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Controlling Manufacturing Costs: Standard Costs

5.Develop standard costs per unit of product. 6.Compute the standard costs of products manufactured during the period and determine cost variances between actual costs and standard costs. 7.Compute the amounts and analyze the nature of variances from standard for raw materials, labor, and manufacturing overhead. Standard Costs As a Control Tool Section Objectives

Reflect what costs should be per unit under normal, efficient operating conditions Used to measure the effectiveness of operations Should be set at an achievable level Standard Costs Page 1101

Raw Materials Standards Direct Labor Standards Manufacturing Overhead Standards Developing Standard Costs Page 1101

Standard Quantity: Number of units of each type of raw material required to manufacture one unit of finished product Standard Cost: Cost of each unit of raw material required to make the product Raw Material Standard Page 1101 Raw Material Standard = Standard Quantity x Standard Cost

Standard Quantity: Number of hours of each type of labor needed to manufacture one unit of finished product Standard Cost: Cost of each type of labor used to make the product Direct Labor Standard Page 1101 Direct Labor Standard = Standard Quantity x Standard Cost

The standard overhead cost per unit of product is usually based on the overhead application rate used to assign overhead costs to products. Overhead application rate can be based on: Direct labor cost Direct labor hours Some other measure Standard Overhead Cost Page 1101

Materials Variance Labor Variance Manufacturing Overhead Variance Variances Between Standard and Actual Costs Page 1103

Shows the per-unit standard costs for one product Preparing a Standard Cost Card STANDARD COST CARD Item: Toy Car—Product DC 24 Materials Base material: 1 $1.79/lb.$1.79 Finishing material: 3 $0.05/ounce.15 Total Materials$1.94 Labor 1/10 $12/hour$1.20 Manufacturing Overhead 1/10 $13 per hour$1.30 Total Standard Cost per Unit$4.44 Page 1102

Compute actual costs. Compare actual costs to standard costs. Analyze the cost variance. Comparing Actual and Standard Costs Page 1103

Comparing Actual and Standard Costs Page 1103 Manufacturing costs charged to job 6, Standard cost of 1,400 units: 1,400 units X $4.44 per unit $6, Compute the variance: Variance $ Job Order Cost Sheet: Manufacturing costs: Materials: Base material: 1,425 $1.92/lb. $2, Job X2–16 Product: Toy Car—Product DC 24 Number of units manufactured: 1,400 Total manufacturing costs $6, Finishing material: 4,300 $.045/ounce Total materials $2, Direct labor: 130 $12.10 per hour 1, Manufacturing overhead: 130 $13.00 per hour 1,690.00

Materials Variance Materials Quantity Variance Results from a difference between the actual quantity of materials consumed and the standard quantity allowed for the job Formula: Materials Price Variance Results from a difference between the actual cost and the standard cost allowed Formula: (Actual Quantity – Standard Quantity) x Standard Cost Page 1104 (Actual Cost – Standard Cost) x Actual Quantity

Page 1104 QUESTION: How is the materials quantity variance calculated? Base Material Actual quantity 1,425 pounds Standard quantity (1,400 units x 1lb./unit) 1,400 pounds (Actual Quantity – Standard Quantity) x Standard Cost Excess base material used 25 pounds Times standard price per pound $ 1.79 Unfavorable quantity variance $44.75 Determining Materials Quantity Variance

Page 1104 QUESTION: How is the materials price variance calculated? Base Material Actual price per pound $ 1.92 Standard price per pound $ 1.79 (Actual Cost – Standard Cost) x Actual Quantity Excess of actual over standard price $ 0.13 Times actual number of pounds consumed 1,425 Unfavorable materials price variance $ Determining Materials Price Variance

Base Material Quantity variance $ (44.75) Favorable or (Unfavorable) Variance Price variance (185.25) $(230.00) Summary of Materials Variances Page 1105

Labor Variance Labor Time Variance Results from a difference between the actual hours worked and the standard labor hours allowed for the job Formula: Labor Rate Variance Results from a difference between the actual labor rate per hour and the standard labor rate per hour Formula: (Actual Hours – Standard Hours) x Standard Rate (Actual Rate – Standard Rate) x Actual Hours Page 1105

Actual hours worked130 Determining Labor Time Variance Because fewer hours were worked than the number of hours allowed by the standard, the variance is favorable. Page 1105 Standard hours allowed (1,400 units x 1/10 hour per unit)140 Excess of standard over actual hours 10 Times standard rate per hour $ Favorable labor time variance $120.00

Actual rate per hour $ Determining Labor Rate Variance Human resources is responsible for labor rate variance, though labor market conditions and operating decisions may also affect the rate at which employees can be hired. Page 1105 Standard rate per hour Excess of actual over standard rate $ 0.10 Times actual number of hours worked 130 Unfavorable labor rate variance $(13.00)

Applied overhead and standard overhead are analyzed to determine the variance. Because it is difficult to determine actual overhead for individual jobs, the overhead variance analysis is usually based on the total actual overhead and total standard overhead for the products manufactured. Manufacturing Overhead Variances Page 1106

REVIEWREVIEW _____________ reflect what costs should be per unit under normal, efficient operating conditions. The raw material standard is the ________ _______ of each raw material multiplied by its ____________. A standard cost card shows the _______ standard costs for materials, labor, and overhead. per unit quantity Standard costs Complete the following sentences: standard cost standard

REVIEWREVIEW The three types of variances between standard costs and actual costs are ________________, _____________, and _____________________________. The labor rate variance is the difference between the ______________ per hour and _________________ per hour, multiplied by the ___________. actual labor rate materials variance Complete the following sentences: labor variance manufacturing overhead variance standard labor rate actual hours The two components of materials variance are ________________________ and _____________________. materials quantity variance materials price variance

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