Chapter 7: Standard Costing and Variance Analysis
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Transcript of Chapter 7: Standard Costing and Variance Analysis
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Chapter 7:Standard Costing and Variance Analysis
Cost Accounting: Foundations & Evolutions, 9e
Kinney and Raiborn
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Learning Objectives Why are standard cost systems used? How are material, labor, and overhead standards set? How are material, labor, and overhead variances
calculated and recorded? How have the setting and use of standards changed
over time? How does the use of a single conversion element
(rather than the traditional labor and overhead elements) affect standard costing?
(Appendix) How are variances affected by multiple material and labor categories?
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Why Use Standard Cost SystemsA standard cost system tracks both standard and actual costs. This dual recording provides an essential element to cost control: having norms against which actual operations can be compared. Motivating Planning Controlling - variance analysis Clerical efficiency Decision making Performance evaluation
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Setting Standards Appropriateness Attainability
Expected standards Practical standards Ideal standards
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Standards Standard costs are budgeted costs to
manufacture a single unit of product, or perform a single service
To develop standards, identify material and labor types, quantities, and prices overhead types and behavior
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Material Standards Materials used
Types Quality Quantity Price
From Product specifications, observation, inquiry Bill of materials
Balance cost, quality, and projected sales price
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Labor Standards Labor used
Types Production, setup, cleanup, and rework
Quantity Cost
Include wages, payroll taxes, and fringe benefits From
Industrial engineering studies including methods-time measurement (MTM), time and motion studies, and historical data
Operations flow document
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Overhead Standards Variable and fixed manufacturing
overhead Estimated level of activity Estimated costs Predetermined factory overhead
application rates
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SP x SQAP x AQ
Total Variance
Total Variance
AP = actual cost/price per unit of materials or hours of labor
AQ = actual quantity of materials or hours of laborSP = standard cost/price per unit of materials or hours of laborSQ = standard quantity of materials or hours of labor
Inputs Outputs
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Material Price Variance (MPV)
AP x AQ SP x SQ
Total Variance
SP x AQ
MPV
(AP - SP) x AQ*
*Favorable or unfavorable
What was paid
What shouldhave been
paid
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Material Price Variance
Calculate Material Price Variance at point of purchase, or when materials used
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Material Quantity Variance (MQV)
AP x AQ SP x SQ
Total Variance
SP x AQ
MQV
(AQ - SQ) x SP*
*Favorable or unfavorable
What shouldhave beenused for
level of output
What wasused
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Labor Rate Variance (LRV)
AP x AQ SP x SQ
Total Variance
SP x AQ
LRV
(AP - SP) x AQ*
*Favorable or unfavorable
What was paid
What shouldhave been
paid
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Labor Efficiency Variance (LEV)
AP x AQ SP x SQ
Total Variance
SP x AQ
LEV
(AQ - SQ) x SP*
*Favorable or unfavorable
What shouldhave beenused for
level of output
What wasused
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Variable Overhead Variances
What should have beenused for level of output
For actual hoursused
VOH Spending Variance
VOH Efficiency Variance
Total VOH Variance
SP x SQSP x AQ
Actual VOH
Budgeted VOH
Applied VOH
Actual
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VOH Spending Variance Caused by price differences
managers have little control over prices
Caused by shrinkage or waste managers should be held
accountable
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Fixed Overhead Variances
SP x SQ
Actual FOH
Budgeted FOH
Applied FOH
FOH Spending Variance
FOH Volume Variance
Total FOH VarianceWhat should have beenused for level of output
ConstantAmount
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FOH Spending Variance Calculate variance for each component Caused by price differences May reflect mismanagement of
resources
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FOH Volume Variance
Calculate variance for each component Measures capacity utilization Caused by producing at a level that differs
from the capacity level used to compute the predetermined overhead rate
Also called the noncontrollable variance
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Questions
Why are standard cost systems used? How are standards set for material, labor,
and overhead? How are material, labor and overhead
variances calculated and recorded?
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Potential Ethical Issues Setting high standards to create favorable variances Ignoring effects of one production area on another Setting overhead rates too low based on high
production levels to distort inventory cost and operating income
Producing inventory only to create a favorable volume variance
Not updating standards so that favorable variances are created
Using low quality materials or labor to create favorable variances and low quality products