Standard Standard
Description Price Usage Cost/Unit
Direct materials $1.50/kg. 10 kgs. $15.00
Direct labour $6.00/hr. 2 hours 12.00
Variable overhead $10.00/hr. 2 hours 20.00
Fixed Overhead1 $8.00/hr. 2 hours 16.00
$63.00
Other Operating Data for Period:
Units produced 20,000 units
210,000 kilograms purchased @ $1.55 per kilogram; 205,000 kgs.
used
Direct labour costs 39,000 hours @ $6.10 per hour
Variable overhead $410,000
1Fixed overhead $300,000; Rate = ($310,000/38,750 hrs)
14-13Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Variable Cost Variance Analysis:Variable Cost Variance Analysis:General DescriptionGeneral Description
Actual Quantity of Input at Actual Price
AQ x AP
Actual Quantity ofInput at Standard Price
AQ x SP
Standard Quantity ofInput at Standard Price
SQ x SP
PriceVariance
AQ x (AP - SP)
UsageVariance
SP x (AQ - SQ)
BudgetVariance
(AQ x AP) - (SQ x SP)
14-14Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Variance InvestigationVariance Investigation
Variances are investigated if two conditions are met:
1. The variance is material
2. The benefits of investigating and taking corrective action are greater than its costs
14-15Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Control Limits: Control Limits: Standard Standard ++ Allowable Deviation Allowable Deviation
Investigating occurs for values outside the allowable range.
Example: Assume the allowable deviation may be the lesser of $8,000 or 10% of the standard. Suppose the standard is $50,000 and the actual deviation from standard is $6,000. Will the variance be investigated.
Answer: Yes. Ten percent of standard is $5,000. Since $6,000 is larger than the allowable deviation, an investigation will take place.
14-16Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Material VariancesMaterial Variances
Formula Approach:
MPV = (AP - SP)AQ MUV = (AQ - SQ)SP
= ($1.55-$1.50)210,000 = (205,000 - 200,000)$1.50
= $10,500 U = $7,500U
Diagram Approach:
AQ x AP AQ x SP AQ x SP SQ x SP
210,000 x $1.55 210,000 x $1.50 205,000 x $1.50 200,000 x $1.50
MPV = $10,500U MUV = $7,500U
Flexible Budget Variance = $18,000U
Responsibility: Responsibility: Purchasing Manufacturing
SQ = 20,000 units x 10 lbs per unit
14-17Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Labour VariancesLabour VariancesFormula Approach:
LRV = (AR - SR)AH LEV= (AH - SH)SR
= ($6.10 - $6.00)39,000 = (39,000 - 40,000)$6.00
= $3,900 U = $6,000 F
Diagram Approach:
AH x AR AH x SR SH x SR 39,000 x $6.10 39,000 x $6.00 40,000 x $6.00
LRV = $3,900 U LEV = $6,000 F
Flexible Budget Variance = $2,100 F
Responsibility: Responsibility: Human Resources Manufacturing
SQ = 20,000 units x 2 hrs. per unit
14-18Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Variable Overhead VariancesVariable Overhead Variances
Formula Approach:
OSV = (AVOR - SVOR)AH OEV = (AH - SH)SVOR
= $410,000 - ($10 X 39,000 hrs) = (39,000 - 40,000)$10.00
= $20,000 U = $10,000 F
Diagram Approach: AH x AVOR AH x SVOR SH x SVOR
$410,000 39,000 x $10.00 40,000 x $10.00
OSV = $20,000 U OEV = $10,000 F
Flexible Budget Variance = $10,000 U
Responsibility: Responsibility:
Manufacturing Manufacturing
SQ = 20,000 units x 2 hrs. per unit
14-19Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Fixed Overhead VariancesFixed Overhead Variances
Actual Overhead Budgeted Overhead Applied Overhead
$300,000 $310,000 SOR x SH ($8 x40,000)
OSV = $10,000F DV = 10,000F Responsibility: Responsibility:
Manufacturing Difficult to Assess
Alternative Approach for Computing FOH Denominator Variance
Planned level 38,750 hrs.
Applied level (SOR) 40,000 hrs.
