Copyright © 2013 Nelson Education Ltd.

Copyright © 2013 Nelson Education Ltd.
PowerPoint Presentations for Cornerstones of Cost Accounting First Canadian Edition Adapted by George Gekas Ryerson University Copyright © 2013 Nelson Education Ltd.

Standard Costing: A Functional-Based Control Approach
9 CHAPTER 9-2 Copyright © 2013 Nelson Education Ltd.

Developing Unit Input Standards
OBJECTIVE 1 Price standards specify how much should be paid per quantity unit of the input to be used. Quantity standards specify how much of the input should be used per unit of output. Unit standard cost is the product of these two standards: Standard price × Standard Quantity (SP × SP) 9-3 Copyright © 2013 Nelson Education Ltd.

Developing Unit Input Standards OBJECTIVE 1 Ideal Standards Demand maximum efficiency and can be achieved only if everything operates perfectly. Attainable Standards or Practical Standards Can be achieved under current efficient operating conditions May be tight but attainable Allowances for breakdown, resting time, and the like are permissible Normal inefficiencies are acceptable 9-4 Copyright © 2013 Nelson Education Ltd.

Developing Unit Input Standards OBJECTIVE 1 Kaizen Standards Continuous improvement standards Considered to be a currently attainable standard and focuses on planned improvement and cost reduction As improvements are made KS are constantly changing 9-5 Copyright © 2013 Nelson Education Ltd.

Total budget cost = (AP × AQ) – (SP × SQ)
Variance Analysis for Direct Materials and Direct Labour OBJECTIVE 3 A flexible budget is constructed using AQ multiplied by Standard Price. It can be used to identify the direct material or direct labour input costs that should have been incurred for the actual level of activity. Total budget variance: The difference between the actual cost of the input and its standard cost Total budget cost = (AP × AQ) – (SP × SQ) 9-9 Copyright © 2013 Nelson Education Ltd.

Variance Analysis for Direct Materials and Direct Labour OBJECTIVE 3 Price (Rate) Variance Difference between actual and standard unit prices of an input multiplied by actual quantity of inputs Usage (Efficiency) Variance Difference between actual and standard quantity of inputs multiplied by standard unit price of the input Unfavourable (U) Variance Occurs whenever actual prices or usage of inputs are greater than standard prices or usage Favourable (F) Variance Occurs whenever actual prices or usage of inputs are less than standard prices or usage 9-10 Copyright © 2013 Nelson Education Ltd.

Variance Analysis for Direct Materials and Direct Labour OBJECTIVE 3 Direct Materials Price Variance (MPV) Difference between what was actually paid for direct materials and what should have been paid for the actual quantity bought at the standard price MPV = (AP × AQ) – (SP × AQ)  If the actual price is greater than standard, the MPV is unfavourable  If the actual price is less than the standard price, the MPV is favourable 9-11 Copyright © 2013 Nelson Education Ltd.

Variance Analysis for Direct Materials and Direct Labour OBJECTIVE 3 Direct Materials Usage Variance (MUV) Difference between the amount of materials actually used and what should have been used for the actual quantity of units produced multiplied by the standard price MUV = (SP X AQ) – (SP X SQ) If the actual quantity is greater than standard, the MUV is unfavourable If the actual quantity is less than the standard quantity, the MUV is favourable See Cornerstone 9-2 9-12 Copyright © 2013 Nelson Education Ltd.

Variance Analysis for Direct Materials and Direct Labour OBJECTIVE 3 Timing of the Direct Material Variance Computation Direct materials variance can be computed at one of two points: When materials are purchased (price and quantity variance) When direct materials are issued for use in production (price and USAGE variance) 9-13 Copyright © 2013 Nelson Education Ltd.

Accounting Entries for the Direct Materials Price and Usage Variances
Variance Analysis for Direct Materials and Direct Labour OBJECTIVE 3 Accounting Entries for the Direct Materials Price and Usage Variances assuming unfavourable variances Materials (SP × AQ) Direct Materials Price Variance (AP – SP)AQ Accounts Payable (AP × AQ) Work in Process (SQ × SP) Direct Materials Usage Variance (AQ – AQ)SP Materials (AQ× SP) 9-15 Copyright © 2013 Nelson Education Ltd.

Variance Analysis for Direct Materials and Direct Labour OBJECTIVE 3 Direct Labour Rate Variance (LRV) Computes difference between what was paid to direct labourers and what should have been paid LRV = (AR × AH) – (SR × AH) Direct Labour Efficiency Variance (LEV) Measures difference between the direct labour hours that were actually used and the direct labour hours that should have been used LEV = (AH × SR) – (SH × SR) See Cornerstone 9-3 9-16 Copyright © 2013 Nelson Education Ltd.

