Presentation is loading. Please wait.

Presentation is loading. Please wait.

Chapter 11 Standard Costs and Variance Analysis

Published byMauricio Eakins Modified over 10 years ago

Similar presentations

Presentation on theme: "Chapter 11 Standard Costs and Variance Analysis"— Presentation transcript:

1 Chapter 11 Standard Costs and Variance Analysis

2 Presentation Outline Types of Standards Variance Calculations
Investigation of Standard Cost Variances

3 I. Types of Standards Ideal Standards
Can only be attained under the best circumstances. No allowance for machine breakdowns or work interruptions Attainable Standards Tight but attainable standards. Allows for machine downtime and employee rest periods.

4 II. Variance Calculations
Material Price Variance Material Price Variance Journal Entry Material Quantity Variance Material Quantity Variance Journal Entry Labor Rate Variance Labor Efficiency Variance Journal Entry for Direct Labor Variances Controllable Overhead Variance Overhead Volume Variance

5 A. Material Price Variance
MPV = (AP – SP) AQ where: MPV = Material price variance AP = Actual unit price of materials SP = Standard unit price of materials AQ = Actual quantity of materials purchased Decision Rule: AP > SP Unfavorable AP < SP Favorable

6 B. Material Price Variance Journal Entry (Recorded at Time of Purchase)
Raw Materials (AQ x SP) XXX Materials Price Variance [(AP-SP)AQ] XXX or XXX Accounts Payable (AQ x AP) XXX

7 C. Material Quantity Variance
MQV = (AQ – SQ) SP where: MQV = Material quantity variance AQ = Actual quantity of materials put into production SQ = Standard quantity allowed for the output produced SP = Standard unit price of materials Decision Rule: AQ > SQ Unfavorable AQ < SQ Favorable

8 D. Material Quantity Variance Journal Entry (Recorded when materials are put into production)
Work in Process (SQ x SP) XXX Materials Quantity Variance [(AQ-SQ)SP] XXX or XXX Raw Materials (AQ x SP) XXX

9 E. Labor Rate Variance LRV = (AR – SR) AH where:
LRV = Labor rate variance AR = Actual labor rate SR = Standard labor rate AH = Actual labor hours worked Decision Rule: AR > SR Unfavorable AR < SR Favorable

10 F. Labor Efficiency Variance
LEV = (AH – SH) SR where: LEV = Labor efficiency variance AH = Actual labor hours worked SH = Standard hours allowed for the output produced SR = Standard labor rate Decision Rule: AH > SH Unfavorable AH < SH Favorable

11 G. Journal Entry for Direct Labor Variances
Work in Process (SH x SR) XXX Labor Rate Variance [(AR-SR)AH] XXX or XXX Labor Efficiency Variance [(AH-SH)SR] XXX or XXX Wages Payable (AH x AR) XXX

12 H. Controllable Overhead Variance
Flexible budget level of overhead for the actual level of production Controllable overhead variance Actual overhead = - Decision Rule: Actual > Flexible budget Unfavorable Actual < Flexible budget Favorable

13 I. Overhead Volume Variance
Flexible budget level of overhead for actual level of production Overhead volume variance Overhead applied to production using standard overhead rate = - Decision Rule: Flexible budget > O/H applied Unfavorable Flexible budget < O/H applied Favorable

14 III. Investigation of Standard Cost Variances
Management by Exception “Favorable” Variances May be Unfavorable Process Improvements and “Unfavorable Variances Variance Evaluation and Excess Production Variance Analysis and Performance Evaluation

15 A. Management by Exception
Most managers take a “management by exception” approach and investigate only those variances that they deem to be exceptional. The absolute dollar value of the variance or the variance as a percent of actual or standard cost is often used as the criterion.

16 B. “Favorable” Variances May be Unfavorable
The fact that a variance is favorable does not mean that it should not be investigated. Indeed, a favorable variance may be indicative of poor management decisions. For example: A favorable material price variance may be arisen from purchasing goods of inadequate quality for production. A favorable overhead volume variance could mean that excessive inventory has been produced beyond customer demand.

