Jzanzig acc 512 chapter 11
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Transcript of Jzanzig acc 512 chapter 11
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Chapter 11Standard Costs and Variance
Analysis
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Presentation Outline
I. Types of Standards
II. Variance Calculations
III. Investigation of Standard Cost Variances
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I. Types of Standards
Ideal Standards
Can only be attained under the best
circumstances. No allowance for machine breakdowns or work
interruptions
Attainable Standards
Tight but attainable standards. Allows for
machine downtime and employee rest
periods.
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II. Variance CalculationsA. Material Price Variance
B. Material Price Variance Journal Entry
C. Material Quantity Variance
D. Material Quantity Variance Journal Entry
E. Labor Rate Variance
F. Labor Efficiency Variance
G. Journal Entry for Direct Labor Variances
H. Controllable Overhead Variance
I. Overhead Volume Variance
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A. Material Price Variance
MPV = (AP – SP) AQ
where:
MPV = Material price variance
AQ = Actual quantity of materials purchased
AP = Actual unit price of materials
SP = Standard unit price of materials
Decision Rule: AP > SP Unfavorable
AP < SP Favorable
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B. Material Price Variance Journal Entry
(Recorded at Time of Purchase)
Raw Materials (AQ x SP) XXX
Materials Price Variance [(AP-SP)AQ] XXX or XXX
Accounts Payable (AQ x AP) XXX
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C. Material Quantity Variance
MQV = (AQ – SQ) SP
where:
MQV = Material quantity variance
SP = Standard unit price of materials
AQ = Actual quantity of materials put into productionSQ = Standard quantity allowed for the output produced
Decision Rule: AQ > SQ Unfavorable
AQ < SQ Favorable
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D. Material Quantity Variance Journal Entry
(Recorded when materials are put into production)
Work in Process (SQ x SP) XXX
Materials Quantity Variance [(AQ-SQ)SP] XXX or XXX
Raw Materials (AQ x SP) XXX
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E. Labor Rate Variance
LRV = (AR – SR) AH
where:
LRV = Labor rate variance
AH = Actual labor hours worked
AR = Actual labor rateSR = Standard labor rate
Decision Rule: AR > SR Unfavorable
AR < SR Favorable
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F. Labor Efficiency Variance
LEV = (AH – SH) SR
where:
LEV = Labor efficiency variance
SR = Standard labor rate
AH = Actual labor hours workedSH = Standard hours allowed for the output produced
Decision Rule: AH > SH Unfavorable
AH < SH Favorable
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G. Journal Entry for Direct Labor Variances
Work in Process (SH x SR) XXX
Labor Rate Variance [(AR-SR)AH] XXX or XXX
Labor Efficiency Variance [(AH-SH)SR] XXX or XXX
Wages Payable (AH x AR) XXX
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H. Controllable Overhead Variance
Flexible budget level of overhead
for the actual level of production
Decision Rule: Actual > Flexible budget Unfavorable
Actual < Flexible budget Favorable
Actual overhead
Controllable overhead variance
= -
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I. Overhead Volume Variance
Overhead applied to production using standard overhead
rate
Decision Rule:Flexible budget > O/H applied UnfavorableFlexible budget < O/H applied Favorable
Flexible budget level of overhead for actual
level of production
Overhead volume
variance= -
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III. Investigation of Standard Cost Variances
A. Management by ExceptionB. “Favorable” Variances May be
UnfavorableC. Process Improvements and “Unfavorable
VariancesD. Variance Evaluation and Excess
ProductionE. Variance Analysis and Performance
Evaluation
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A. Management by Exception
Most managers take a “management by exception” approach and investigate only
those variances that they deem to be exceptional.
The absolute dollar value of the variance or the variance as a percent of actual or
standard cost is often used as the criterion.
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B. “Favorable” Variances May be Unfavorable
The fact that a variance is favorable does not mean that it should not be investigated. Indeed, a favorable variance may be indicative of poor management decisions. For
example:A favorable material price variance may be arisen from
purchasing goods of inadequate quality for production.A favorable overhead volume variance could mean that
excessive inventory has been produced beyond customer demand.
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C. Process Improvements and Unfavorable Variances
Production workers suggest a change in the manufacturing process so that the standard for labor time per unit is reduced from 4 to 3 hours. If the company does not need to increase production and keeps the same
number of workers, an unfavorable labor efficiency variance will arise.
(See Illustration on page 397)
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D. Variance Evaluation and Excess Production
The Theory of Constraints tells us that production departments in front of bottleneck departments should
not produce excess work-in-process inventory.Evaluation in terms of standard cost variances could
result in this dysfunctional behavior.For example, rather than lay off workers, a department
with a temporary demand slump may produce excess units simply to avoid an unfavorable labor efficiency
variance.
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E. Variance Analysis and Performance Evaluation
Responsibility accounting states that managers should only be held accountable
for variance that they can control.Unfavorable variances do not imply poor performance. For example, an unfavorable labor efficiency variance could result from
the purchase of inferior goods (which by the way resulted in a favorable material price
variance).
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Summary
Ideal vs. Attainable StandardsMaterial VariancesLabor Variances
Overhead Variances