Accounting Entry for the Direct Labour Rate and Efficiency Variance
Variance Analysis for Direct Materials and Direct Labour OBJECTIVE 3 Accounting Entry for the Direct Labour Rate and Efficiency Variance (assuming a favourable direct labour rate variance and an unfavourable labour efficiency variance) Work in Process (SH × SR) Direct Labour Efficiency Variance (AH –SH)SR Direct Labour Rate Variance (AH – SR) AH Wages Payable (AH × AR) 9-17 Copyright © 2013 Nelson Education Ltd.

Variance Analysis for Direct Materials and Direct Labour OBJECTIVE 3 Investigating Direct Materials and Labour Variances Random variations around the standard are expected Management should establish an acceptable range of performance and/or a minimum absolute amount or a percentage deviation over which investigation is warranted Acceptable range is the standard, plus or minus one allowable deviation Upper control limit is the standard plus the allowable deviation and the lower control limit is the standard minus the allowable deviation See Cornerstone 9-4 9-18 Copyright © 2013 Nelson Education Ltd.

VOSV = (AVOR × AH) – (SVOR × AH) VOEV = (SVOR × AH) – (SVOR × SH)
Variance Analysis for Overhead Costs OBJECTIVE 4 Variable Overhead Spending Variance Measures the aggregate effect of differences in the actual variable overhead rate and the standard variable overhead rate VOSV = (AVOR × AH) – (SVOR × AH) (Variable overhead is assumed to vary as production volume changes—variable overhead changes in proportion to changes in the direct labour hours used) Variable Overhead Efficiency Variance Measures change in variable overhead consumption that occur because of efficient/inefficient use of direct labour VOEV = (SVOR × AH) – (SVOR × SH) See Cornerstone 9-7 9-19 Copyright © 2013 Nelson Education Ltd.

Variance Analysis for Overhead Costs OBJECTIVE 4 Fixed Overhead Spending Variance Difference between the actual fixed overhead and the budgeted fixed overhead FOSV = AFOH – BFOH If less (more) is spent on fixed overhead items than was budgeted, the spending variance is favourable (unfavourable) See Cornerstone 9-8 9-22 Copyright © 2013 Nelson Education Ltd.

Variance Analysis for Overhead Costs OBJECTIVE 4 Fixed Overhead Volume Variance Difference between budgeted fixed overhead and applied fixed overhead Volume variance = Budgeted fixed overhead – Applied fixed overhead If actual production is less than budgeted production, the volume variance will be unfavourable If actual production is more than budgeted production, the volume variance will be favourable The difference is due solely to the differences in production or planned utilization of capacity See Cornerstone 9-8 9-23 Copyright © 2013 Nelson Education Ltd.

Accounting Entries for Overhead Variances
Variance Analysis for Overhead Costs OBJECTIVE 4 Accounting Entries for Overhead Variances 1. To recognize the incurrence of actual overhead: Variable Overhead Control Fixed Overhead Control Miscellaneous Accounts 2. To recognize the variances: Variable Overhead Efficiency Variance Fixed Overhead Spending Variance Variable Overhead Spending Variance Fixed Overhead Volume Variance 9-25 Copyright © 2013 Nelson Education Ltd.

Variance Analysis for Overhead Costs OBJECTIVE 4 Accounting Entries for Overhead Variances (continued) 3. To close the variances to Cost of Goods Sold: Fixed Overhead Volume Variance Variable Overhead Spending Variance Cost of Goods Sold Variable Overhead Efficiency Variance Fixed Overhead Spending Variance 9-26 Copyright © 2013 Nelson Education Ltd.

Mix and Yield Variances: Materials and Labour OBJECTIVE 5 Mix Variance Created whenever the actual mix of inputs differs from the standard mix Yield Variance Occurs whenever the actual yield (output) differs from the standard yield 9-29 Copyright © 2013 Nelson Education Ltd.

Mix and Yield Variances: Materials and Labour OBJECTIVE 5 Direct Materials Mix Variance Difference in the standard cost of the actual mix of inputs use and the standard cost of the mix of inputs that should have been used If relatively more of a more expensive input is used, the mix variance will be unfavourable. If relatively more of a less expensive input is used, the mix variance will be favourable. Mix Variance = See Cornerstone 9-9 9-30 Copyright © 2013 Nelson Education Ltd.

Yield variance = (Standard yield – Actual yield) SPy
Mix and Yield Variances: Materials and Labour OBJECTIVE 5 Direct Materials Yield Variance Designed to show the extent to which the amount of input resulted in the expected amount of output Yield variance = (Standard yield – Actual yield) SPy where: Standard yield – Yield ratio × Total actual inputs Yield ratio = Total output/Total input SPy = Standard cost of the yield (similar equations for labour) See Cornerstone 9-10 9-31 Copyright © 2013 Nelson Education Ltd.

End of Chapter 9

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