Standard Costs Pertemuan 7

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Costs Standard Costs are Predetermined. Used for planning labor, material and overhead requirements. Benchmarks for measuring performance. Used to simplify the accounting system.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Costs Direct Material Managers focus on quantities and costs that exceed standards, a practice known as management by exception. Type of Product Cost Amount Direct Labor Manufacturing Overhead Standard

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations. Setting Standard Costs

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Setting Standard Costs Production Manager: “Practical standards should be set at levels that are currently attainable with reasonable and efficient effort.” HRD: ”I agree. Ideal standards, based on perfection, are unattainable and discourage most employees.” Engineer&Managerial Accountant: “Should we use practical standards or ideal standards?”

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Setting Direct Material Standards Price Standards Final, delivered cost of materials, net of discounts. Quantity Standards Use product design specifications.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Setting Direct Labor Standards Rate Standards Use wage surveys and labor contracts. Time Standards Use time and motion studies for each labor operation.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Setting Variable Overhead Standards Rate Standards The rate is the variable portion of the predetermined overhead rate. Activity Standards The activity is the base used to calculate the predetermined overhead.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Cost Card – Variable Production Cost A standard cost card for one unit of product might look like this:

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Are standards the same as budgets? A budget is set for total costs. Standards vs. Budgets A standard is a per unit cost. Standards are often used when preparing budgets.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Cost Variances Cost Standard This variance is unfavorable because the actual cost exceeds the standard cost. A standard cost variance is the amount by which an actual cost differs from the standard cost.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Cost Variances I see that there is an unfavorable variance. But why are variances important to me? First, they point to causes of problems and directions for improvement. Second, they trigger investigations in departments having responsibility for incurring the costs.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Variance Analysis Cycle Prepare standard cost performance report Analyze variances Begin Identify questions Receive explanations Take corrective actions Conduct next period’s operations

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Cost Variances Price Variance The difference between the actual price and the standard price Quantity Variance The difference between the actual quantity and the standard quantity

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price VarianceQuantity Variance Standard price is the amount that should have been paid for the resources acquired.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Price VarianceQuantity Variance Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price A General Model for Variance Analysis Standard quantity is the quantity allowed for the actual good output. Standard input per unit of output times amount of good output.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin A General Model for Variance Analysis AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity Price VarianceQuantity Variance Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Costs Let’s use the general model to calculate standard cost variances for direct material.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Glacier Peak Outfitters has the following direct material standard for the fiberfill in its mountain parka. 0.1 kg. of fiberfill per parka at $5.00 per kg. Last month 210 kgs of fiberfill were purchased and used to make 2,000 parkas. The material cost a total of $1,029. Material Variances Example

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg. = $1,029 = $1,050 = $1,000 Price variance $21 favorable Quantity variance $50 unfavorable Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Material Variances Summary

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg. = $1,029 = $1,050 = $1,000 Price variance $21 favorable Quantity variance $50 unfavorable Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price $1,029  210 kgs = $4.90 per kg Material Variances Summary

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg. = $1,029 = $1,050 = $1,000 Price variance $21 favorable Quantity variance $50 unfavorable Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 0.1 kg per parka  2,000 parkas = 200 kgs Material Variances Summary

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Note: Using the formulas Materials price variance MPV = AQ (AP - SP) = 210 kgs ($4.90/kg - $5.00/kg) = 210 kgs (-$0.10/kg) = $21 F Materials quantity variance MQV = SP (AQ - SQ) = $5.00/kg (210 kgs-(0.1 kg/parka  2,000 parkas)) = $5.00/kg (210 kgs kgs) = $5.00/kg (10 kgs) = $50 U

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Suppose only 190 kgs of fiberfill were used to make 2,000 parkas. What is the materials quantity variance? Remember that the standards call for 0.1 kg of fiberfill per parka at a cost of $5 per kg of fiberfill. a. $50 F b. $50 U c. $100 F d. $100 U Suppose only 190 kgs of fiberfill were used to make 2,000 parkas. What is the materials quantity variance? Remember that the standards call for 0.1 kg of fiberfill per parka at a cost of $5 per kg of fiberfill. a. $50 F b. $50 U c. $100 F d. $100 U Quick Check MQV = SP (AQ - SQ) = $5.00/kg (190 kgs-(0.1 kg/parka  2,000 parkas)) = $5.00/kg (190 kgs kgs) = $5.00/kg (-10 kgs) = $50 F

