1. Use only with permission of Susan Crosson Chapter 9 Standard Costing and Variance Analysis Fall 2007 Crosson

2. Use only with permission of Susan Crosson Learning Objectives: Responsibility Accounting & Cost Centers Cost Performance Evaluation using Master and Flexible Budgets Standard Costing Basics for Cost Centers Performance Evaluation using Standard Costing: Spending and Efficiency Variances Compute and Analyze DM,DL,VOH, and FOH variances

3. Use only with permission of Susan Crosson Responsibility Accounting: Cost Center: An information system that classifies data according to a manager’s responsibilities for organizational resources Manager accountable for costs that have well-defined relationships between the center’s resources and products or services.

4. Use only with permission of Susan Crosson Cost Performance Evaluation using Flexible and Master Budgets ACTUAL PRODUCTION FLEXIBLE BUDGET MASTER BUDGET Actual Output x Actual Quantity x Actual Cost Actual Output x Standard Quantity x Standard Cost Estimated Output x Standard Quantity x Standard Cost

5. Use only with permission of Susan Crosson What Do You Know? Flexible Budget Preparation Look and listen to SE5. P2 parts 3 & 4

6. Use only with permission of Susan Crosson P2 Cost Performance Evaluation ACTUALPRODUCTION (46,560) APRIL FLEXIBLE BUDGET (46,560) MASTER BUDGET (50,000) DM $4,975 DL $5,850 IDL $1,290 Supplies $ 960 VH&P $1,325 VO $2,340 FH&P $3,500 Depreciation $4,200 I&T $1,200 FO $1,600 Total $27,240 DM $.10 x 46,560= $4,656.00 DL $.12 x 46,560= $5587.20 IDL $.03 x 46,560= $1396.80 Sup. $.02 x 46,560= $931.20 VH&P $.03 x 46,560= $1,396.80 VO $.05 x 46,560= $2,328.00 FH&P $3,500 Dep. $4,200 I&T $1,200 FO $1,600 Total $26,796 DM $5,000 DL $ 6,000 IDL $1,500 Sup. $1.000 VH&P $1,500 VO $2,500 FH&P $3,500 Dep. $4,200 I&T $1,200 FO $1,600 Total $28,000

7. Use only with permission of Susan Crosson Performance Evaluation using Flexible and Master Budgets ACTUAL PRODUCTION FLEXIBLE BUDGET MASTER BUDGET Actual Output x Actual Quantity x Actual Cost Actual Output x Standard Quantity x Standard Cost Estimated Output x Standard Quantity x Standard Cost Standard Costing

8. Use only with permission of Susan Crosson Standard Costing Basics: Master Budget Prepared for year As part of the Master Budget, Standard Quantities and Rates set for Materials, Labor, Variable Overhead and Fixed Overhead (i.e., predetermined rates—remember applied OH? During year Journal Entries use these Standards Managers monitor Cost Centers by computing and analyzing Price and Quantity Variances for Materials, Labor and Variable Overhead and Budget and Volume Variances for Fixed Overhead

9. Use only with permission of Susan Crosson Material, Labor, and Variable Overhead Variances ACTUAL PRODUCTION FLEXIBLE BUDGET Actual Output x Actual Quantity x Actual Cost Actual Quantity x Standard Cost Actual Output x Standard Quantity x Standard Cost Spending or Price or Rate Variance Efficiency or Quantity Variance

10. Use only with permission of Susan Crosson Use the following information to answer questions: The California Steel Works uses a standard costing system. BUDGET: BUDGET: The variable standard cost of producing one case of steel brackets is: Direct material (5 pounds @ $1 per pound) $ 5.00 Direct labor (2 hours @ $2 per hour) $ 4.00 Variable overhead (2 hours @ $3 per hour) $ 6.00 Thus, total variable cost per case $15.00. The predetermined overhead rate is $7 per direct labor hour ($3 VOH and $2 FOH). Based on a master budget of 20,000 cases. ACTUAL: ACTUAL: During the past accounting period the company produced 25,000 cases and the actual cost per case were: Direct material (5 pounds @ $.90 per pound $ 4.50 Direct labor ( 2 1/4 hours @ $1.80 per hour) $4.05 Variable overhead ($148,750/25,000 cases) $ 5.95 The actual fixed overhead was $105,250.