17 C. Process Improvements and Unfavorable Variances
Production workers suggest a change in the manufacturing process so that the standard for labor time per unit is reduced from 4 to 3 hours. If the company does not need to increase production and keeps the same number of workers, an unfavorable labor efficiency variance will arise. (See Illustration on page 397)

18 D. Variance Evaluation and Excess Production
The Theory of Constraints tells us that production departments in front of bottleneck departments should not produce excess work-in-process inventory. Evaluation in terms of standard cost variances could result in this dysfunctional behavior. For example, rather than lay off workers, a department with a temporary demand slump may produce excess units simply to avoid an unfavorable labor efficiency variance.

19 E. Variance Analysis and Performance Evaluation
Responsibility accounting states that managers should only be held accountable for variance that they can control. Unfavorable variances do not imply poor performance. For example, an unfavorable labor efficiency variance could result from the purchase of inferior goods (which by the way resulted in a favorable material price variance).

20 Ideal vs. Attainable Standards
Summary Ideal vs. Attainable Standards Material Variances Labor Variances Overhead Variances

Download ppt "Chapter 11 Standard Costs and Variance Analysis"

Similar presentations

CHAPTER 10 The Need for Standards Standards Are common in business They are often imposed by government agencies (and called regulations) Standard costs.

CHAPTER 10 The Need for Standards Standards Are common in business They are often imposed by government agencies (and called regulations) Standard costs.
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 10 Standard Costing, Operational Performance Measures,

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 10 Standard Costing, Operational Performance Measures,
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Chapter Eleven Standard Costs and the Balanced Scorecard.

Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Chapter Eleven Standard Costs and the Balanced Scorecard.
Principles of Managerial Accounting Chapter 10. Standard Costs Set to encourage efficient operations – management by exception. Quantity Standards A benchmark.

Principles of Managerial Accounting Chapter 10. Standard Costs Set to encourage efficient operations – management by exception. Quantity Standards A benchmark.
Standard Costing and Variances

Standard Costing and Variances
Managerial Accounting by James Jiambalvo

Managerial Accounting by James Jiambalvo
Standard Costing: A Managerial Control Tool

Standard Costing: A Managerial Control Tool
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Standard Costs and the Balanced Scorecard Chapter Ten.

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Standard Costs and the Balanced Scorecard Chapter Ten.
Standard Costs 11/16/04 Chapter 10. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Costs Standard Costs are Predetermined. Used for.

Standard Costs 11/16/04 Chapter 10. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Costs Standard Costs are Predetermined. Used for.
Standard Costs Pertemuan 7. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Costs Standard Costs are Predetermined. Used for planning.

Standard Costs Pertemuan 7. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Costs Standard Costs are Predetermined. Used for planning.
Standard Costs and Variance Analysis

Standard Costs and Variance Analysis
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Standard Costs and Variance Analysis Chapter Ten & Eleven.

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Standard Costs and Variance Analysis Chapter Ten & Eleven.
PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright.

PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright.
Prepared by Debby Bloom-Hill CMA, CFM. Slide 11-2 CHAPTER 11 Standard Costs and Variance Analysis Standard Costs and Variance Analysis.

Prepared by Debby Bloom-Hill CMA, CFM. Slide 11-2 CHAPTER 11 Standard Costs and Variance Analysis Standard Costs and Variance Analysis.
Managerial Accounting by James Jiambalvo Chapter 9: Standard Costs and Variance Analysis Slides Prepared by: Scott Peterson Northern State University.

Managerial Accounting by James Jiambalvo Chapter 9: Standard Costs and Variance Analysis Slides Prepared by: Scott Peterson Northern State University.
Chapter 7: Standard Costing and Variance Analysis

Chapter 7: Standard Costing and Variance Analysis
Standard Costs and Balanced Scorecard

Standard Costs and Balanced Scorecard
Standard Costs and Operating Performance Measures.

Standard Costs and Operating Performance Measures.
Financial and Managerial Accounting

Financial and Managerial Accounting
Cost Accounting: Foundations and Evolutions, 8e Kinney ● Raiborn © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated,

Cost Accounting: Foundations and Evolutions, 8e Kinney ● Raiborn © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated,

Similar presentations

Ads by Google