Standard Costing: A Functional-Based Control Approach

1
Standard Costing A Functional-Based Control
Approach
9
CHAPTER

2
Developing Unit Input Standards
OBJECTIVE
1

• Price Standards specify how much should be paid
  for the quantity of the input to be used.
• Quantity standards specify how much of the input
  should be used per unit of output.
• Unit standard cost is the product of these two
  standards
• Standard price X Standard Quantity (SP X SP)

3
Developing Unit Input Standards
OBJECTIVE
1

• 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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4
Variance Analysis and Accounting Direct
Materials and Direct Labor
3
OBJECTIVE

• A flexible budget can be used to identify the
  direct material or direct labor input costs that
  should have been incurred for the actual level of
  activity
• Total budget variance the difference between
  the actual cost of the input and its standard
  cost
• Total budget cost (AP X AQ) (SP X SQ)

9-4
5
Variance Analysis and Accounting Direct
Materials and Direct Labor
OBJECTIVE
3

• Price (Rate) Variance difference between the
  actual and standard unit prices of an input
  multiplied by the actual quantity of inputs
• Usage (efficiency) variance difference between
  the actual and standard quantity of inputs
  multiplied by the standard unit price of the
  input
• Unfavorable (U) variance occurs whenever actual
  prices or usage of inputs are greater than
  standard prices or usage
• Favorable (F) variance occurs whenever actual
  prices or usage of inputs are less than standard
  prices or usage

9-5
6
Variance Analysis and Accounting Direct
Materials and Direct Labor
OBJECTIVE
3

• Direct Materials Price Variance difference
  between what was actually paid for direct
  materials and what would have been paid for the
  actual quantity bought if it had been bought at
  the standard price
• MPV (AP X AQ) (SP X AQ)
• ?if the actual price is greater than standard,
  the MPV is unfavorable
• ?if the actual price is less than the standard
  price, the MPV is favorable

9-6
7
Variance Analysis and Accounting Direct
Materials and Direct Labor
OBJECTIVE
3

• Direct Materials Usage Variance the difference
  between the amount of materials actually used and
  what should have been used for the actual
  quantity of units produced multiplied by the
  standard price
• MUV (SP X AQ) (SP X SQ)
• ?if the actual quantity is greater than standard,
  the MUV is unfavorable
• ?if the actual quantity is less than the standard
  quantity, the MUV is favorable

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Variance Analysis and Accounting Direct
Materials and Direct Labor
OBJECTIVE
3

• Timing of the Price Variance Computation
• The direct materials price variance can be
  computed at one of two points
• When the direct materials are issued for use in
  production
• When they are purchased

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9
Variance Analysis and Accounting Direct
Materials and Direct Labor
3
OBJECTIVE

• Accounting for the Direct Materials Price and
  Usage Variances
• Materials (SP X AQ)
• Direct Materials Price Variance (AP SP)AQ
• Accounts Payable (AP X AQ)
• Work in Process (SQ X SP)
• Direct Materials Usage Variance (AQ-AQ)SP
• Materials (AQ X SP)

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10
Variance Analysis and Accounting Direct
Materials and Direct Labor
OBJECTIVE
3

• Direct Labor Rate Variance computes the
  difference between what was paid to direct
  laborers and what should have been paid
• LRV (AR X AH) (SR X AH)
• Direct Labor Efficiency variance measures the
  difference between the direct labor hours that
  were actually used and the direct labor hours
  that should have been used
• LEV (AH X SR) (SH X SR)

9-10
11
Variance Analysis and Accounting Direct
Materials and Direct Labor
OBJECTIVE
3

• Accounting for the Direct Labor Rate and
  Efficiency Variance
• (assuming a favorable direct labor rate variance
  and an unfavorable labor efficiency variance)
• Work in Process (SH X SR)
• Direct Labor Efficiency Variance (AH SH)SR
• Direct Labor Rate Variance (AH SR) AH
• Wages Payable (AH X AR)

9-11
12
Variance Analysis and Accounting Direct
Materials and Direct Labor
OBJECTIVE
3

• Investigating Direct Materials and Labor
  Variances
• Because random variations around the standard are
  expected, management should establish an
  acceptable range of performance.
• The acceptable range is the standard, plus or
  minus one allowable deviation. The upper control
  limit is the standard plus the allowable
  deviation and the lower control limit is the
  standard minus the allowable deviation.

1-12
13
Variance Analysis Overhead Costs
OBJECTIVE
4

• Variable overhead spending variance measures the
  aggregate effect of differences in the actual
  variable overhead rate and the standard variable
  overhead rate
• VOSV (AVOR X AH) (SVOR X AH)
• Variable overhead is assumed to vary as the
  production volume changes variable overhead
  changes in proportion to changes in the direct
  labor hours used
• Variable overhead efficiency variance measures
  the change in variable overhead consumption that
  occur because of the efficient/inefficient use of
  direct labor
• VOEV (SVOR X AH) (SVOR X SH)

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Variance Analysis Overhead Costs
OBJECTIVE
4

• Fixed overhead spending variance is the
  difference between the actual fixed overhead and
  the budgeted fixed overhead
• FOSV AFOH BFOH
• If less (more) is spent on fixed overhead items
  than was budgeted, the spending variance is
  favorable (unfavorable).
• Fixed overhead volume variance is the difference
  between budgeted fixed overhead and applied fixed
  overhead
• Volume variance Budgeted fixed overhead
  Applied fixed overhead
• As a general rule, if actual production is less
  than budgeted production, the volume variance
  will be unfavorable, if actual production is more
  than budgeted production, the volume variance
  will be favorable? the difference is due solely
  to the differences in production or planned
  utilization of capacity

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Variance Analysis Overhead Costs
OBJECTIVE
4

• Accounting for Overhead Variances
• To Recognize the incurrence of actual overhead
• Variable Overhead Control
• Fixed Overhead Control
• Miscellaneous Accounts
• To Recognize the variances
• Fixed Overhead Control
• Variable Overhead Efficiency Variance
• Fixed Overhead Spending Variance
• Variable Overhead Control
• Variable Overhead Spending Variance
• Fixed Overhead Volume Variance

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Variance Analysis Overhead Costs
OBJECTIVE
4

• Accounting for Overhead Variances (continued)
• To close the variances to Cost of Goods Sold
• Fixed Overhead Volume Variance
• Variable Overhead Spending Variance
• Cost of Goods Sold
• Cost of Goods Sold
• Variable Overhead Efficiency Variance
• Fixed Overhead Spending Variance

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Mix and Yield Variances Materials and Labor
OBJECTIVE
5

• Direct Materials Mix Variance
• Difference in the standard cost of the actual mix
  of inputs use and the standard cost of the mix of
  inputs that should have been used
• If relatively more of a more expensive input is
  used, the mix variance will be unfavorable. If
  relatively more of a less expensive input is
  used, the mix variance will be favorable.

Mix Variance
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Mix and Yield Variances Materials and Labor
OBJECTIVE
5

• Direct Materials Yield Variance
• Designed to show the extent to which the amount
  of input resulted in the expected amount of
  output
• Yield variance (Standard yield Actual yield)
  SPy
• Where
• Standard yield yield ratio X total actual
  inputs
• Yield ratio total output/total input
• SPy Standard cost of the yield
• (Similar equations for labor)

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