Standard Cost Systems

1
Chapter23
Standard Cost Systems
2
Standard Cost Systems
Based on carefullypredetermined amounts.
Used for planning labor, materialand overhead
requirements.
The expected levelof performance.
Benchmarks formeasuring performance.
3
Standard Cost Systems
A standard cost varianceis the amount by
whichan actual cost differs fromthe standard
cost.
Amount
DirectMaterial
DirectLabor
ManufacturingOverhead
Type of Product Cost
4
Standard Cost Systems
This variance isfavorable becausethe actual
costis less than thestandard cost.
This variance is unfavorable because the actual
cost exceeds the standard cost.
Amount
DirectMaterial
DirectLabor
ManufacturingOverhead
Type of Product Cost
5
Variance Analysis


Takecorrective actions
Identifyquestions
Receive explanations
Conduct next periods operations

Analyze variances
Prepare standard cost performance report
Begin
6
Establishing and RevisingStandard Costs
Productionmanager
ManagerialAccountant
Engineer
7
Establishing and RevisingStandard Costs
HumanResourcesManager
8
Use of Standard Costs in Developing Budgets
Are standards the same as budgets?
9
Direct Material Standards
PriceStandards
QuantityStandards
10
Direct Material Standards
The standard material cost for one unit of
product is standard quantity
standard price for of material
one unit of material
required for one unit of product

11
Direct Labor Standards
TimeStandards
RateStandards
12
Setting Direct Labor Standards
The standard labor cost for one unit of product
is standard number standard wage
rate of labor hours
for one hour for one
unit
of product

13
Manufacturing Overhead Standards
ActivityStandards
RateStandards
14
Manufacturing Overhead Standards

15
A General Model forVariance Analysis
16
A General Model forVariance Analysis
Actual Quantity Actual Quantity
Standard Quantity

Actual Price Standard Price
Standard Price
Price Variance
Quantity Variance
Standard price is the amount that should have
been paid for the resources acquired.
17
A General Model forVariance Analysis
Actual Quantity Actual Quantity
Standard Quantity

Actual Price Standard Price
Standard Price
Price Variance
Quantity Variance
Standard quantity is the quantity that should
have been used for the actual good output.
18
Standard Costs and Variance Analysis An
Illustration
Lets use the concepts of the general model to
calculate standard cost variances, starting
withdirect material.
19
Standard Costs and Variance Analysis An
Illustration

• Hanson Inc. has the following material standard
  to manufacture one Zippy
• 1.5 pounds per Zippy at 4.00 per pound
• Records last week show 1,700 pounds of
  material were purchased on May 10 at a total cost
  of 6,630. The material was used to make 1,000
  Zippies that were completed on May 15.

20
Material Price and Quantity Variances
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
Materials price variance Materials
quantity variance Labor rate variance
Labor efficiency variance
Variable overhead Variable
overhead spending variance
efficiency variance
21
Material VariancesQuestion 1

• The actual price per pound paid forthe material
  was
• a. 4.00 per pound.
• b. 4.10 per pound.
• c. 3.90 per pound.
• d. 6.63 per pound.

22
Material VariancesQuestion 1

• The actual price per pound paid forthe material
  was
• a. 4.00 per pound.
• b. 4.10 per pound.
• c. 3.90 per pound.
• d. 6.63 per pound.

AP 6,630 1,700 lbs.AP 3.90 per lb.
23
Material VariancesQuestion 2
Hansons material price variance (MPV)for the
week was a. 170 unfavorable. b. 170
favorable. c. 800 unfavorable. d. 800
favorable.
24
Material VariancesQuestion 2
Hansons material price variance (MPV)for the
week was a. 170 unfavorable. b. 170
favorable. c. 800 unfavorable. d. 800
favorable.
MPV AQ(AP - SP) MPV 1,700 lbs. (3.90 -
4.00) MPV 170 favorable
25
Material VariancesQuestion 3

• The standard quantity of material thatshould
  have been used to produce1,000 Zippies is
• a. 1,700 pounds.
• b. 1,500 pounds.
• c. 2,550 pounds.
• d. 2,000 pounds.

26
Material VariancesQuestion 3

• The standard quantity of material thatshould
  have been used to produce1,000 Zippies is
• a. 1,700 pounds.
• b. 1,500 pounds.
• c. 2,550 pounds.
• d. 2,000 pounds.

