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Standard Costing and Variance Analysis

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1 Standard Costing and Variance Analysis
April 1, 2017 Standard Costing and Variance Analysis UAA – ACCT Principles of Managerial Accounting Dr. Fred Barbee Fred Barbee

2 Standard Costing and Variance Analysis
April 1, 2017 The Work of Management Planning Decision Making Evaluating Organizing & Directing Controlling Fred Barbee

3 The Control Process Establish Standards Measure Actual Revise?
Take Action Compare Actual/Std.

4 Standard Costing and Variance Analysis
April 1, 2017 Standard Costs Predetermined Used for planning labor, material, and overhead requirements Benchmarks for measuring performance. Standard Costs are Used to simplify the accounting system. Fred Barbee

5 Standard Costing and Variance Analysis
April 1, 2017 Standard Costs Managers focus on quantities and costs that exceed standards, a practice known as management by exception. Standard Amount Direct Material Direct Labor Manufacturing Overhead Type of Product Cost Fred Barbee

6 Setting Standard Costs
Standard Costing and Variance Analysis April 1, 2017 Setting Standard Costs Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations. Fred Barbee

7 Setting Standard Costs
Standard Costing and Variance Analysis April 1, 2017 Setting Standard Costs Should we use practical standards or ideal standards? Engineer Managerial Accountant Fred Barbee

8 Setting Standard Costs
Standard Costing and Variance Analysis April 1, 2017 Setting Standard Costs Practical standards should be set at levels that are currently attainable with reasonable and efficient effort. Production manager Fred Barbee

9 Setting Standard Costs
Standard Costing and Variance Analysis April 1, 2017 Setting Standard Costs I agree. Ideal standards, based on perfection, are unattainable and discourage most employees. Human Resources Manager Fred Barbee

10 A Standard is . . . A benchmark or “norm” for measuring performance.
They are “expected” levels of performance. They are monetary measures to which actual costs are compared.

11 Standard Costs . . . Are realistically predetermined costs for
Direct materials Direct labor Factory overhead They are typically expressed as cost per unit of finished product.

12 Why Standard Costs? They are useful in preparing operating budgets.
They make it easier to pinpoint production costs that must be controlled. They are useful in evaluating performance of managers and workers.

13 Why Standard Costs? They help in setting realistic prices.
They simplify accounting procedures for inventories and product costing.

14 Cost Assignment Approaches
Manufacturing Costs Cost System DM DL MOH Actual Actual Actual Actual Normal Actual Actual Budgeted Standard Standard Standard Standard

15 Standard Costing and Variance Analysis
April 1, 2017 Setting DM Standards Price Standards Final, delivered cost of materials, net of discounts. Quantity Standards Use product design specifications. Fred Barbee

16 Standard Costing and Variance Analysis
April 1, 2017 Setting DL Standards Rate Standards Use wage surveys and labor contracts. Time Standards Use time and motion studies for each labor operation. Fred Barbee

17 Standard Costing and Variance Analysis
April 1, 2017 Setting VOH Standards Rate Standards The rate is the variable portion of the predetermined overhead rate. Activity Standards The activity is the base used to calculate the predetermined overhead. Fred Barbee

18 Standard Costing and Variance Analysis
April 1, 2017 Standards vs. Budgets Are standards the same as budgets? A budget is set for total costs. A standard is a per unit cost. Standards are often used when preparing budgets. Fred Barbee

19 Standard Cost Variances
Standard Costing and Variance Analysis April 1, 2017 Standard Cost Variances A standard cost variance is the amount by which an actual cost differs from the standard cost. This variance is unfavorable because the actual cost exceeds the standard cost. Standard Cost Fred Barbee

20 Hermon O. Thompson Sports, Inc. aka (HOTS, Inc)

21 HOTS, Inc. To illustrate the use of standard costs, consider Herman O Thompson Sports, Inc. (HOTS, Inc.), a manufacturer of a popular jogging suit. The company wishes to have standard costs developed for the suit in terms of Direct Material, Direct Labor and Manufacturing Overhead.

