2. Chapter 17 Inventory & Control

3. What we will cover: n Standard costs n Variance Analysis

4. Standard Cost n A “budget” for a single unit. n A difference between standard & actual cost is a variance. n Large variances can be investigated & hopefully corrected.

5. Variances can be either favorable or unfavorable.

6. Inventory Accounts are Increased by n Standard cost of raw materials n Standard cost of labor n Standard cost of factory overhead.

7. Direct Materials n Price Standard: Cost incurred to acquire one unit of DM. –Includes invoice cost + shipping costs. n Quantity Standard: Number of DM units needed to produce a unit of product.

8. Direct Materials Variances: n Price: (AP-SP) x AQ purchased. n Quantity: (AQ used -SQ allowed) x SP

9. Direct Labor n Price (or Rate) Standard: Amount that should be paid per direct labor hour. n Quantity Standard: Amount of time that should be incurred to produce a product.

10. Direct Labor Variances: n Price: (AP - SP) x AQ of hours n Efficiency: (AQ - SQ allowed) x SP

11. Overhead: n Price standard: the predetermined OH rates (chpt.16) –Often have separate rates for variable and fixed. n Quantity standard: amount of volume (usually DLHs) allowed for production. –Creates a problem - if volume changes from amt. used to determine predetermined OH rate, you automatically have a variance! Use Normal Activity level.

12. Overhead Variances: n Budget Variance: Actual OH - Flex. Budget OH n Volume Variance: Flex. Budget OH - Applied OH –Applies only to fixed OH! (Not a volume variance for variable OH)

13. At end of accounting period: n Close out all variance accounts to CGS

14. Points: n Variances indicate problems - some will need attention, some will not. n Managers who have control over the problems should take action. n Just because a variance is favorable does not mean that all is OK!

15. The End