11. Use only with permission of Susan Crosson Material, Labor, and Variable Overhead Variances ACTUAL PRODUCTION 25,000 cases (AAA) ACTUAL Quantity AT STANDARD Cost (AAS) FLEXIBLE BUDGET 25,000 cases ( ASS) DM: 25,000 x (5 pounds @ $.90 per pound)= $112,500 DM: 25,000 x 5 x$1= $125,000 DM: 25,000 x (5 pounds @ $1 per pound)= $125,000 DL: 25,000 x ( 2 1/4 hours @ $1.80 per hour)= $101,250 DL: 25,000 x 2 1/4 x$2= $112,500 DL: 25,000 x (2 hours @ $2 per hour)= $100,000 VOH: $148,750 VOH: 25,000 x 2 ¼ x$3= $168,750 VOH: 25,000 x (2 hours @ $3 per hour)= $150,000 Spending or Price or Rate Variance Efficiency or Quantity Variance

12. Use only with permission of Susan Crosson Material, Labor, and Variable Overhead Variances ACTUAL PRODUCTION FLEXIBLE BUDGET Actual Output x Actual Quantity x Actual Cost Actual Quantity x Standard Cost Actual Output x Standard Quantity x Standard Cost Favorable or Unfavorable Spending or Price or Rate Variance Favorable or Unfavorable Efficiency or Quantity Variance

13. Crosswalk to Variable Overhead Account Variable Overhead Actual VOH: Actual Output x Actual Quantity x Actual Cost Applied VOH: Actual Output x Standard Quantity x Standard Cost ( SAME AS FLEXIBLE BUDGET!!!) Underapplied aka Net Spending & Efficiency Variances Overapplied aka Net Spending & Efficiency Variances Dr. COGS xx Cr. OH xx Dr. OH xx Cr. COGS xx

14. Use only with permission of Susan Crosson Fixed Overhead Variances ACTUAL PRODUCTION MASTER or FLEXIBLE BUDGET APPLIED OVERHEAD ActualFixedOverheadBudgetedFixedOverhead Actual Output x Fixed Overhead Rate* * (Standard Quantity x Standard Cost) Budget or Spending or ControllableVariance Volume or Uncontrollable Variance

15. Crosswalk to Fixed Overhead Account Fixed Overhead Actual FOH:ActualFixedOverhead Applied FOH: Actual Output x Fixed Overhead Rate* * (Standard Quantity x Standard Cost) Underapplied aka Net Budget and Volume Variances Overapplied aka Net Budget and Volume Variances Dr. COGS xx Cr. OH xx Dr. OH xx Cr. COGS xx

16. Use only with permission of Susan Crosson Use the following information to answer questions: The California Steel Works uses a standard costing system. BUDGET: BUDGET: The variable standard cost of producing one case of steel brackets is: Direct material (5 pounds @ $1 per pound) $ 5.00 Direct labor (2 hours @ $2 per hour) $ 4.00 Variable overhead (2 hours @ $3 per hour) $ 6.00 Thus, total variable cost per case $15.00 The predetermined overhead rate is $7 per direct labor hour ($3 VOH and $2 FOH). Based on a master budget of 20,000 cases. ACTUAL: ACTUAL: During the past accounting period the company produced 25,000 cases and the actual cost per case were: Direct material (5 pounds @ $.90 per pound $ 4.50 Direct labor ( 2 1/4 hours @ $1.80 per hour) $4.05 Variable overhead ($148,750/25,000 cases) $ 5.95 The actual fixed overhead was $105,250.

17. Use only with permission of Susan Crosson Fixed Overhead Variances ACTUAL PRODUCTION BUDGET (MASTER or FLEXIBLE) APPLIED OVERHEAD $105,250$80,000* *(20,000 cases x $2/DLH x 2DLH) $100,000* * 25,000 cases x $4/case or 25,000 cases x $2/DLH x 2DLH Favorable or Unfavorable Budget or Spending or Controllable Variance Favorable or Unfavorable Volume or Uncontrollable Variance

18. Use only with permission of Susan Crosson What Do You Know? Compute and Analyze DM,DL,VOH, and FOH variances P4 Look and listen SE6, SE7, SE8.

19. Use only with permission of Susan Crosson What Do You Know? Variance Analysis P3 P7

20. Use only with permission of Susan Crosson Homework P4