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STANDARD COST.

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Presentation on theme: "STANDARD COST."— Presentation transcript:

1 STANDARD COST

2 STANDARD COSTING A simple method that allocates to production the material, labor, and overhead costs on a predetermined basis. The basis for the standards can be ideal, i.e., minimum costs, loose, i.e., maximum costs, or expected costs.

3 VARIANCE ANALYSIS Variances from standard can be calculated and analyzed. If costs exceed standard, we classify the variance as “UNFAVORABLE” and if costs are below standard, we classify the variance as “FAVORABLE.”

4 MATERIAL VARIANCES MATERIAL PRICE VARIANCE =
DIFFERENCE BETWEEN ACTUAL PRICE PAID FOR THE MATERIALS PURCHASED AND THE STADARD PRICE OF THE MATERIALS PURCHASED MATERIAL QUANTITY VARIANCE DIFFERENCE BETWEEN THE ACTUAL QUANTITY USED AND THE STANDARD QUANTITY THE STANDARD PRICE PER UNIT

5 MATERIAL VARIANCES EXAMPLE
THE STANDARD WAS: 5 $10 = $50 PURCHASED 6,000 POUNDS FOR $58,000 PRODUCED 1,100 UNITS OF PRODUCT USED 5,800 POUNDS OF MATERIALS

6 SOLUTION TO EXAMPLE MATERIAL PRICE VARIANCE
$58, $10 (6,000) = $2,000 favorable MATERIAL QUANTITY VARIANCE $10 ( 5,800 – 5,500) = $3,000 unfavorable

7 LABOR VARIANCE LABOR RATE (PRICE) VARIANCE =
DIFFERENCE BETWEEN ACTUAL RATE PAID FOR THE LABOR PURCHASED AND THE STADARD RATE OF THE LABOR PURCHASED LABOR EFFICIENCY (QUANTITY) VARIANCE DIFFERENCE BETWEEN THE ACTUAL QUANTITY USED AND THE STANDARD QUANTITY THE STANDARD RATE PER HOUR

8 LABOR VARIANCE EXAMPLE
THE STANDARD WAS: 3 $20 = $60 PRODUCED 1,100 UNITS OF PRODUCT USED 3,200 HOURS OF LABOR LABOR COST $60,800

9 SOLUTION TO EXAMPLE LABOR RATE VARIANCE
$60,800 - $20 (3,200) = $3,200 favorable LABOR EFFICIENCY VARIANCE $20 ( 3,300 – 3,200) = $2,000 favorable

10 GRAPHICALLY $ 20 19 HOURS 3,200 3,300 LABOR RATE VAR. LEV ACTUAL COSTS

11 EXERCISE STANDARD COSTS WERE: MATERIALS 6 POUNDS @ $3
LABOR 7 $15 PRODUCED 2,000 UNITS: PURCHASED 11,000 POUNDS OF MATERIALS FOR $34,500 USED 12,500 POUNDS OF MATERIALS USED 13,400 HOURS OF LABOR FOR $198,400

12 SOLUTION TO EXERCISE MATERIAL PRICE VARIANCE
$34, $3 (11,000) = $1,500 unfavorable MATERIAL QUANTITY VARIANCE $3 (12,000 – 12,500) = $1,500 unfavorable LABOR RATE VARIANCE $198,400 - $15 (13,400) = $2,600 favorable LABOR EFFICIENCY VARIANCE $15 ( 13,400 – 14,000) = $9,000 favorable

13 WHO IS RESPONSIBLE FOR VARIANCES
MATERIAL PRICE VARIANCE IS THE RESPONSIBILITY OF THE PURCHASING MANAGER LABOR RATE VARIANCE IS THE RESPONSIBILITY OF THE PERSONNEL MANAGER MATERIAL QUANTITY AND LABOR EFFICIENCY VARIANCES ARE THE RESPONSIBILTY OF THE PRODUCTION MANAGER

14 CAUTION ABOUT USE OF VARIANCES
ASSUME THE PURCHASING MANAGER HAS AN OPPORTUNITY TO PURCHASE SOME MATERIALS AT A PRICE BELOW STANDARD BUT THE MATERIALS ARE AT THE LOW END OF THE QUALITY USED IN SETTING THE STANDARD THE RESULT WILL BE A FAVORABLE MATERIALPRICE VARIANCE BUT PROBABLY AN UNFAVORABLE MATERIAL QUANTITY VARIANCE AND AN UNFAVORABLE LABOR EFFICIENCY VARIANCE

15 OVERHEAD VARIANCES SPENDING VARIANCE
DIFFERENCE BETWEEN ACTUAL COSTS AND STANDARD COSTS FOR UNITS PRODUCED EFFICIENCY VARIANCE DIFFERENCE BETWEEN ACTUAL AND STANDARD STANDARD VARIABLE OVERHEAD RATE CAPACITY/VOLUME/DENOMINATOR VARIANCE DIFFERENCE BETWEEN ACTUAL UNITS PRODUCED AND UNITS USED TO DETERMINE STANDARD OVERHEAD COST PER THE STANDARD FIXED OVERHEAD RATE

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