Standard Costing and Analysis of Direct Costs Chapter 10 McGraw-Hill/Irwin Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Managing Costs Standard cost Actual cost Comparison between standard and actual performance level Cost variance 10-2

Perfection versus Practical Standards: A Behavioral Issue Should we use practical standards or perfection standards? Practical standards should be set at levels that are currently attainable with reasonable and efficient effort. 10-3

I agree. Perfection standards are unattainable and therefore discouraging to most employees. Perfection versus Practical Standards: A Behavioral Issue 10-4

Standard Cost Variances Cost Variance Analysis Quantity Variance Price Variance The difference between the actual price and the standard price. The difference between the actual quantity and the standard quantity. 10-5

A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price VarianceQuantity Variance Materials price variance Materials quantity variance Labor rate variance Labor efficiency variance Variable overhead Variable overhead spending variance efficiency variance AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity 10-6

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. 10-7

A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price VarianceQuantity Variance Standard quantity is the quantity that should have been used. 10-8

Significance of Cost Variances 1. Size of variance 1. Dollar amount 2. Percentage of standard 2. Recurring variances 3. Trends 4. Controllability 5. Favorable variances 6. Costs and benefits of investigation What clues help me to determine the variances that I should investigate? 10-9

If I buy cheaper materials, my direct- materials expenses will be lower than what is budgeted. Then I’ll get my bonus. But we may lose customers because of lower quality. Behavioral Impact of Standard Costing 10-10

Interaction among Variances I am not responsible for the unfavorable labor efficiency variance! You purchased cheap material, so it took more time to process it. You used too much time because of poorly trained workers and poor supervision

Standard Costs and Product Costing Standard material and labor costs are entered into Work-in-Process inventory instead of actual costs. Standard cost variances are closed directly to Cost of Goods Sold

Advantages of Standard Costing Management by Exception Stable Product Costs Sensible Cost Comparisons Advantages Performance Evaluation Employee Motivation 10-13

Criticisms of Standard Costing Not specific Focus on cost minimization Too aggregate, too late Disadvantages Too much focus on direct-labor Narrow definition Stable production required Shorter life cycles 10-14

Use of Standard Costs for Product Costing 10-15

Use of Standard Costs for Product Costing 10-16

Use of Standard Costs for Product Costing 10-17

Use of Standard Costs for Product Costing 10-18