SQ 1,000 units 1.5 lbs per unit SQ 1,500
lbs
27
Material VariancesQuestion 4
Hansons material quantity variance (MQV) for the
week was a. 170 unfavorable. b. 170
favorable. c. 800 unfavorable. d. 800
favorable.
28
Material VariancesQuestion 4
Hansons material quantity variance (MQV) for the
week was a. 170 unfavorable. b. 170
favorable. c. 800 unfavorable. d. 800
favorable.
MQV SP(AQ - SQ) MQV 4.00(1,700 lbs - 1,500
lbs) MQV 800 unfavorable
29
Material VariancesSummary
Actual Quantity Actual Quantity
Standard Quantity

Actual Price Standard Price
Standard Price
1,700 lbs. 1,700 lbs.
1,500 lbs.

3.90 per lb.
4.00 per lb. 4.00 per lb.
6,630 6,800
6,000
Price variance170 favorable
Quantity variance800 unfavorable
30
Responsibility forMaterial Variances
I am not responsible for this unfavorable
materialquantity variance. You purchased
cheapmaterial, so my peoplehad to use more of
it.
31
Labor Rate and Efficiency Variances

• Lets turn our attention to labor variances.

32
Standard Costs and Variance Analysis An
Illustration
Hanson Inc. has the following labor standard to
manufacture one Zippy 1.5 standard hours per
Zippy at 8.00 per hour Payroll records last
week show 1,450 hours were worked at a total
labor cost of 11,890 to make 1,000 Zippies that
were completed on May 15.
33
Labor Rate and Efficiency Variances
Actual Hours Actual Hours
Standard Hours

Actual Rate Standard Rate
Standard Rate
Rate Variance
Efficiency Variance
AH(AR - SR)
SR(AH - SH) AH Actual Hours SR Standard
Rate AR Actual Rate SH Standard Hours
Materials price variance Materials
quantity variance Labor rate variance
Labor efficiency variance
Variable overhead Variable
overhead spending variance
efficiency variance
34
Labor VariancesQuestion 1
Hansons actual rate (AR) for laborfor the week
was a. 8.20 per hour. b. 8.00 per
hour. c. 7.80 per hour. d. 7.60 per hour.
35
Labor VariancesQuestion 1
Hansons actual rate (AR) for laborfor the week
was a. 8.20 per hour. b. 8.00 per
hour. c. 7.80 per hour. d. 7.60 per hour.
AR 11,890 1,450 hours AR 8.20 per hour
36
Labor VariancesQuestion 2
Hansons labor rate variance (LRV) forthe week
was a. 290 unfavorable. b. 290
favorable. c. 400 unfavorable. d. 400
favorable.
37
Labor VariancesQuestion 2
Hansons labor rate variance (LRV) forthe week
was a. 290 unfavorable. b. 290
favorable. c. 400 unfavorable. d. 400
favorable.
LRV AH(AR - SR) LRV 1,450 hrs(8.20 -
8.00) LRV 290 unfavorable
38
Labor VariancesQuestion 3
The standard hours (SH) of labor thatshould
have been worked to produce1,000 Zippies
is a. 1,550 hours. b. 1,500 hours. c. 1,700
hours. d. 1,800 hours.
39
Labor VariancesQuestion 3
The standard hours (SH) of labor thatshould
have been worked to produce1,000 Zippies
is a. 1,550 hours. b. 1,500 hours. c. 1,700
hours. d. 1,800 hours.
SH 1,000 units 1.5 hours per unit SH
1,500 hours
40
Labor VariancesQuestion 4
Hansons labor efficiency variance (LEV) for the
week was a. 290 unfavorable. b. 290
favorable. c. 400 unfavorable. d. 400
favorable.
41
Labor VariancesQuestion 4
Hansons labor efficiency variance (LEV) for the
week was a. 290 unfavorable. b. 290
favorable. c. 400 unfavorable. d. 400
favorable.
LEV SR(AH - SH) LEV 8.00(1,450 hrs - 1,500
hrs) LEV 400 favorable
42
Labor VariancesSummary
Actual Hours Actual Hours
Standard Hours

Actual Rate Standard Rate
Standard Rate
1,450 hours 1,450 hours
1,500 hours

8.20 per hour 8.00 per
hour 8.00 per hour 11,890
11,600
12,000
Rate variance290 unfavorable
Efficiency variance400 favorable
43
Labor Rate Variance
Using highly paid skilled workers toperform
unskilled tasks results in anunfavorable rate
variance.
High skill,high rate
Low skill,low rate
Production managers who make work assignmentsare
generally responsible for rate variances.
44
Labor Efficiency Variance
UnfavorableEfficiencyVariance
45
Responsibility for Labor Variances
I am not responsible for the unfavorable
laborefficiency variance! You purchased
cheapmaterial, so it took moretime to process
it.
46
Responsibility for Labor Variances
Maybe I can attribute the laborand material
variances to personnel for hiring the wrong
peopleand training them poorly.
47
Manufacturing Overhead Variances

