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McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Standard Cost Systems Standard Cost Systems Chapter 24
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Standard Cost SystemsStandard Cost Systems
Chapter 24
Benchmarks formeasuring performance.
The expected levelof performance.
Based on carefullypredetermined amounts.
Used for planning labor, materialand overhead requirements.Standard
Costs are
Standard Cost SystemsStandard Cost Systems
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DirectMaterial
Type of Product Cost
Am
ou
nt
DirectLabor
ManufacturingOverhead
Standard cost
A standard cost varianceis the amount by which
an actual cost differs fromthe standard cost.
A standard cost varianceis the amount by which
an actual cost differs fromthe standard cost.
Standard Cost SystemsStandard Cost Systems
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This variance is unfavorable because the actual cost
exceeds the standard cost.
This variance isfavorable because
the actual costis less than thestandard cost.
Standard Cost SystemsStandard Cost Systems
DirectMaterial
Type of Product Cost
Am
ou
nt
DirectLabor
ManufacturingOverhead
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Use product design specifications.
Use competitivebids for the quality
and quantity desired.
QuantityStandards
Direct Materials Standards Direct Materials Standards
PriceStandards
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TimeStandards
RateStandards
Direct Labor Standards Direct Labor Standards
Use time and motion studies for
each labor operation.
Use wage surveys and
labor contracts.
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ActivityStandards
RateStandards
Manufacturing Overhead Manufacturing Overhead Standards Standards
The activity is the cost driver used to
calculate the overhead rate.
The rate is basedon an estimate of totaloverhead at the normal
level of activity.
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Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance Quantity Variance
A General Model for A General Model for Variance Analysis Variance Analysis
Standard price is the amount that should have been paid for the resources acquired.
Standard quantity is the quantity that should have been used for the actual good output.
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Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance Quantity Variance
AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity
A General Model for A General Model for Variance Analysis Variance Analysis
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Budgeted Applied Actual Overhead at Overhead at Overhead Actual Activity Standard Hours
Spending Variance
VolumeVariance
Manufacturing Overhead Manufacturing Overhead VariancesVariances
Shows how economically overheadServices were purchased and howefficiently overhead services were
used. Contains both fixed andvariable costs.
A controllable variance.
Caused by producing ata level other than that
used for computing thestandard overhead rate.
Contains only fixedcosts.
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$15,450 $9,000 fixed 3,200 hrs. + × $6,400 variable $5.00 per hr.
Manufacturing OverheadManufacturing OverheadVariances ExampleVariances Example
Zippy
Budgeted Applied Actual Overhead at Overhead at Overhead Actual Activity Standard Hours
Spending variance$50 unfavorable
Volume variance$600 favorable
$2.00 per hr. × 3,200 hrs.$2.00 per hr. × 3,200 hrs.
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Standard Cost VariancesStandard Cost Variances
Close toCost of Goods Sold
Work in ProcessFinished GoodsCost of Goods Sold
Close byapportioning to:
Disposing of VariancesDisposing of Variances
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Summary of Variance Summary of Variance Computations and Manager Computations and Manager ResponsibilitiesResponsibilities
Variance Computation Manager ResponsibleMaterials
Price variance AQ × (SP – AP) Purchasing agentQuantity variance SP × (SQ – AQ) Production manager
LaborRate Variance AH × (SR – AR) Production managerEfficiency variance SR × (SH – AH) Production manager
OverheadSpending variance Budgeted OH at Actual Production Production manager for
Level – Actual OH the controllable costs.
Volume variance Actual OH at Standard Rate – None – A result of producing Budgeted OH at Actual Production Level at a level other than normal.
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Ethics, Fraud, andEthics, Fraud, andCorporate GovernanceCorporate Governance
For a company using standard costing systems, the accuracy of the inventory and cost of goods sold figures reported in the company’s financial statements is dependent on the reliability of the
standard cost numbers.
For a company using standard costing systems, the accuracy of the inventory and cost of goods sold figures reported in the company’s financial statements is dependent on the reliability of the
standard cost numbers.
A company’s financial statements can be materially misstated when standard costs are
not representative of manufacturing costs incurred.
A company’s financial statements can be materially misstated when standard costs are
not representative of manufacturing costs incurred.
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End of Chapter 24End of Chapter 24
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