1. Cornerstones of Managerial Accounting 2e Chapter Nine
Standard Costing: A Managerial Control Tool
Mowen/Hansen
Copyright © 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

2. Objective # 1
Explain how units standards are set and why standard cost systems are adopted.

3. Unit Standards Developing standards enhances control.
Need to determine the unit standard cost for a particular input
Two decisions:
Quantity decision
Pricing decision

4. Called “Quantity Standard”
Quantity Decision
The amount of input that should be used per unit of output
Called “Quantity Standard”

5. Called “Price Standard”
Price Decision
The amount that should be paid for the quantity of input to be used.
Called “Price Standard”
Quantity Standard x Price Standard = Unit Standard

6. Used to enhance cost control Are budgeted ‘unit’ costs
Unit Standard
Used to enhance cost control
Are budgeted ‘unit’ costs
Unlike budgets which contain aggregate amounts of total revenue and total costs

7. Development of Standards
Quantity Standards are developed by:
Historical experience
Engineering studies
Input from operating personnel

8. Development of Standards
Price Standards are the joint responsibility of:
Operations
Purchasing
Personnel
Accounting

9. Types of Standards Ideal standards ---
demand maximum efficiency and can be achieved only if everything operates perfectly
Currently attainable standards
---
can be achieved under efficient operating conditions

10. Why Standard Cost Systems Are Adopted
Two reasons:
To improve planning and control
To facilitate product costing

11. Actual costs are compared to budgeted costs and variances are computed
Planning and Control
Standards:
Enhance planning and control
Improve performance management
Fundamental requirement for a flexible budgeting system
Actual costs are compared to budgeted costs and variances are computed

12. Costs are assigned to products using standards for:
Product Costing
Costs are assigned to products using standards for:
Direct materials quantity
Direct materials price
Direct labor quantity
Direct labor price
Overhead quantity
Overhead price

13. Standard Costing Advantages: Greater capacity for control
Provides readily available unit cost information
Simplifies cost assignments in both process and job costing systems

14. Explain the purpose of a standard cost sheet.
Objective # 2
Explain the purpose of a standard cost sheet.

15. Unit Quantity Standard Actual Output SQ = x
Example
Corn allowed:
Unit Quantity Standard
Actual Output SQ = x
Standard quantity of materials allowed

16. Unit Quantity Standard
Example
Unit Quantity Standard
Actual Output SQ = x SQ = 18 x
100,000 SQ =
1,800,000 ounces

17. Unit Quantity Standard Actual Output SH = x
Example
Operator hours allowed:
Unit Quantity Standard
Actual Output SH = x
Standard hours allowed

18. Unit Quantity Standard
Example
Operator hours allowed:
Unit Quantity Standard
Actual Output SH = x SH =
0.01 x
100,000 SH =
1,000 direct labor hours

19. Objective # 3
Describe the basic concepts underlying variance analysis, and explain when variances should be investigated.

20. Variance Analysis Components
SP = Standard unit price of an input
SQ = Standard quantity of input for the actual output
AP = Actual price per unit of the input
AQ = Actual quantity of the input used

21. Total Budget Variance Total Variance Actual Cost Planned Cost = –
(AP x AQ) –
(SP x SQ)

22. Price (Rate) Variance Actual Price Standard Price
Number of inputs used x -
Favorable variance = Actual price is less than standard price
Unfavorable variance = Actual price is greater than standard price

23. Usage (Efficiency) Variance
Actual Quantity
Standard Quantity
Standard Unit Price x -
Favorable variance = Actual quantity is less than standard quantity
Unfavorable variance = Actual quantity is greater than standard quantity

24. The Decision to Investigate
Performance rarely meets established standards exactly
Random variations around the standard are expected
Management should determine an acceptable range of performance

25. HOW TO Use Control Limits to Trigger a Variance Investigation
Cornerstone 9-2
HOW TO Use Control Limits to Trigger a Variance Investigation

26. Example
Information: Standard cost: $100,000; allowable deviation: $10,000; actual costs for six months:
June
$97,500
September
$102,500
July
105,000
October
107,500
August
95,000
November
112,500
Required: Plot the actual costs over time against the upper and lower control limits. Determine when a variance should be investigated.

27. Acceptable Range (Don’t Investigate)
Example
$120,000
110,000
Acceptable Range (Don’t Investigate)
Standard
100,000
90,000
June
July
August
September
October
November

28. Example $120,000 Investigate 110,000 100,000 90,000 June July August
September
October
November

29. Objective # 4
Compute the materials variances, and explain how they are used for control.

30. Direct Material Variances Materials Price Variance
Measures the difference between what should have been paid for raw materials and what was actually paid
MPV =
(AP
– SP) x AQ

31. Direct Material Variances Materials Usage Variance
Measures the difference between the direct materials actually used and the direct materials that should have been used for the actual output
MUV =
(AQ
– SQ) SP

32. Responsibility for the Materials Price Variance
Belongs to the purchasing agent
Price can be influenced by:
Quality
Quantity discounts
Distance of the source from the plant

33. Responsibility for the Materials Usage Variance
Belongs to the production manager
Variance can be influenced by minimizing:
Scrap
Waste
Rework

34. Analysis of the Variances
First step:
Decide whether the variance is significant
Second step:
Find out why it occurred

35. Accounting and Disposition of Materials Variances
Materials variances are ADDED to cost of goods sold if they are UNFAVORABLE.
Materials variances are SUBTRACTED from cost of goods sold if FAVORABLE

36. Direct Labor Variances
Labor Rate Variance
Computes the difference between what was paid to direct laborers and what should have been paid
LRV =
(AR
- SR) AH

37. Direct Labor Variances Labor Efficiency Variance
Measures the difference between the labor hours that were actually used and the labor hours that should have been used
LEV =
(AH
– SH) SR

38. Compute the labor variances and explain how they are used for control.
Objective # 5
Compute the labor variances and explain how they are used for control.

39. Causes of Labor Rate Variance
Labor rates are largely determined by such external forces as labor markets and union contracts.
Labor rates can vary when:
More skilled and more highly paid laborers are used for less skilled tasks
Unexpected overtime occurs

40. Responsibility for the Labor Efficiency Variance
Generally speaking, production managers are responsible for the use of direct labor
But once the cause is discovered, responsibility may be assigned elsewhere.