Libby, Libby and Short

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Standard Costing A Functional-Based Control
Approach
Prepared by Douglas Cloud Pepperdine University
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Objectives
1. Describe how unit input standards are
developed, and explain why standard cost systems
are adopted. 2. Explain the purpose of a standard
cost sheet. 3. Compute and journalize the direct
materials and direct labor variances, and explain
how they are used for control. 4. Compute
overhead variances three different ways, and
explain overhead accounting.
After studying this chapter, you should be able
to
Continued
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Objectives
5. Calculate mix and yield variances for direct
materials and direct labor.
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Standard cost
Standard cost is a predetermined cost for the
production of goods or services, which serves as
a benchmark against which to compare the actual
cost.
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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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Sources for Setting Standards

• Historical experience
• Engineering studies
• Input from operating personnel

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Establishing 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.
• Kaizen standards reflect a planned improvement
  and are a type of currently attainable standard.

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Purpose of Standards

• To Improve Planning and Control
• To Facilitate Product Costing
• Cost management

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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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Standard Cost Sheet
Deluxe Strawberry Frozen Yogurt
Standard
Standard Standard Description
Price Usage Cost
Subtotal
Direct materials Yogurt 0.020 x 25
oz. 0.50 Strawberries 0.010 x 10 oz.
0.10 Milk 0.015 x 8 oz. 0.12 Whipped
cream 0.025 x 4 oz. 0.10 Gelatin 0.010 x 1 oz.
0.01 Container 0.030 x 1 0.03 Total
direct materials 0.86
Continued
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Standard
Standard Standard Description
Price Usage Cost
Subtotal
Direct labor Machine operators 8.00 x 0.01
hr. 0.08 Total direct labor 0.08 Over
head Variable overhead 6.00 x 0.01
hr. 0.06 Fixed overhead 20.00 x 0.01 hr.
0.20 Total overhead 0.26 Total
standard unit cost 1.20
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Standard Usage Allowed
Standard Quantity (SQ) of Materials Allowed for
20,000 quarts
SQ Unit quantity standard x Actual output
25 x 20,000
500,000 ounces
Standard Hours (SH) of Labor Allowed for 20,000
quarts
SH Unit quantity standard x Actual output
0.01 x 20,000
200 direct labor hours
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Price and Usage Variances
Actual production 30,000 quarts Actual yogurt
usage 780,000 ounces Actual price per ounce of
yogurt 0.025 Actual direct labor hours 325
hours Actual wage rate 8.20 per hour
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Price and Usage Variances
AP x AQ (Actual Quantity at Actual Price) (1)
SP x AQ (Actual Quantity at Standard Price) (2)
SP x SQ (Standard Quantity at Standard Price) (3)
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Summary of Variances
MPV (AP SP)AQ
MUV (AQ SQ)SP
LRV (AR SR)AH
LEV (AH SH)SR
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Material Price Variance
MPV (AP SP)AQ
Actual price per unit
Standard price per unit
Actual quantity of direct material used
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Material Price Variance
MPV (AP SP)AQ
(0.025 0.020)780,000 0.005 x 780,000
3,900 U
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Direct Materials Usage Variance
MUV (AQ SQ)SP
Actual quantity of materials used
Standard quantity of materials allowed for the
actual output
Standard price per unit
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Direct Materials Usage Variance
MUV (AQ SQ)SP
(780,000 750,000)0.02 30,000 x 0.02
600 U
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The actual price is 0.025 per ounce while the
standard price is 0.020 and 780,000 ounces are
purchased. Helado Company would make the
following entry
Materials 15 600 00 Direct Materials Price
Variance 3 900 00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
Material Price Variance
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The entry to record Helados usage of 780,000
ounces of yogurt during the first week of May
would be
Work in Process 15 000 00 Direct Materials
Usage Variance 600 00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
Material Usage Variance
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Rate and Efficiency Variances
AH x AR (Actual Hours at Actual Rate) (1)
AH x SR (Actual Hours at Standard Rate) (2)
SH x SR (Standard Hours at Standard Rate) (3)
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Labor Rate Variances
LRV (AR SR)AH
Actual hourly wage rate
Standard hourly wage rate
Actual direct labor hours used
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Labor Rate Variances
LRV (AR SR)AH
(8.20 8.00)325 0.20 x 325 65 U
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Labor Efficiency Variances
LEV (AH SH)SR
Actual direct labor hours used
Standard direct labor hours that should have been
used
Standard hourly wage rate
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Labor Efficiency Variances
LEV (AH SH)SR
(325 300)8.00 25 x 8.00 200 U
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During the period Helado Company uses 325 actual
direct labor hours, while the standard hours for
the units produced is 300 hours. The actual rate
incurred is 8.20 per hour while the standard
rate is 8.00 per hour.
Work in Process 2 400 00 Direct Labor Rate
Variance 65 00 Direct Labor Efficiency
Variance 200 00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
Labor Variances
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Disposition of Direct Materials and Direct Labor
Variances
Cost of Goods Sold 4 765 00 Direct
Materials Price Variance 3 900 00 Direct
Materials Usage Variance 600 00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
Direct Labor Rate Variance 65 00
Direct Labor Efficiency Variance 200 00
If immaterial in amount
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Disposition of Direct Materials and Direct Labor
Variances
Prime Costs Percentage of Total
Work in Process 0 0 Finished
Goods 3,480 20 Cost of Goods Sold 13,920 80
Total 17,400 100
If material in amount
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Disposition of Direct Materials and Direct Labor
Variances
Finished Goods 953 00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
Cost of Goods Sold 3 812 00 Direct
Materials Price Variance 3 900 00 Direct
Materials Usage Variance 600 00 Direct Labor
Rate Variance 65 00 Direct Labor Efficiency
Variance 200 00
If material in amount
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Variable Overhead Variances
Variable overhead rate (standard) 6.00/DLH Actual
variable overhead costs 7,540 Actual hours
worked 1,300 Quarts of deluxe frozen strawberry
yogurt produced 120,000 Hours allowed for
production 1,200 Applied variable overhead 7,200
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Variable Overhead Variances
Actual Variable Overhead (1)
Variable Overhead Rate x Actual Hours (2)
Variable Overhead Rate x Standard Hours (3)
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Variable Overhead Variances

