1. Standard Costing and Analysis of Direct Costs
CHAPTER 10
Standard Costing and Analysis of Direct Costs
Chapter 10: Standard Costing and Analysis of Direct Costs
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2. Learning Objective 1
Learning Objective 1. Describe the elements of a cost control system.
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3. Comparison between standard and actual performance level
Managing Costs
Standard cost
Actual cost
Comparison between standard and actual performance level
A managerial accountant’s budgetary-control system has three parts. First, a predetermined or standard cost is set. In essence, a standard cost is a budget for the production of one unit of product or service. It serves as the benchmark in the budgetary-control system. When the firm produces more than one unit, the managerial accountant uses the standard unit cost to determine the budgeted cost of production or the total standard cost. Second, the managerial accountant measures the actual cost incurred in the production process. Third, the managerial accountant compares the actual cost with the budgeted or standard cost. Any difference between the two is called a cost variance. Cost variances then are used in controlling costs. (LO1)
Cost variance
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4. Management by Exception
Managers focus on quantities and costs that exceed standards, a practice known as management by exception..
Standard
Amount
Direct Material
Managers do not have time to investigate every variance between actual and standard costs.
They focus their attention on the causes of significant cost variances.
This is called management by exception.
When operations are going along as planned, actual costs and profit will typically be close to the budgeted amounts.
However, if there are significant departures from planned operations, such effects will show up as significant cost variances. Managers investigate these variances to determine their causes, if possible, and take corrective action when indicated. (LO1)
Direct Labor
Type of Product Cost
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5. Learning Objective 2
Learning Objective 2. Describe two ways to set cost standards and distinguish between perfection and practical standards.
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6. Analysis of Historical Data
Setting Standards
Cost Standards
Analysis of Historical Data
Task Analysis
Two methods are typically used for setting cost standards: analysis of historical data and task analysis.
One indicator of future costs is historical cost data. In a mature production process, where the firm has a lot of production experience, historical costs can provide a good basis for predicting future costs.
In using task analysis, the emphasis shifts from what the product did cost in the past to what it should cost in the future.
The managerial accountant typically works with engineers to conduct studies in an effort to determine exactly how much direct material should be required, how machinery should be used in the production process, and many direct labor hours are required. (LO2)
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7. Participation in Setting Standards
Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations.
Standards should not be determined by the managerial accountant alone.
People generally will be more committed to meeting standards if they are allowed to participate in setting them.
For example, production supervisors should have a role in setting production cost standards, and sales managers should be involved in setting targets for sales prices and volume.
In addition, knowledgeable staff personnel should participate in the standard-setting process. (LO2)
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8. Perfection versus Practical Standards: A Behavioral Issue
Practical standards should be set at levels that are currently attainable with
reasonable and
efficient effort.
Should we use practical standards or perfection standards?
Standards that are as tight as practical, but still are expected to be attained, are called practical (or attainable) standards.
Such standards assume a production process that is as efficient as practical under normal operating conditions.
Practical standards allow for such occurrences as occasional machine breakdowns and normal amounts of raw-material waste. (LO2)
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9. Perfection versus Practical Standards: A Behavioral Issue
I agree. Perfection standards are unattainable and therefore discouraging to most employees.
Some managers believe that perfection standards motivate employees to achieve the lowest cost possible.
They claim that since the standard is theoretically attainable, employees will have an incentive to come as close as possible to achieving it.
Other managers and many behavioral scientists disagree.
They feel that perfection standards discourage employees, since they are so unlikely to be attained.
Moreover, setting unrealistically difficult standards may encourage employees to sacrifice product quality to achieve lower costs. (LO2)
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10. Use of Standards by Service Organizations
Standard cost analysis may be used in any organization with repetitive tasks.
A relationship between tasks and output measures must be established.
Many service industry firms, nonprofit organizations, and governmental units make use of standards.
Fast food restaurants set a standard for the amount of ingredients in a menu item.
Airlines set standards for fuel and maintenance costs.
Insurance companies set standards for the amount of time to process an insurance application.
Even a county motor vehicle office may have a standard for the number of days required to process and return an application for vehicle registration.