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson Inc. has the following direct material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Last week 1,700 pounds of material were purchased and used to make 1,000 Zippies. The material cost a total of $6,630. Material Variances Example Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin What is the actual price per pound paid for the material? a.$4.00 per pound. b.$4.10 per pound. c.$3.90 per pound. d.$6.63 per pound. What is the actual price per pound paid for the material? a.$4.00 per pound. b.$4.10 per pound. c.$3.90 per pound. d.$6.63 per pound. Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin What is the actual price per pound paid for the material? a.$4.00 per pound. b.$4.10 per pound. c.$3.90 per pound. d.$6.63 per pound. What is the actual price per pound paid for the material? 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. Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s material price variance (MPV) for the week was: a.$170 unfavorable. b.$170 favorable. c.$800 unfavorable. d.$800 favorable. Hanson’s material price variance (MPV) for the week was: a.$170 unfavorable. b.$170 favorable. c.$800 unfavorable. d.$800 favorable. Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s material price variance (MPV) for the week was: a.$170 unfavorable. b.$170 favorable. c.$800 unfavorable. d.$800 favorable. Hanson’s material price variance (MPV) for the week was: a.$170 unfavorable. b.$170 favorable. c.$800 unfavorable. d.$800 favorable. MPV = AQ(AP - SP) MPV = 1,700 lbs. × ($ ) MPV = $170 Favorable Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin The standard quantity of material that should have been used to produce 1,000 Zippies is: a.1,700 pounds. b.1,500 pounds. c.2,550 pounds. d.2,000 pounds. The standard quantity of material that should have been used to produce 1,000 Zippies is: a.1,700 pounds. b.1,500 pounds. c.2,550 pounds. d.2,000 pounds. Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin The standard quantity of material that should have been used to produce 1,000 Zippies is: a.1,700 pounds. b.1,500 pounds. c.2,550 pounds. d.2,000 pounds. The standard quantity of material that should have been used to produce 1,000 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 Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Quick Check Hanson’s material quantity variance (MQV) for the week was: a.$170 unfavorable. b.$170 favorable. c.$800 unfavorable. d.$800 favorable. Hanson’s material quantity variance (MQV) for the week was: a.$170 unfavorable. b.$170 favorable. c.$800 unfavorable. d.$800 favorable. Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s material quantity variance (MQV) for the week was: a.$170 unfavorable. b.$170 favorable. c.$800 unfavorable. d.$800 favorable. Hanson’s 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 Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 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 variance $170 favorable Quantity variance $800 unfavorable Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Material Variances Summary Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson Inc. has the following material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Last week 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700 pounds were used to make 1,000 Zippies. Material Variances Continued Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Actual Quantity Actual Quantity Purchased Purchased × × Actual Price Standard Price 2,800 lbs. 2,800 lbs. × × $3.90 per lb. $4.00 per lb. = $10,920 = $11,200 Price variance $280 favorable Price variance increases because quantity purchased increases. Zippy Material Variances Continued

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Actual Quantity Used Standard Quantity × × Standard Price Standard Price 1,700 lbs. 1,500 lbs. × × $4.00 per lb. $4.00 per lb. = $6,800 = $6,000 Quantity variance $800 unfavorable Quantity variance is unchanged because actual and standard quantities are unchanged. Material Variances Continued Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Note Materials variances: Material price variance MPV = AQ (AP - SP) Material quantity variance MQV = SP (AQ - SQ) Labor variances: Labor rate variance LRV = AH (AR - SR) Labor efficiency variance LEV = SR (AH - SH) Actual hours Actual rate Standard rate Standard hours allowed for the actual good output