22 Determining Standard Cost
The Quantity Decision – the amount of input to be used for a standard unit of output. The Pricing Decision – the amount that should be paid for the quantity of the input to be used.

23 Standard DM Price/Unit
The standard price per unit for DM should be the final, delivered cost of materials. Specified quantity of materials, Quantity discounts, Transportation (freight) costs, Receiving and handling costs, Seasonal availability (if any).

24 Standard DM Price/Unit
A material known as crylon is used in the jogging suits. The standard price for a yard of crylon is determined as follows: Purchase Price, Grade A Crylon $5.70 Freight, by Truck .40 Receiving & Handling .10 Less Discount (20,000 yard lots) (.20) Standard Price Per Yard $6.00

25 Standard DM Quantity/Unit
The amount of materials that should go into each finished unit of product Engineered (bill of materials) requirements, Expected spoilage of RM, Unavoidable waste, DM in scrapped WIP (Rejects).

26 Standard DM Quantity/Unit
The standard quantity of crylon that goes into one jogging suit is computed as follows: Bill of Materials Requirement 2.8 Yds Allowance for Waste 0.6 Yds Allowance for Rejects 0.1 Yds Standard Quantity/Jogging Suit 3.5 Yds

27 Standard DM Quantity/Unit
Once the price and standard quantities have been set, the standard cost of materials (crylon) for one unit of finished product can be computed. 3.5 Yards per jogging suit x $6.00 per yard = $21.00

28 Standard Rate For DL Hour
The standard rate per hour for DL should include all costs associated with DL workers: Hourly wage rates Expected labor mix Fringe benefits Employment taxes

29 Standard DL Rate Per Hour
The standard rate per hour for the expected mix is determined by using average wage rates, fringe benefits, and employment taxes for the labor mix. Average wage rate per hour $13 Average fringe benefits 4 Average employment taxes 1 Standard rate per DL hour $18.

30 Standard Hours Per Unit
Engineered labor time per unit. Allowance for breaks, personal needs, and cleanup. Allowance for setup and other machine downtime. Allowance for rejects.

31 Standard DL Hours Per Unit
The standard hours determined to produce a jogging suit is determined as follows: Basic labor time per unit 1.4 Hrs Allowance for breaks & cleanup 0.1 Hrs Allowance for setup and downtime 0.3 Hrs Allowance for rejects 0.2 Hrs Standard Hours Per Jogging Suit 2.0 Hrs

32 2.0 Hrs per Jogging Suit x $18 per Hour = $36 per Suit
Standard DL Costs Once the time and rate standards have been set, the standard cost of labor for one unit of product can be computed. 2.0 Hrs per Jogging Suit x $18 per Hour = $36 per Suit

33 Variable OH Standards Standards exist for VOH and are typically expressed in terms of “rate” and “hours.” The rate is the variable portion of the POR The hours represent the base used to apply overhead to products.

34 Variable OH Standards HOTS, Inc. applies MOH costs to products on the basis of DL hours. The variable portion of the POR is $4 per DL hour. Using this rate, the standard cost of variable overhead for one unit of product is (2 DL Hours x $4 per Hour = $8 per suit).

35 Standard Cost Card After standards have been set for DM, DL and MOH, a standard cost card can be prepared. The cost card indicates what the final, manufactured cost should be for a unit of product.

36 Standard Cost Card For Jogging Suits
HOTS, Inc. Standard Cost Card For Jogging Suits Quantity Price Cost Direct Materials 3.5 Yds. $6/Yd. $21 Direct Labor 2.0 Hrs. 18/Hr. 36 Variable Overhead 2.0 Hrs. 4/Hr. 8 Standard Cost Per Unit $65

37 A General Model For Variance Analysis Variable Production Costs
AQ x AP AQ x SP SQ x SP DM Price Variance DM Quantity Var. DL Rate Variance DL Efficiency Var. VOH Spending Var. VOH Efficiency Var. Variance Variance Total Variance

38 DM Price Variances . . . (AQ x AP) - (AQ x SP) AQ(AP - SP)

39 DM Quantity Variances . . . (AQ x SP) - (SQ x SP) SP(AQ - SQ)

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