These and similar organizations use standards in budgeting and cost control in much the same way that manufacturers use standards. (LO2)
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11. Learning Objective 3
Learning Objective 3. Compute and interpret the direct-material price and quantity variances and the direct-labor rate and efficiency variances.
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12. Cost Variance Analysis
Standard Cost Variances
Price Variance
Quantity Variance
There are two types of standard cost variances: price variance and quantity variance.
A price variance arises when there is a difference between the actual price and the standard price.
A quantity variance occurs when there is a difference between the actual quantity used and the standard quantity to be used. (LO3)
The difference between the actual price and the standard price.
The difference between the actual quantity and the standard quantity.
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13. A General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance
Quantity Variance
Materials price variance Materials quantity variance Labor rate variance Labor efficiency variance Variable overhead Variable overhead spending variance efficiency variance
The general model for variance analysis calculates the price variance and the quantity variance.
The (actual quantity times the actual price) less (the actual quantity times the standard price) is the formula for calculating the price variance.
This formula can be restated as the actual price minus the standard price, then multiplied by the actual quantity.
The (actual quantity times the standard price) less (the standard quantity times the standard price) is the formula for calculating the quantity variance.
This formula can be restated as the actual quantity minus the standard quantity, then multiplied by the standard price. (LO3)
AQ(AP - SP) SP(AQ - SQ)
AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity
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14. A General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Standard price is the amount that should have been paid for the resources acquired.
Price Variance
Quantity Variance
In this model, the standard price is the amount that should have been paid for the resources acquired. (LO3)
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15. A General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance
Quantity Variance
The standard quantity is the quantity of that resource that should have been used. (LO3)
Standard quantity is the quantity that should have been used.
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16. Standard Costs
Let’s use the concepts of the general model to calculate standard cost variances, starting with direct material.
Let’s use the concepts of the general model to calculate standard cost variances for Hanson, Inc.
We will start with direct materials. (LO3)
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17. 1.5 pounds per Zippy at $4.00 per pound
Material Variances
Zippy
Hanson Inc. has the following direct material standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week 1,700 pounds of material were purchased and used to make 1,000 Zippies. The material cost a total of $6,630.
Hanson Inc. manufactures a product called a Zippy.
The direct material standard for one Zippy is 1.5 pounds of material at a cost of $4.00 per pound.
Last week, 1,700 pounds of materials were purchased and used to make 1,000 Zippies.
The actual cost of the materials was $6,630. (LO3)
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18. Material Variances
Zippy
What is the actual price per pound paid for the material? a. $4.00 per pound. b. $4.10 per pound. c. $3.90 per pound. d. $6.63 per pound.
To calculate the direct-material price variance, we must first determine the actual price per pound of material. (LO3)
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19. Material Variances
Zippy
What is the actual price per pound paid for the material? a. $4.00 per pound. b. $4.10 per pound. c. $3.90 per pound. d. $6.63 per pound.
The actual price per pound can be calculated by taking the total actual cost of $6,630 and dividing it by the actual number of pounds which was 1,700.
Therefore, the actual cost per pound was $ (LO3)
AP = $6,630 ÷ 1,700 lbs. AP = $3.90 per lb.
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20. Material Variances
Zippy
Hanson’s direct-material price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.
Now that we know the actual price per pound, the standard price per pound and the actual number of pounds used, we can calculate the material price variance. (LO3)
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21. Material Variances
Zippy
Hanson’s direct-material price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.
The standard price of $4.00 is subtracted from the actual price of $3.90.
This difference is multiplied by the actual quantity of 1,700 pounds.
The resulting variance is a negative $170.
The variance is favorable because the actual price per pound was less than the standard price per pound. (LO3)
MPV = AQ(AP - SP) MPV = 1,700 lbs. × ($ ) MPV = $170 Favorable
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22. Material Variances
Zippy
The standard quantity of material that should have been used to produce 1,000 Zippies is:
a. 1,700 pounds.
b. 1,500 pounds.
c. 2,550 pounds.
d. 2,000 pounds.
To calculate the direct-material quantity variance, we must first determine the standard quantity of materials that should have been used to produce 1,000 Zippies. (LO3)
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23. Material Variances
Zippy
The standard quantity of material that should have been used to produce 1,000 Zippies is:
a. 1,700 pounds.
b. 1,500 pounds.
c. 2,550 pounds.
d. 2,000 pounds.