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson Inc. has the following direct labor standard to manufacture one Zippy: 1.5 standard hours per Zippy at $12.00 per direct labor hour Last week 1,550 direct labor hours were worked at a total labor cost of $18,910 to make 1,000 Zippies. Labor Variances Example Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin What was Hanson’s actual rate (AR) for labor for the week? a. $12.20 per hour. b. $12.00 per hour. c. $11.80 per hour. d. $11.60 per hour. What was Hanson’s actual rate (AR) for labor for the week? a. $12.20 per hour. b. $12.00 per hour. c. $11.80 per hour. d. $11.60 per hour. Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin What was Hanson’s actual rate (AR) for labor for the week? a. $12.20 per hour. b. $12.00 per hour. c. $11.80 per hour. d. $11.60 per hour. What was Hanson’s actual rate (AR) for labor for the week? a. $12.20 per hour. b. $12.00 per hour. c. $11.80 per hour. d. $11.60 per hour. Quick Check AR = $18,910 ÷ 1,550 hours AR = $12.20 per hour Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable. Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable. Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable. Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable. Quick Check LRV = AH(AR - SR) LRV = 1,550 hrs($ $12.00) LRV = $310 unfavorable Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin The standard hours (SH) of labor that should have been worked to produce 1,000 Zippies is: a. 1,550 hours. b. 1,500 hours. c. 1,700 hours. d. 1,800 hours. The standard hours (SH) of labor that should have been worked to produce 1,000 Zippies is: a. 1,550 hours. b. 1,500 hours. c. 1,700 hours. d. 1,800 hours. Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin The standard hours (SH) of labor that should have been worked to produce 1,000 Zippies is: a. 1,550 hours. b. 1,500 hours. c. 1,700 hours. d. 1,800 hours. The standard hours (SH) of labor that should have been worked to produce 1,000 Zippies is: a. 1,550 hours. b. 1,500 hours. c. 1,700 hours. d. 1,800 hours. Quick Check SH = 1,000 units × 1.5 hours per unit SH = 1,500 hours Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. Hanson’s labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. Hanson’s labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. Quick Check LEV = SR(AH - SH) LEV = $12.00(1,550 hrs - 1,500 hrs) LEV = $600 unfavorable Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate Labor Variances Summary Rate variance $310 unfavorable Efficiency variance $600 unfavorable 1,550 hours 1,550 hours 1,500 hours × × × $12.20 per hour $12.00 per hour $12.00 per hour = $18,910 = $18,600 = $18,000 Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Labor Efficiency Variance – A Closer Look Unfavorable Efficiency Variance Poor supervision of workers Poorly maintained equipment Poorly trained workers Poor quality materials Insufficient demand

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Note Labor variances: Labor rate variance LRV = AH (AR - SR) Labor efficiency variance LEV = SR (AH - SH) Variable overhead variances: Variable overhead spending variance VOSV = AH (AR - SR) Variable overhead efficiency variance VOEV = SR (AH Quick Check Actual hours of the allocation base Actual variable overhead rate Standard variable overhead rate Standard hours allowed for the actual good output

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was: a.$465 unfavorable. b.$400 favorable. c.$335 unfavorable. d.$300 favorable. Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was: a.$465 unfavorable. b.$400 favorable. c.$335 unfavorable. d.$300 favorable. Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was: a.$465 unfavorable. b.$400 favorable. c.$335 unfavorable. d.$300 favorable. Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was: a.$465 unfavorable. b.$400 favorable. c.$335 unfavorable. d.$300 favorable. Quick Check SV = AH(AR - SR) SV = 1,550 hrs($ $3.00) SV = $465 unfavorable Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was: a.$435 unfavorable. b.$435 favorable. c.$150 unfavorable. d.$150 favorable. Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was: a.$435 unfavorable. b.$435 favorable. c.$150 unfavorable. d.$150 favorable. Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was: a.$435 unfavorable. b.$435 favorable. c.$150 unfavorable. d.$150 favorable. Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was: a.$435 unfavorable. b.$435 favorable. c.$150 unfavorable. d.$150 favorable. Quick Check EV = SR(AH - SH) EV = $3.00(1,550 hrs - 1,500 hrs) EV = $150 unfavorable 1,000 units × 1.5 hrs per unit Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Spending variance $465 unfavorable Efficiency variance $150 unfavorable 1,550 hours 1,550 hours 1,500 hours × × × $3.30 per hour $3.00 per hour $3.00 per hour = $5,115 = $4,650 = $4,500 Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate Variable Manufacturing Overhead Variances Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Advantages of Standard Costs Management by exception Improved cost control and performance evaluation Better Information for planning and decision making Possible reductions in production costs Advantages

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Potential Problems Emphasis on negative may impact morale. Emphasizing standards may exclude other important objectives. Favorable variances may be misinterpreted. Continuous improvement may be more important than meeting standards. Standard cost reports may not be timely. Incentives to build inventories. Disadvantages of Standard Costs

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Akhir Pertemuan 7: Terima kasih