Don R' Hansen

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COST MANAGEMENT

• Don R. Hansen
• Maryanne M. Mowen

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Chapter Nine
Standard Costing A Functional-Based Control
Approach
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Learning 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.

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Learning Objectives (continued)

• Compute and journalize the materials and labor
  variances, and explain how they are used for
  control.
• Compute overhead variances three different ways,
  and explain overhead accounting.
• Calculate mix and yield variances for materials
  and labor.

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Unit 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)?

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Types 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.

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Sources for Quantitative Standards

• 1. Historical experience
• 2. Engineering studies
• 3. Input from operating personnel

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Factors for Price Standards - Materials

• 1. Market forces
• 2. Discounts
• 3. Freight
• 4. Quality

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Factors for Price Standards - Labor

• 1. Market forces
• 2. Trade unions
• 3. Payroll taxes
• 4. Qualifications

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Purposes of Standards

• To Improve Planning and Control
• To Facilitate Product Costing

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Cost Assignment Approaches

• 
  Manufacturing Costs
• Direct Direct
• Materials Labor Overhead
• Actual costing system Actual Actual Actual
• Normal costing system Actual Actual Budgeted
• Standard costing system Standard Standard Standard
  

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A Standard Cost Sheet
Standard Standard Standard Description Price Usag
e Cost/Unit Direct materials 1.50/lb. 10
lbs. 15.00 Direct labor 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 pounds purchased
_at_ 1.55 per pound 205,000 lbs. used Direct
labor costs 39,000 hours _at_ 6.10 per hour
Variable overhead 410,000 1Fixed overhead
300,000 Rate (310,000/38,750 hrs)
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Variance Analysis General Description
Actual Quantity of Input at Actual Price AQ x AP
Actual Quantity of Input at Standard Price AQ x SP
Standard Quantity of Input at Standard Price SQ x
SP
Price Variance AQ x (AP - SP)
Usage Variance SP x (AQ - SQ)
Total Variance (AQ x AP) - (SQ x SP)
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Variance 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.

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Control Limits Standard 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.

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Material 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
SQ 20,000 units x 10 lbs per unit
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
Responsibility
Responsibility
Purchasing
Manufacturing
Flexible Budget Variance 18,000U
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Accounting for Material 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 Unfavorable variances are
debited and favorable variances are
credited.
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Accounting for Material Variances (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 SQ Standard quantity allowed for
actual production SP Standard price paid per
unit of material
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Labor Variances
Formula 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
SQ 20,000 units x 2 hrs. per unit
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 U
Responsibility
Responsibility
Human Resources
Manufacturing
Flexible Budget Variance 2,100 F
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Accounting for Labor Variances
Recording the Direct Labor Costs Work in Process
(SH x SR) 240,000 LEV (AH - SH) SR
3,900 Payroll (AH x
AR) 237,900 LRV (AR - SR) AH 6,000
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Variable 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
SQ 20,000 units x 2 hrs. per unit
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
Responsibility
Responsibility
Manufacturing
Manufacturing
Flexible Budget Variance 10,000 U
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Fixed Overhead Variances
Actual Overhead Budgeted Overhead
Applied Overhead
300,000
310,000 SOR x
SP(40,000 x 8)
OSV 10,000F OVV
10,000F
Responsibility
Responsibility Manufacturing
Difficult to Assess
Alternative Approach for Computing Overhead
Volume Variance
Budgeted level
38,750 hrs. Applied level (SOR)
40,000 hrs. Over
1,250 hrs.
x
8 Production Volume Variance 10,000 F

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Accounting for Variable Overhead
Recording Variable Overhead Work in Process (SQ
x SP) 400,000 Manufacturing Overhead Applied (SQ
x SP) 400,000 Variable Overhead Control (Actual
Cost) 410,000 Various Accounts 410,000
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Accounting for Fixed Overhead
Recording Fixed Overhead Work in Process (SQ x
SP) 320,000 Manufacturing Overhead
Applied 320,000 Fixed Overhead Control (Actual
Cost) 300,000 Various Accounts 300,000
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Accounting for Overhead Variances
Assigning Overhead to Production Work in
Process 720,000 Variable Overhead
Control 400,000 Fixed Overhead
Control 320,000 To recognize the incurrence of
actual overhead Variable Overhead
Control 410,000 Fixed Overhead Control 300,000 Mi
xcellaneous accounts 710,000
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Recognition of Variances
To recognize overhead variances Fixed Overhead
Control 20,000 Variable Overhead Spending
Variance 20,000 Variable Overhead Efiiciency
Variance 10,000 Fixed Overhead Spending
Variance 10,000 Fixed Overhead Volume
Variance 10,000 Variable Overhead
Control 10,000
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Standard Mix Information Materials

• Material Mix Mix
  Proportion SP Standard Cost
• Peanuts 128 lbs. 0.80 0.50 64
• Almonds 32 lbs. 0.20 1.00 32
• Total 160 lbs. 96
• Yield 120 lbs.
• Yield ratio 0.75(120/160)
• Standard cost of yield (SPy) 0.80 per pound
  (96/120 pounds of yield)

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Standard Mix Information Materials (continued)

• Now suppose that Malcom processes a batch of
  1,600 pounds and produces the following actual
  results
• Material Actual Mix
  Percentages
• Peanuts 1,120 lbs. 70
• Almonds 480 lbs. 30
• Total 1,600 lbs. 100
• Yield 1,300 lbs. 81.3
• Uses 1,600 lbs. as the base

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Materials Mix Variance

• Mix Variance ?(AQi - SMi)SPi
• Material AQ SM AQ -
  SM SP (AQ - SM)SP
• Peanuts 1,120 1,280 (160 ) 0.50 (80 )
• Almonds 480 320 160 1.00 160
• Mix variance 80 U

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Materials Yield Variance

• Yield variance (Standard yield - Actual
  yield)SPy (9.2)
• where
• Standard yield Yield ratio x Total actual
  inputs
• Thus, for the actual input of 1,600 pounds, the
  standard yield is 1,200 pounds (0.75 x 1,600).
  The yield variance is computed as follows
• Yield variance (1,200 - 1,300)0.80
• 80 F
• The yield variance is favorable because the
  actual yield is greater than the standard yield.

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Standard Mix Information

• Labor Type Mix Mix Proportion
  SP Standard Cost
• Shelling 3 hrs. 0.60 8.00 24
• Mixing 2 hrs. 0.40 15.00 30
• Total 5 hrs. 54
• Yield 120 lbs.
• Yield ratio 24 (120/5), or 2.400
• Standard cost of yield (SPy) 0.45 per pound
  (54/120 pounds of yield)

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Standard Mix Information (continued)

• As earlier, suppose that Malcom processes 1,600
  pounds of nuts and produces the following actual
  results
• Labor Type Actual Mix Percentages
• Shelling 20 hrs. 40
• Mixing 30 hrs. 60
• Total 50 hrs. 100
• Yield 1,300 lbs. 2,600
• Uses 50 hours as the base.

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Standard Mix Information (continued)

• Labor Type AH SM AH -SM
  SP (AH -SM)/SP
• Shelling 20 30 (10) 8.00 (80)
• Mixing 30 20 10 15.00 150
• Labor mix variance (70) U

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Standard Mix Information (continued)

• Using the standard mix information and the actual
  results, the yield variance is computed as
  follows
• Yield variance (Standard yield - Actual
  yield)SPy
• ((24 x 50) - 1,300)0.45
• (1,200 - 1,300)0.45
• 45 F
• The yield variance is favorable because the
  actual yield is greater than the standard yield.

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End of Chapter 9