© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 7: Standard Costing and Variance Analysis Cost Accounting Principles, 9e Raiborn ● Kinney

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives Why are standard cost systems used? How are material, labor, and overhead standards set? How are material, labor, and overhead variances calculated and recorded? How have the setting and use of standards changed over time? How does the use of a single conversion element (rather than the traditional labor and overhead elements) affect standard costing? (Appendix) How are variances affected by multiple material and labor categories?

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Why Use Standard Cost Systems A standard cost system tracks both standard and actual costs. This dual recording provides an essential element to cost control: having norms against which actual operations can be compared. Motivating Planning Controlling - variance analysis Clerical efficiency Decision making Performance evaluation

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Setting Standards Appropriateness Attainability  Expected standards  Practical standards  Ideal standards

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Standards Standard costs are budgeted costs to  manufacture a single unit of product, or  perform a single service To develop standards, identify  material and labor types, quantities, and prices  overhead types and behavior

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Material Standards Materials used  Types  Quality  Quantity  Price From  Product specifications, observation, inquiry  Bill of materials Balance cost, quality, and projected sales price

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Labor Standards Labor used  Types Production, setup, cleanup, and rework  Quantity  Cost Include wages, payroll taxes, and fringe benefits From  Industrial engineering studies including methods- time measurement (MTM), time and motion studies, and historical data  Operations flow document

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Overhead Standards Variable and fixed manufacturing overhead Estimated level of activity Estimated costs Predetermined factory overhead application rates

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. SP x SQAP x AQ Total Variance AP = actual cost/price per unit of materials or hours of labor AQ = actual quantity of materials or hours of labor SP =standard cost/price per unit of materials or hours of labor SQ =standard quantity of materials or hours of labor Inputs Outputs

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Material Price Variance (MPV) AP x AQSP x SQ Total Variance SP x AQ MPV (AP - SP) x AQ * * Favorable or unfavorable What was paid What should have been paid

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Material Price Variance Calculate Material Price Variance at  point of purchase, or  when materials used

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Material Quantity Variance (MQV) AP x AQSP x SQ Total Variance SP x AQ MQV (AQ - SQ) x SP * * Favorable or unfavorable What should have been used for level of output What was used

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Labor Rate Variance (LRV) AP x AQSP x SQ Total Variance SP x AQ LRV (AP - SP) x AQ * * Favorable or unfavorable What was paid What should have been paid

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Labor Efficiency Variance (LEV) AP x AQSP x SQ Total Variance SP x AQ LEV (AQ - SQ) x SP * * Favorable or unfavorable What should have been used for level of output What was used

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Variable Overhead Variances What should have been used for level of output For actual hours used VOH Spending Variance VOH Efficiency Variance Total VOH Variance SP x SQSP x AQ Actual VOH Budgeted VOH Applied VOH Actual

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. VOH Spending Variance Caused by price differences  managers have little control over prices Caused by shrinkage or waste  managers should be held accountable

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Fixed Overhead Variances SP x SQ Actual FOH Budgeted FOH Applied FOH FOH Spending Variance FOH Volume Variance Total FOH Variance What should have been used for level of output Constant Amount

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. FOH Spending Variance Calculate variance for each component Caused by price differences May reflect mismanagement of resources

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. FOH Volume Variance Calculate variance for each component Measures capacity utilization Caused by producing at a level that differs from the capacity level used to compute the predetermined overhead rate Also called the noncontrollable variance

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Questions Why are standard cost systems used? How are standards set for material, labor, and overhead? How are material, labor and overhead variances calculated and recorded?

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Potential Ethical Issues Setting high standards to create favorable variances Ignoring effects of one production area on another Setting overhead rates too low based on high production levels to distort inventory cost and operating income Producing inventory only to create a favorable volume variance Not updating standards so that favorable variances are created Using low quality materials or labor to create favorable variances and low quality products