1. Standard Costs Predetermined. Used for planning labor, material and overhead requirements. Benchmarks for measuring performance. Used to simplify the accounting system. Next Page Click Here

2. A standard is a per unit cost. A budget sets forth the total amount of planned costs. Standards are often used to develop a budget. Standards vs. Budgets Next Page Click Here Are standards the same as budgets?

3. Setting Standard Costs Should we use practical standards or ideal standards? Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations. I agree. Ideal standards, that are based on perfection, are unattainable and discourage most employees. Practical standards should be set at levels that are currently attainable with reasonable and efficient effort. Next Page Click Here

4. Standard Cost Card A standard cost card for one unit of product might look like the following: Next Page Click Here

5. The direct material variance is unfavorable because the actual cost exceeds the standard cost. Management by Exception Direct Material Managers focus on quantities and costs that exceed standards, a practice known as management by exception. Type of Product Cost Amount Direct Labor Overhead Standard Next Page Click Here A standard cost variance is the amount by which an actual cost differs from the standard cost. The others are favorable.

6. Variance Analysis Cycle Prepare standard cost performance report Analyze variances Begin Identify questions Receive explanations Take corrective actions Conduct next periods operations Next Page Click Here

7. Direct Materials Cost Variances Price Variance The difference between the actual price and the standard price Quantity Variance The difference between the actual quantity and the standard quantity Next Page Click Here

8. The standard quantity allowed is the quantity that should have been used to make the actual output (that is, the actual number of units made). Model for Direct Materials Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price VarianceQuantity Variance The standard price is the amount that should have been paid for a single unit of materials (including allowances for quality, quantity purchased, shipping, receiving, and other such costs, net of any discounts allowed). Next Page Click Here difference

9. Model for Direct Materials Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price VarianceQuantity Variance Next Page Click Here difference AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity

10. Glacier Peak Outfitters has the following direct material standard for the fiberfill in its mountain parka: 0.1 kg. of fiberfill per parka at $5.00 per kg. Last month, 210 kgs of fiberfill were purchased and used to make 2,000 parkas. The material cost a total of $1,029. Information for Direct Material Variances Example Next Page Click Here

11. 210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg. = $1,029 = $1,050 = $1,000 Price variance $21 favorable Quantity variance $50 unfavorable Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Using the Model to Compute Direct Materials Variances Actual Price $1,029 210 kgs = $4.90 per kg Standard Quantity 0.1 kg per parka 2,000 parkas = 200 kgs Next Page Click Here

12. Using Formulas to Compute Direct Materials Variances Materials price variance MPV = AQ x (AP - SP) = 210 kgs x ($4.90/kg - $5.00/kg) = 210 kgs x (-$0.10/kg) = $21 F Materials quantity variance MQV = SP x (AQ - SQ) = $5.00/kg x (210 kgs- (0.1 kg/parka 2,000 parkas)) = $5.00/kg x (210 kgs - 200 kgs) = $5.00/kg x (10 kgs) = $50 U The standard quantity (SQ) is the quantity that was allowed for the actual output (that is, the quantity that should have been used to produce the units that were actually made). Since the standard is 0.1 kg per unit and 2,000 parkas were actually produced, 2,000 actual units x 0.1 kg per unit or 200 kgs is the standard quantity (SQ). Next Page Click Here Compute the SQ carefully!