SQ = 1,000 units × 1.5 lbs per unit SQ = 1,500 lbs
The standard quantity of material for one Zippy is 1.5 pounds.
Since 1,000 Zippies were produced, we must multiply 1.5 pounds times 1,000 units to get 1,500 pounds of material for the standard quantity. (LO3)
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24. Material Variances
Zippy
Hanson’s direct-material quantity variance (MQV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.
Now that we know the actual quantity used, the standard quantity that should have been used and the standard price per pound, we can calculate the material quantity variance. (LO3)
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25. Material Variances
Zippy
Hanson’s direct-material quantity variance (MQV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.
MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable
The standard quantity of 1,500 pounds is subtracted from the actual quantity of 1,700 pounds.
This difference is multiplied by the standard price of $4.00 per pound.
The resulting variance is a positive $800.
The variance is unfavorable because the actual quantity used was greater than the standard quantity that should have been used to make the 1,000 Zippies. (LO3)
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26. Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
1,700 lbs ,700 lbs ,500 lbs × × × $3.90 per lb $4.00 per lb $4.00 per lb.
$6, $ 6, $6,000
To summarize, the direct-material price variance is the difference between the actual quantity at the actual price and the actual quantity at the standard price.
The result is a $170 favorable price variance.
The direct-material quantity variance is the difference between the actual quantity at the standard price and the standard quantity at the standard price.
The result is a $800 unfavorable quantity variance. (LO3)
Price variance $170 favorable
Quantity variance $800 unfavorable
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27. Material Variances
Zippy
Hanson purchased and used 1,700 pounds. How are the variances computed if the amount purchased differs from the amount used?
The price variance is computed on the entire quantity purchased.
The quantity variance is computed only on the quantity used.
When the amount of direct-materials purchased is different from the amount used, the direct-material price variance is based on the quantity purchased.
The difference between the purchase price and the standard price are highlighted by the price variance, which relates to the purchasing function.
In contrast, the direct-material quantity variance is based on the amount of material used in production.
The quantity variance highlights differences between the quantity of material actually used and the standard quantity allowed. (LO3)
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28. 1.5 pounds per Zippy at $4.00 per pound
Material Variances
Zippy
Hanson Inc. has the following material standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700 pounds were used to make 1,000 Zippies.
Let’s try an example where the amount of materials purchased is different than the amount of materials used in production.
The direct material standard for one Zippy is still 1.5 pounds of material at a cost of $4.00 per pound.
Last week, 2,800 pounds of materials were purchased at a total cost of $10,920.
1,700 pounds of material were used to make 1,000 Zippies. (LO3)
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29. Price variance $280 favorable
Material Variances
Zippy
Actual Quantity Actual Quantity Purchased Purchased × × Actual Price Standard Price
MPV = AQ(AP - SP) MPV = 2,800 lbs × ($ ) MPV = $ Favorable
2,800 lbs ,800 lbs × × $3.90 per lb $4.00 per lb.
$10, $11,200
The standard price of $4.00 is subtracted from the actual price of $3.90.
This difference is multiplied by the amount of materials purchases, which is 2,800 pounds.
The resulting direct-material price variance is a negative $280.
The variance is favorable because the actual price per pound was less than the standard price per pound.
But the variance is larger when a greater quantity of materials were purchased. (LO3)
Price variance $280 favorable
Price variance increases because quantity purchased increases.
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30. Quantity variance $800 unfavorable
Material Variances
Zippy
Actual Quantity Used Standard Quantity × × Standard Price Standard Price
MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs ,500 lbs) MQV = $800 unfavor.
1,700 lbs ,500 lbs × × $4.00 per lb $4.00 per lb.
$6, $6,000
To calculate the material quantity variance, the standard quantity of 1,500 pounds is subtracted from the actual quantity of 1,700 pounds.
This difference is multiplied by the standard price of $4.00 per pound.
The resulting direct-material quantity variance is a positive $800.
The variance is unfavorable because the actual quantity used was greater than the standard quantity that should have been used to make the 1,000 Zippies. Notice that the amount of material purchased did not effect this variance. (LO3)
Quantity variance is unchanged because actual and standard quantities are unchanged.
