Copyright 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Mowen/HansenStandard Costing: A Managerial Control ToolChapter NineCornerstones of Managerial Accounting 2e

Explain how units standards are set and why standard cost systems are adopted.Objective # 1

Unit StandardsDeveloping standards enhances control.Need to determine the unit standard cost for a particular inputTwo decisions:Quantity decisionPricing decision

Quantity DecisionThe amount of input that should be used per unit of outputCalled Quantity Standard

Price DecisionThe amount that should be paid for the quantity of input to be used.Called Price StandardQuantity Standard x Price Standard = Unit Standard

Used to enhance cost controlAre budgeted unit costsUnlike budgets which contain aggregate amounts of total revenue and total costsUnit Standard

Development of StandardsHistorical experienceEngineering studiesInput from operating personnelQuantity Standards are developed by:

Development of StandardsOperationsPurchasingPrice Standards are the joint responsibility of:PersonnelAccounting

Types of StandardsIdeal standards ---demand maximum efficiency and can be achieved only if everything operates perfectlyCurrently attainable standards ---can be achieved under efficient operating conditions

Why Standard Cost Systems Are AdoptedTwo reasons:To improve planning and controlTo facilitate product costing

Planning and ControlActual costs are compared to budgeted costs and variances are computedStandards:Enhance planning and controlImprove performance managementFundamental requirement for a flexible budgeting system

Product CostingCosts are assigned to products using standards for:Direct materials quantity Direct materials priceDirect labor quantityDirect labor priceOverhead quantityOverhead price

Standard CostingAdvantages:Greater capacity for controlProvides readily available unit cost informationSimplifies cost assignments in both process and job costing systems

Explain the purpose of a standard cost sheet.Objective # 2

ExampleCorn allowed:SQ=Unit Quantity StandardxActual OutputStandard quantity of materials allowed

ExampleSQ=Unit Quantity StandardxActual Output18x100,000==SQSQ1,800,000 ounces

ExampleOperator hours allowed:SH=Unit Quantity StandardxActual OutputStandard hours allowed

ExampleOperator hours allowed:SH=Unit Quantity StandardxActual Output0.01x100,000==SHSH1,000 direct labor hours

Describe the basic concepts underlying variance analysis, and explain when variances should be investigated.Objective # 3

Variance Analysis ComponentsSP = Standard unit price of an inputSQ = Standard quantity of input for the actual outputAP = Actual price per unit of the inputAQ = Actual quantity of the input used

Total Budget VarianceTotal Variance=Actual CostPlanned Cost(AP x AQ)(SP x SQ)

Price (Rate) VarianceActual Price-Standard PriceNumber of inputs usedFavorable variance = Actual price is less than standard priceUnfavorable variance = Actual price is greater than standard pricex

Usage (Efficiency) VarianceActual Quantity-Standard QuantityStandard Unit PriceFavorable variance = Actual quantity is less than standard quantityUnfavorable variance = Actual quantity is greater than standard quantityx

The Decision to InvestigatePerformance rarely meets established standards exactlyRandom variations around the standard are expectedManagement should determine an acceptable range of performance

Cornerstone 9-2HOW TO Use Control Limits to Trigger a Variance Investigation

ExampleInformation: Standard cost: $100,000; allowable deviation: $10,000; actual costs for six months:JuneJulyAugust$97,500105,00095,000$102,500SeptemberOctober 107,500November 112,500Required: Plot the actual costs over time against the upper and lower control limits. Determine when a variance should be investigated.

ExampleJuneJulyAugust 90,000100,000110,000SeptemberOctoberNovember $120,000

StandardAcceptable Range (Dont Investigate)

ExampleJuneJulyAugust90,000100,000110,000SeptemberOctoberNovember $120,000

Investigate

Compute the materials variances, and explain how they are used for control.Objective # 4

MPV=(APAQ SP) xMaterials Price VarianceMeasures the difference between what should have been paid for raw materials and what was actually paidDirect Material Variances

MUV=(AQSP SQ) Materials Usage VarianceMeasures the difference between the direct materials actually used and the direct materials that should have been used for the actual outputDirect Material Variances

Responsibility for the Materials Price VarianceBelongs to the purchasing agentPrice can be influenced by:QualityQuantity discountsDistance of the source from the plant

Responsibility for the Materials Usage VarianceBelongs to the production managerVariance can be influenced by minimizing:ScrapWasteRework

Analysis of the VariancesFirst step:Decide whether the variance is significant Second step:Find out why it occurred

Accounting and Disposition of Materials VariancesMaterials variances are ADDED to cost of goods sold if they are UNFAVORABLE. Materials variances are SUBTRACTED from cost of goods sold if FAVORABLE

LRV=(ARAH - SR) Labor Rate VarianceComputes the difference between what was paid to direct laborers and what should have been paidDirect Labor Variances

LEV=(AHSR SH) Labor Efficiency VarianceMeasures the difference between the labor hours that were actually used and the labor hours that should have been usedDirect Labor Variances

Objective # 5Compute the labor variances and explain how they are used for control.

Causes of Labor Rate VarianceLabor rates are largely determined by such external forces as labor markets and union contracts.Labor rates can vary when:More skilled and more highly paid laborers are used for less skilled tasksUnexpected overtime occurs

Responsibility for the Labor Efficiency VarianceGenerally speaking, production managers are responsible for the use of direct laborBut once the cause is discovered, responsibility may be assigned elsewhere.