• Variable Overhead Spending Variance
• VOSV (AVOR SVOR)AH
• Variable Overhead Efficiency Variance
• VOEV (AH SH)SVOR

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Variable Overhead Spending Variances
VOSV (AVOR x AH) (SVOR x AH)
(AVOR SVOR)AH (5.80 6.00)1,300 260 F
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Variable Overhead Efficiency Variances
VOEV (AH SH)SVOR
(1,300 1,200)6.00
600 U
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Fixed Overhead Variances

• Total Fixed Overhead Variance
• Actual FOV Applied FOH
• Fixed Overhead Spending Variance
• FOSV AFOH BFOH
• Fixed Overhead Volume Variance
• FOVV Budgeted fixed overhead Applied fixed
  overhead

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Fixed Overhead Variances
Budgeted or Planned Items (May)
Budgeted fixed overhead 20,000 Expected
activity 1,000 direct labor hours Standard fixed
overhead rate 20
Actual Results
Actual production 120,000 quarts Actual fixed
overhead cost 20,500 Standard hours allowed for
actual production (0.01 x 120,000) 1,200
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Total Fixed Overhead Variances
Applied fixed overhead
Standard fixed overhead rate x Standard hours
(allowed for actual production).

20 x 1,200 24,000
3,500 Overapplied
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Fixed Overhead Variances
Actual Fixed Overhead (1)
Budgeted Fixed Overhead (2)
Fixed Overhead Rate x Standard Hours (3)
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Fixed Overhead Spending Variance
FOSV AFOH BFOH
20,500 20,000 500 U
Results from paying more or less than expected
for OH item.
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Helado Company, Inc. Performance Report For the
Month Ended May 31, 2004
Actual Cost
Budgeted Cost
Fixed Overhead Items
Variance
Depreciation 5,000 5,000 ----
Salaries 13,400 13,000 400 U Taxes 1,100 1,050 5
0 U Insurance 1,000 950 50 U
Total 20,500 20,000 500 U
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Fixed Overhead Volume Variance
FOVV Budgeted fixed overhead Applied fixed
overhead
Standard fixed overhead rate x SH(D)
(Standard fixed overhead x SH)
20(1,000 1,200) 4,000 F

• Results from the inability to operate at the same
  level
• planned for the period. It has no significance
  for control purpose.

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End of
Chapter
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