PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 9 Standard Costing and Variances

9- 3 Standard Cost Systems Benchmarks for measuring performance. The expected level of performance. Based on carefully predetermined amounts. Used for planning labor, material, and overhead requirements. Standard Costs are In a standard cost system, all manufacturing costs are recorded at standard rather than actual amounts.

9- 4 Ideal versus Attainable Standards I recommend using attainable standards that can be achieved with reasonable and efficient effort. Should we use ideal standards that require employees to work at 100 percent peak efficiency ?

9- 5 Types of Standards

9- 6 Master Budgets Versus Flexible Budgets

9- 7 Type of Product Cost Amount Direct Labor Standard This variance is unfavorable because the actual cost exceeds the standard cost. Direct Material These variances are favorable because the actual cost is less than the standard cost. Manufacturing Overhead Variance Analysis

9- 8 Variance Analysis

9- 9 Flexible Budget Standard Quantity (SQ) × Standard Price (SP) Actual Costs Actual Quantity (AQ) × Actual Price (AP) Spending Variance Price Variance Quantity Variance Actual Quantity (AQ) × Standard Price (SP) Total Spending Variance Variable Cost Variances

9- 10 Materials Price VarianceMaterials Quantity Variance The standard price is used to compute the quantity variance so that the production manager is not held responsible for the purchasing manager’s performance. Direct Materials Variances Production Manager Purchasing Manager

9- 11 Flexible Budget Standard Hours(SH) × Standard Rate (SR) Actual Costs Actual Hours (AH) × Actual Rate (AR) Spending Variance Rate Variance Efficiency Variance Actual Hours (AH) × Standard Rate (SR) Total Spending Variance Direct Labor Variances

9- 12 Responsibility for Labor Variances Production managers are usually held accountable for labor variances because they can influence the: Mix of skill levels assigned to work tasks. Level of employee motivation. Quality of production supervision. Quality of training provided to employees. Production Manager

9- 13 Flexible Budget Standard Hours(SH) × Standard Rate (SR) Actual Costs Actual Hours (AH) × Actual Rate (AR) Spending Variance Rate Variance Efficiency Variance Actual Hours (AH) × Standard Rate (SR) Total Spending Variance Variable Manufacturing Overhead Variances

9- 14 Variable Manufacturing Overhead Variances Rate Variance Efficiency Variance Results from paying more or less than expected for overhead items and from excessive usage of overhead items. A function of the selected allocation measure (direct labor hours). It does not reflect overhead control.

9- 15 Summary of Spending Variances Variances are always calculated by comparing actual results to budgeted, or standard, results. Companies try to hold specific managers responsible for specific variances, while removing the effects of factors that are beyond managers’ control. The formulas for variances allow only one factor, such as price, quantity or volume to change, while holding everything else constant at either actual or standard values (depending on the type of variance). The driving factor for a variance always appears in parentheses in the formula, as well as in the name of the variance. For example, the formula for the direct materials price variance is AQ X (SP - AP). Try not to memorize rules or rely on the formulas to determine whether a variance is favorable or unfavorable; just think about it. For example, paying more for material, or using more materials to produce the same number of units is unfavorable.

9- 16 Framework for Fixed Overhead Spending and Volume Variances

9- 17 The initial debit to an inventory account (Raw Materials, Work in Process, or Finished Goods) and the eventual debit to Cost of Goods Sold should be based on the standard cost, not the actual cost. Cash, payables, or other accounts, such as accumulated depreciation or prepaid assets, should be credited for the actual cost incurred. The difference between the standard cost (a debit) and the actual cost (a credit) should be recorded as the cost variance. Unfavorable variances should appear as debit entries; favorable variances should appear as credit entries. At the end of the accounting period, all the variances should be closed to the Cost of Goods Sold account to adjust the standard cost up or down to the actual cost. Common Rules Supplement 9B – Recording Standard Costs and Variances in a Standard Cost System

9- 18 End of Chapter 9