Quantity variance $800 unfavorable
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31. Isolation of Material Variances
I need the variances as soon as possible so that I can better identify problems and control costs.
You accountants just don’t understand the problems we production managers have.
Okay. I’ll start computing the price variance when material is purchased and the quantity variance as soon as material is used.
A significant price variance should be investigated as soon as possible after the material is purchased.
The direct-material quantity variance should be calculated at the time the material is used in production. (LO3)
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32. Now let’s calculate standard cost variances for direct labor.
Standard Costs
Now let’s calculate standard cost variances for direct labor.
Now we will use the concepts of the general model to calculate the direct-labor variances for Hanson. (LO3)
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33. 1.5 standard hours per Zippy at $10.00 per direct labor hour
Labor Variances
Zippy
Hanson Inc. has the following direct labor standard to manufacture one Zippy:
1.5 standard hours per Zippy at $10.00 per direct labor hour
Last week 1,550 direct labor hours were worked at a total labor cost of $15,810 to make 1,000 Zippies.
Hanson has established a standard for direct-labor at 1.5 hours at $10 per hour for one Zippy.
Last week, 1,550 direct labor hours were used to make 1,000 Zippies.
The total direct labor cost was $15,810. (LO3)
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34. What was Hanson’s actual rate (AR) for labor for the week?
Labor Variances
Zippy
What was Hanson’s actual rate (AR) for labor for the week?
a. $10.20 per hour.
b. $10.10 per hour.
c. $9.90 per hour.
d. $9.80 per hour.
To calculate the direct-labor rate variance, we must first determine the actual price per direct labor hour. (LO3)
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35. What was Hanson’s actual rate (AR) for labor for the week?
Labor Variances
Zippy
What was Hanson’s actual rate (AR) for labor for the week?
a. $10.20 per hour.
b. $10.10 per hour.
c. $9.90 per hour.
d. $9.80 per hour.
AR = $15,810 ÷ 1,550 hours AR = $10.20 per hour
The total direct labor cost for the week of $15,810 is divided by the 1,550 direct labor hours worked.
Therefore, the actual rate for the week was $10.20 per hour. (LO3)
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36. Hanson’s labor rate variance (LRV) for the week was:
Labor Variances
Zippy
Hanson’s labor rate variance (LRV) for the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Now that we know the actual direct labor rate, the standard rate, and the actual direct labor hours used, we can calculate the direct-labor rate variance. (LO3)
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37. Hanson’s labor rate variance (LRV) for the week was:
Labor Variances
Zippy
Hanson’s labor rate variance (LRV) for the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
The standard rate of $10.00 is subtracted from the actual rate of $10.20.
This difference is multiplied by the actual direct-labor hours of 1,550 pounds.
The resulting variance is a positive $310.
The variance is unfavorable because the actual rate per hour was greater than the standard rate per hour. (LO3)
LRV = AH(AR - SR) LRV = 1,550 hrs($ $10.00) LRV = $310 unfavorable
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38. Labor Variances
Zippy
The standard hours (SH) of labor that should have been worked to produce 1,000 Zippies is:
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.
To calculate the direct-labor efficiency variance, we must first determine the standard number of hours that should have been used to produce 1,000 Zippies. (LO3)
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39. Labor Variances
Zippy
The standard hours (SH) of labor that should have been worked to produce 1,000 Zippies is:
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.
The standard hours allowed for one Zippy is 1.5 hours.
Since 1,000 Zippies were produced, we must multiply 1.5 hours times 1,000 units to get 1,500 hours of direct-labor for the total standard hours allowed. (LO3)
SH = 1,000 units × 1.5 hours per unit SH = 1,500 hours
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40. Hanson’s labor efficiency variance (LEV) for the week was:
Labor Variances
Zippy
Hanson’s labor efficiency variance (LEV) for the week was:
a. $510 unfavorable.
b. $510 favorable.
c. $500 unfavorable.
d. $500 favorable.
Now that we know the actual hours used, the standard hours allowed, and the standard rate per hour, we can calculate the direct-labor efficiency variance. (LO3)
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41. Hanson’s labor efficiency variance (LEV) for the week was:
Labor Variances
Zippy
Hanson’s labor efficiency variance (LEV) for the week was:
a. $510 unfavorable.
b. $510 favorable.
c. $500 unfavorable.
d. $500 favorable.