Over 1,250 hrs.
x $8
FOH Denominator Variance $10,000 F
======
14-20Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
APPENDIX AAPPENDIX AAPPENDIX AAPPENDIX A
14-21Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Further Analysis of the Further Analysis of the Profit Volume VarianceProfit Volume Variance
The profit volume variance can be decomposed further, for example into industry volume and market share variances
In the next slide, assume that the master budget was based on a certain percentage of market share, and that the industry experienced an increase in its volume of 10%
14-22Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Master Budget(1,000 units)
Flexible Budget(800 units)
Actual(800 units)
Sales $ 100,000 $ 80,000 $ 82,000
Variable Costs 40,000 32,000 39,000
Contribution Margin 60,000 48,000 43,000
Fixed Costs 30,000 30,000 34,000
Operating Income 30,000 18,000 9,000
Comparing the flexible to the static (master) budget isolates theeffects of volume on profits, and comparing actual to flexible budgetisolates the appropriate cost variances as well as the sales pricevariance, as follows:
Profit volume variance = 18,000 – 30,000 = $ - 12,000 (U)Sales price variance = 82,000 – 80,000 = 2,000 (F)Variable cost variances = 32,000 – 39,000 = - 7,000 (U)Fixed cost variances = 30,000 – 34,000 = - 4,000 (U)
Total variances = $ - 21,000 (U)===========
Profit VariancesProfit Variances from Chapter 13from Chapter 13
14-23Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Master Budget(1,000 units)
MasterBudgetadjusted forActualIndustryVolume
Flexible Budget(800 units)
Actual(800 units)
Sales $ 100,000 $ 110,000 $ 80,000 $ 82,000
Variable Costs 40,000 44,000 32,000 39,000
ContributionMargin
60,000 66,000 48,000 43,000
Fixed Costs 30,000 30,000 30,000 34,000
Operating Income 30,000 36,000 18,000 9,000
Comparing the flexible to the static (master) budget isolates the effects of volume onprofits This in turn can be broken down into an industry volume variance and a marketshare variance
Industry volume variance = 36,000 – 30,000 = $ 6,000 (F)Market share variance = 18,000 – 36,000 = - 18,000 (U) _______Profit volume variance = 18,000 – 30,000 = $ - 12,000 (U)
=========IVV = 10% of CM of $60,000MSV= 30,000 loss of revenues to maintain the same market share x CMR of 0.60
Industry Volume and Market Share VariancesIndustry Volume and Market Share Variances
14-24Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Sales Mix VarianceSales Mix Variance
Assume that the previous statement was for a multi-product company, and that its budgeted CMR at its budgeted mix was 0.60.
Assume further that the actual sales mix would have resulted in a budgeted CMR of 0.58 instead
How much is the Sales Mix Variance?
Answer: - 0.02 x 80,000 = $ -1,600 U
The following spreadsheet includes a comprehensive analysis of all profit variances
14-25Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Master Budget MasterBudgetadjusted forActualIndustryVolume
Flexible Budget FlexibleBudgetadjusted forActualSales Mix
Actual
Sales $ 100,000 $ 110,000 $ 80,000 $ 80,000 $ 82,000
Variable Costs 40,000 44,000 32,000 33,600 39,000
ContributionMargin
60,000 66,000 48,000 46,400 43,000
Fixed Costs 30,000 30,000 30,000 30,000 34,000
Operating Income 30,000 36,000 18,000 16,400 9,000
Summary of VariancesIndustry volume variance = 36,000 – 30,000 = $ 6,000 (F)Market share variance = 18,000 – 36,000 = - 18,000 (U) Profit volume variance = 18,000 – 30,000 = $ - 12,000 (U)Sales mix variance = 16,400 – 18,000 = - 1,600 (U)
Sales price variance = 82,000 – 80,000 = 2,000 (F)Variable cost variances = 33,600 – 39,000 = - 5,400 (U)Fixed cost variances = 30,000 – 34,000 = - 4,000 (U)
__________Total variances - 21,000 (U)
=========
Profit Variances - A Comprehensive AnalysisProfit Variances - A Comprehensive Analysis
14-26Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Profitability Analysis:Profitability Analysis: Problem 14-44Problem 14-44
1. Total CM per Master Budget
A 9,000 x $8 = $72,000
B 6,500 x 11 = 71,500 $143,500
Total standard CM for Actual Quantities
A 10,000 x $8 = $80,000
B 6,000 x 11 = 66,000 $146,000
Profit Volume Variance (gross) 2,500 F
=======