• Lets turn our attention to manufacturing
  overhead

48
Manufacturing Overhead Variances

• Recall that overhead costs are applied to
  products and services using a predetermined
  overhead rate (POHR)

Applied Overhead POHR Standard Activity
POHR
49
Manufacturing Overhead Variances
Contains variableoverhead thatincreases
asactivity increases.
Contains fixedoverhead thatremains constant
asactivity changes.
Overhead Rate
Function of activity levelchosen to determine
rate.
50
Manufacturing OverheadVariances Example

• Hanson, Inc. has the following manufacturing
  overhead at three different levels of activity

Hanson applies overhead based on machine hour
activity.
51
Overhead Variances Question 1
The total overhead rate for an estimated
activity of 3,000 machine hours (MH) is a.
5.00 per machine hour. b. 4.00 per machine
hour. c. 3.00 per machine hour. d. 2.00
per machine hour.
52
Overhead Variances Question 1
The total overhead rate for an estimated
activity of 3,000 machine hours (MH) is a.
5.00 per machine hour. b. 4.00 per machine
hour. c. 3.00 per machine hour. d. 2.00
per machine hour.
15,000 3,000 machine hours
53
Overhead Variances Question 1
The total overhead rate for an estimated
activity of 3,000 machine hours (MH) is a.
5.00 per machine hour. b. 4.00 per machine
hour. c. 3.00 per machine hour. d. 2.00
per machine hour.
15,000 3,000 machine hours
The 5.00 overhead rate containsa variable
portion 6,000 3,000 MH 2.00 per MH and a
fixed portion 9,000 3,000 MH 3.00 per MH
54
Manufacturing Overhead Variances
Budgeted
Applied Actual
Overhead at Overhead at
Overhead Actual
Activity Standard Hours
Spending Variance
VolumeVariance
55
Manufacturing Overhead Variances
Budgeted
Applied Actual
Overhead at Overhead at
Overhead Actual
Activity Standard Hours
Shows how economicallyoverhead services
werepurchased and howefficiently
overheadservices were used. Contains both
fixedand variable costs. A controllable variance.
Spending Variance
VolumeVariance
56
Manufacturing Overhead Variances
Budgeted
Applied Actual
Overhead at Overhead at
Overhead Actual
Activity Standard Hours
Caused by producing ata level other than
thatused for computing thestandard overhead
rate. Contains only fixed costs.
Spending Variance
VolumeVariance
57
Manufacturing OverheadVariances Example

• Hansons actual production for theperiod was
  1,600 Zippies resulting in 3,200 standard machine
  hours. Actual total overhead cost for the period
  was 15,450.
• Compute the overhead spending and volume
  variances.

58
Manufacturing OverheadVariances Example
Budgeted
Applied Actual
Overhead at Overhead at
Overhead Standard
Hours Standard Hours
15,450 9,000 fixed
3,200 hrs.


6,400 variable 5.00 per hr.
2.00 per hr. 3,200 hrs.
59
Manufacturing OverheadVariances Example
Budgeted
Applied Actual
Overhead at Overhead at
Overhead Standard
Hours Standard Hours
15,450 9,000 fixed
3,200 hrs.


6,400 variable 5.00 per hr.
15,450 15,400
16,000
Spending variance50 unfavorable
Volume variance600 favorable
60
Disposing of Variances
Close byapportioning to
Close toCost of Goods Sold

• Work in Process
• Finished Goods
• Cost of Goods Sold.

61
Advantages of Standard Costs
Possible reductionsin production costs.
Improved cost control and performanceevaluation.
Better informationfor planning anddecision
making.
62
Disadvantages of Standard Costs
Emphasis onnegativeexceptions mayimpact morale.
It may be difficultto determinewhich
variancesare significant.
Emphasis on negativeexceptions maylead to
under-reporting.
63
JIT Systems and Variance Analysis
JIT systems may reduce unfavorable variances.
Long-term agreementswith suppliers
eliminateprice variances.
Well-trained flexiblework force reduces
laborefficiency variance.
Emphasis on qualityreduces materialquantity
variances.
64
End of Chapter 23