LEV = SR(AH - SH) LEV = $10.00(1,550 hrs - 1,500 hrs) LEV = $500 unfavorable
The standard hours allowed of 1,500 hours is subtracted from the actual hours used of 1,550 pounds.
This difference is multiplied by the standard rate of $10.00 per hour.
The resulting variance is a positive $500.
The variance is unfavorable because the actual hours used were greater than the standard hours allowed to make the 1,000 Zippies. (LO3)
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42. Labor Variances Summary
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
1,550 hours ,550 hours ,500 hours × × × $10.20 per hour $10.00 per hour $10.00 per hour
$15, $15, $15,000
To summarize, the direct-labor rate variance is the difference between the actual hours at the actual rate and the actual hours at the standard rate.
The result is a $310 unfavorable price variance.
The direct-labor efficiency variance is the difference between the actual hours at the standard rate and the standard hours at the standard rate.
The result is a $500 unfavorable efficiency variance. (LO3)
Rate variance $310 unfavorable
Efficiency variance $500 unfavorable
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43. Learning Objective 4
Learning Objective 4. Explain several methods for determining the significance of cost variances.
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44. Significance of Cost Variances
What clues help me to determine the variances that I should investigate?
Size of variance
Dollar amount
Percentage of standard
Recurring variances
Trends
Controllability
Favorable variances
Costs and benefits of investigation
Managers do not have time to investigate all variances.
Management by exception enables managers to investigate only significant variances.
But what is significant?
Some guidelines that managers often follow are the size of the variance, recurring variances, trends of the variance, the controllability of the cost item, and favorable as well as unfavorable variances. Managers must also consider the cost and benefits of the investigation. (LO4)
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45. Statistical Control Chart
Warning signals for investigation • •
Favorable Limit • • • •
Desired Value • •
Unfavorable Limit •
Ideally, managers would be able to sort out the randomly caused variances from those with substantive and controllable underlying causes.
It is impossible to accomplish this with 100 percent accuracy, but a statistical control chart can help.
A statistical control chart plots cost variances across time and compares them with a statistically determined critical value that triggers an investigation.
This critical value is usually determined by assuming that cost variances have a normal probability distribution with a mean of zero.
The critical value is set at some multiple of the distribution’s standard deviation.
Variances greater than the critical value are investigated.
Those less than the critical value are not.
The presumption is that these minor variances are due to random causes and are not worth investigating. (LO4) 1 2 3 4 5 6 7 8 9
Variance Measurements
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46. Learning Objective 5
Learning Objective 5. Describe some behavioral effects of standard costing.
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47. Behavioral Impact of Standard Costing
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.
Standard costs and variance analysis are useful in diagnosing organizational performance.
These tools help managers discern “the story behind the story”—the details of operations that underlie reported cost and profit numbers.
Standard costs, budgets, and variances also are used to evaluate the performance of individuals and departments.
The performance of individuals, relative to standards or budgets, often is used to help determine salary increases, bonuses, and promotions.
When standards and variances affect employee reward structures, they can profoundly influence behavior. (LO5)
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48. Controllability of Variances
Direct-Material Price Variance
Direct-Material Quantity Variance
Who is responsible for the direct-material price and quantity variances?
The direct labor rate and efficiency variances?
These questions are often difficult to answer, but it is often possible to identify the manager who is most able to influence a particular variance, even if he or she does not exercise complete control over the outcome.
The purchasing manager is generally in the best position to influence direct-material price variances.
However, the production supervisor is usually in the best position to influence direct-material quantity variances.
The production supervisor is generally in the best position to influence the work schedules of employees with different skill levels and seniority which will effect the direct-labor rate variance.
Also, the production supervisor can maximize the efficiency of employees by motivating employees toward production goals and preparing effective work schedules.
This will impact the direct-labor efficiency variance. (LO5)
Direct-Labor Rate Variance
Direct-Labor Efficiency Variance
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49. Interaction among Variances
You used too much time because of poorly trained workers and poor supervision.
I am not responsible for the unfavorable labor efficiency variance!
You purchased cheap material, so it took more time to process it.
Interactions among variances often occur, making it even more difficult to determine the responsibility for a particular variance.