14-27Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Profitability AnalysisProfitability Analysis: : Problem 14-45 (continued)Problem 14-45 (continued)
2. Weighted average CM per unit based on Master Budget
$143,500/15,500 = 9.2581
Total standard CM for Actual Quantity 146,000
Total standard CM for 16,000 units
assuming budgeted sales mix
16,000 x $9.2581 148,129
Sales mix variance $ 2,129 U
Profit volume variance (net)
(16,000 - 15,500) x $9.2581 = 4,629 F
14-28Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Profitability Analysis:Profitability Analysis: Problem 14-45 (continued)Problem 14-45 (continued)
3. Decline in industry sales
(77,500 - 64,000) x 77,500 = 17.42%
Industry volume variance
.1742 x 15,1500 x 9.2581 = $24,997 U
Budgeted market share: 15,500/77,500 = 20%
Market share variance
(16,000-[0.20 x 64,000]) x 9.2581 = $29,626 F
4. Sales Price Variance
A 10,000($21 - 20) = 10,000 F
B 6,000($32 - 30) = 12,000 F $22,000 F
14-29Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Profitability Analysis:Profitability Analysis: Problem 14-45 (continued)Problem 14-45 (continued)
5. Variable cost flexible budget variances
Variable manufacturing costs
A 10,000($12 - 11) = 10,000 U
B 6,000($20 - 18) = 12,000 U = $22,000 U
Variable marketing and administrative
A 10,000($1.10 - 1) = 1,000 U
B 6,000($1.10 - 1) = 600 U = $ 1,600 U
$23,600 U
6. Fixed cost flexible budget variance
Manufacturing 36,000 - 34,500 = 1,500 U
Mktg and admin 44,000 - 40,000 = 4,000 U $5,500 U
14-30Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Profitability Analysis:Profitability Analysis: Problem 14-45 (continued)Problem 14-45 (continued)
7. Budgeted net income $69,000
Industry volume variance $24,997 U
Market share variance 29,626 F
Profit volume variance (net) 4,629 F
Sales mix variance 2,129 U
Profit Volume Variance (gross) 2,500 F
Sales price variance $22,000 F
Variable cost flex. bud. var. $23,600 U
Fixed cost flex. bud. var. 5,500 U
Total profit variances $ 4,600U
Actual net income $ 64,400
14-31Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
APPENDIX BAPPENDIX BAPPENDIX BAPPENDIX B
14-32Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Accounting for VariancesAccounting for Variances
Journal Entry for Purchase of Direct Materials
Materials (AQ x SP) 315,000
MPV (AP - SP)AQ 10,500
Accounts Payable (AQ x AP) 325,500
Rule: Unfavourable variances are recorded by a debit and favourable variances are recorded by a credit.
14-33Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Accounting for Variances Accounting for Variances (continued)(continued)
Recording the Issuance of Materials to Production
Work in Process (SQ x SP) 300,000
MUV [(AQ - SQ)SP] 7,500
Materials (AQ x SP) 307,500
AQ = Actual quantity used in production
14-34Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Accounting for Variances Accounting for Variances (continued)(continued)
Recording the Direct Labour Costs
Work in Process (SH x SR) 240,000
LEV [(AH - SH) SR] 3,900
Accrued Payroll (AH x AR) 237,900
LRV [(AR - SR) AH] 6,000
14-35Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Accounting for Variances Accounting for Variances (continued)(continued)
Recording Variable Overhead
Work in Process (SQ x SP) 400,000
Manufacturing Applied (SQ x SP) 400,000
Manufacturing Overhead (Actual) 410,000
Various Accounts 410,000
14-36Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Accounting for Variances Accounting for Variances (continued)(continued)
Recording Fixed Overhead
Work in Process (SQ x SP) 320,000
Manufacturing Overhead Applied 320,000
Manufacturing Overhead (Actual) 300,000
Various Accounts 300,000
14-37Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Accounting for Variances Accounting for Variances (continued)(continued)
Recording O/H Variances and Closing the O/H Accounts
Manufacturing O/H Applied (Variable) 400,000
Manufacturing O/H Applied (Fixed) 320,000
OSV (Variable) 20,000
Manufacturing Overhead (Variable) 410,000
Manufacturing Overhead (Fixed) 300,000
OEV (Variable) 10,000
OSV (Fixed) 10,000
DV (Fixed) 10,000
14-38Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Accounting for Variances Accounting for Variances (continued)(continued)
Disposition of Overhead Variances
OEV (Variable) 10,000
OSV (Fixed) 10,000
DV (Fixed) 10,000
OSV (Variable) 20,000
Cost of Goods Sold 10,000