Standards

1
Standards

• Performance goals used to evaluate and
• control operations (any type of business)
• Standard Cost Systems accounting systems
• that use standards for DM, DL, FOH
• Enable management to compare how much a
• product should cost (standard cost) vs. how
• much it did cost (actual cost), and investigate
  the
• causes of the differences

2
StandardSetting Process

• Requires joint efforts of accountants,
• engineers, and other management personnel
• Accountants express in dollars the results of
• judgments and studies

3
Types of Standards

• Ideal (theoretical) standards only achieved
  under perfect operating conditions
• Currently attainable (normal) standards can be
  obtained with reasonable effort
• Standards should be continuously reviewed and
  revised when they no longer reflect operating
  conditions

4
Western Rider Inc. Standard Cost per Pair of XL
Jeans
Direct materials 5.00 per square yard x 1.5
square yards 7.50 Direct labor 9.00 per
hour x 0.80 hour per pair 7.20 Factory
overhead 6.00 per hour x 0.80 hour per pair
4.80 Total standard cost per pair 19.50
5
Western Rider Inc. Budget Performance Report For
the Month Ended June 30, 2006
Standard Cost Cost at Actual Variance Actual
Volume (favorable) Manufacturing
Costs Costs (5,000 units) Unfavorable

• Direct materials 40,150 37,500 2,650

Direct labor 38,500 36,000 2,500 Factory
overhead 22,400 24,000 (1,600) Total
mfg. costs 101,050 97,500 3,550
6
Total Manufacturing Cost Variance
7
Direct Materials Variance Relationships
Total Direct Materials Cost Variance
2,650 U
8
Direct Materials Variance Relationships
Actual quantity x Standard price 7,300 x 5.00
36,500
Actual quantity x Actual price 7,300 x 5.50
40,150
Standard quantity x Standard price 7,500 x 5.00
37,500
Material Price Variance
Material Quantity Variance
3,650 U
(1,000) F
9
Total Direct Labor Cost Variance
2,500 U
10
Direct Labor Variance Relationships
Actual hours x Standard rate 3,850 x 9.00
34,650
Actual hours x Actual rate 3,850 x 10
38,500
Standard hours x Standard rate 4,000 x 9.00
36,000
Direct Labor Rate Variance
Direct Labor Time Variance
3,850 U
(1,350) F
11
Factory Overhead Variances

• More difficult to manage than DM DL
• since relationship between production
• volume and indirect costs is not easy to
• determine
• Because of this, most companies split FOH into
  variable and fixed costs

12
Factory Overhead Variance

• Total actual FOH
• --- Total actual DLHrs x stnd FOH rate)
• Total FOH Cost Variance
• Due to
• Actual variable FOH cost different than budgeted
  variable FOH for actual production
• 2) Actual production at a level above/below 100
  of normal capacity

13
Variable FOH Controllable Variance

• Actual variable overhead
• --- Budgeted variable overhead
• (for actual production)
• Controllable Variance
• (Budgeted Variable FOH rate Total variable FOH
  costs/DLHrs at 100 of normal capacity)
• Indicates managements ability to keep
• variable FOH costs within the budget limits

14
Fixed FOH Volume Variance

• DLHrs at normal capacity
• --- Standard Hrs at actual production
• --------------------------------------------
• Capacity not used
• X Standard FOH rate
• Volume Variance
• Measures the use of fixed overhead resources

15
Recording/Reporting Variances from Standards (1)

• Standard costs can be used as a management tool
  separate from G/L accounts
• Both standard and actual costs may be recorded in
  G/L accounts an account exists for each type of
  variance
• Variances may be reported in income statements
  prepared for management but are not reported
  externally

16
Recording/Reporting Variances from Standards (2)

• At year end, variances are
• Transferred to COGS (if not significant)
• Allocated to COGS, Work-in-Process, and Finished
  Goods (if significant)
• Variances should be supplemented with
• nonfinancial measures of performance

17
On August 1, Western Rider Inc. purchased, on
account, the 7,300 square yards of blue denim at
5.50 per square yard. Recall, the standard
price was 5.00.
Aug. 1 Materials (7,300 sq. yds. X 5.00)
36 500 00 Direct Materials Price Variance 3
650 00
Accounts Payable 40 150 00
18
Western Rider Inc. used 7,300 square yards of
blue denim to produce 5,000 pairs of XL jeans,
compared to the standard of 7,500 square yards.
Date the entry August 31.
Aug. 31 Work in Process (7,500 x 5.00) 37
500 00
Direct Materials Quantity Variance 1 000 00
Materials (7,300 x 5.00) 36 500 00
19
For the month of August, Western Rider Inc.
accrued wages of 38,500 (3,850 hours at 10 per
hour) in producing 5,000 XL Jeans. The standard
rate is 9 per hour and each pair of jeans had a
time standard of 0.8 hr.
Aug. 31 Work in Process 36 000
00 Direct Labor Rate Variance 3 850 00
Direct Labor Time Variance 1 350 00 Wages
Payable 38 500 00
This entry is not shown in the textbook.