Less expensive materials may also mean lower quality, making the material difficult to work with.
On the other hand, using highly paid skilled workers to perform unskilled tasks can also result in an unfavorable direct-labor rate variance. (LO5)
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50. Learning Objective 6
Learning Objective 6. Explain how standard costs are used in product costing.
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51. 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.
In actual-costing and normal-costing systems, the actual costs of direct material and direct labor are charged to Work-in-Process Inventory.
In a standard costing system, the standard costs of direct material and direct labor are entered into Work-in-Process Inventory.
The cost variances are calculated and then closed to cost of goods sold. (LO6)
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52. Learning Objective 7
Learning Objective 7. Summarize some advantages of standard costing.
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53. Advantages of Standard Costing
Sensible Cost Comparisons
Management by Exception
Performance Evaluation
Employee Motivation
Advantages
There are several advantages attributed to standard costing.
Standard costs provide a basis for sensible cost comparisons.
2. Standard costs and cost variances enables managers to employ management by exception.
3. Variances provide a means of performance evaluation and rewards for employees.
4. Standard costing provides motivation for employees to adhere to standards.
5. Use of standard costs in product costing results in more stable product costs.
6. A standard-costing system is usually less expensive than an actual or normal product-costing system. (LO7)
Stable Product Costs
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54. Learning Objective 8
Learning Objective 8. Explain several common criticisms of standard costing.
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55. Criticisms of Standard Costing
Too aggregate, too late
Not specific
Disadvantages
Too much focus on direct-labor
Stable production required
Shorter life cycles
Narrow definition
There are also several criticisms of standard costing.
1. The variances calculated under standard costing are at too aggregate a level and come too late to be useful.
2. Traditional cost variances are also too aggregate in the sense that they are not tied to specific product lines or production batches.
3. Traditional standard-costing systems focus too much on the cost and efficiency of direct labor, which is rapidly becoming a relatively unimportant factor of production.
4. The introduction of flexible manufacturing systems has reduced the stability of the production process, which is required for successful standard costing systems.
5. Shorter product life cycles mean that standards are relevant for only a short time. When new products are introduced, new standards must be developed.
6. Traditional standard costs are not defined broadly enough to capture various important aspects of performance.
7. Traditional standard-costing systems tend to focus too much on cost minimization, rather than increasing product quality or customer service.
Focus on cost minimization
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56. Learning Objective 9
Learning Objective 9. Prepare journal entries to record and close out cost variances (appendix).
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57. Use of Standard Costs for Product Costing
To record the purchase of raw-material in a standard costing system, the raw material inventory account is debited for the actual quantity of materials purchased at the standard cost.
The accounts payable account is credited for the actual quantity at the actual cost.
The difference between these two amounts, is the direct-material price variance.
If the variance is unfavorable, the account is debited.
If the difference is favorable, the account is credited. (LO9)
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58. Use of Standard Costs for Product Costing
To record the use of raw materials in production, the work-in-process inventory account is debited for the standard quantity of materials at the standard cost.
The raw-material inventory account is credited for the actual quantity of material at the standard cost.
The difference between these two amounts, is the direct-material quantity variance.
If the variance is unfavorable, the account is debited. If the difference is favorable, the account is credited. (LO9)
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59. Use of Standard Costs for Product Costing
To record the use of direct-labor in production, the work-in-process inventory account is debited for the standard hours at the standard rate.
The wages payable account is credited for the actual hours at the actual cost.
The difference between these two amounts is composed of the direct-labor rate variance and the direct-labor efficiency.
An unfavorable variance results in a debit and a favorable variance results in a credit. (LO9)
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60. Use of Standard Costs for Product Costing
Variances are closed to the cost of goods sold account.
The variance accounts that have a debit balance, that is, are unfavorable, must be credited for the balance of that account.
In turn, the cost of goods sold account is debited for the same amount. Therefore, cost of goods sold is increased by the unfavorable variances.
On the other hand, the variance accounts that have a credit balance, that is, are favorable, must be debited for the balance of that account.
In turn, the cost of goods sold account is credited for the same amount.
Therefore, cost of goods sold is decreased by the favorable variances. (LO9)
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61. Let’s set the standard a little higher.
End of Chapter 10
Let’s set the standard a little higher.
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