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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Copyright © 2012 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin

Standard Cost SystemsStandard Cost Systems

Chapter 24

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Benchmarks formeasuring performance.

The expected levelof performance.

Based on carefullypredetermined amounts.

Used for planning labor, materialand overhead requirements.Standard

Costs are

Standard Cost SystemsStandard Cost Systems

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DirectMaterial

Type of Product Cost

Am

ou

nt

DirectLabor

ManufacturingOverhead

Standard cost

A standard cost varianceis the amount by which

an actual cost differs fromthe standard cost.

A standard cost varianceis the amount by which

an actual cost differs fromthe standard cost.

Standard Cost SystemsStandard Cost Systems

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This variance is unfavorable because the actual cost

exceeds the standard cost.

This variance isfavorable because

the actual costis less than thestandard cost.

Standard Cost SystemsStandard Cost Systems

DirectMaterial

Type of Product Cost

Am

ou

nt

DirectLabor

ManufacturingOverhead

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Actual and Standard Quantities and Costs

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EngineerManagerialAccountant

Establishing and Revising Establishing and Revising Standard CostsStandard Costs

Productionmanager

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Use product design specifications.

Use competitivebids for the quality

and quantity desired.

QuantityStandards

Direct Materials Standards Direct Materials Standards

PriceStandards

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TimeStandards

RateStandards

Direct Labor Standards Direct Labor Standards

Use time and motion studies for

each labor operation.

Use wage surveys and

labor contracts.

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ActivityStandards

RateStandards

Manufacturing Overhead Manufacturing Overhead Standards Standards

The activity is the cost driver used to

calculate the overhead rate.

The rate is basedon an estimate of totaloverhead at the normal

level of activity.

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Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

Price Variance Quantity Variance

A General Model for Variance A General Model for Variance Analysis Analysis

Standard price is the amount that should have been paid for the resources acquired.

Standard quantity is the quantity that should have been used for the actual good output.

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Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

Material Price Variance

Material Quantity Variance

MPV =AQ(AP - SP) MQV = SP(AQ - SQ) MPV = Price Variance MQV = Quantity VarianceAQ = Actual Quantity SP = Standard PriceAP = Actual Price AQ = Actual Quantity SP = Standard Price SQ = Standard Quantity

A General Model for Variance A General Model for Variance Analysis Analysis

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Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate

Labor Rate Variance

Labor Efficiency Variance

LRV = AH(AR - SR) LEV = SR(AH - SH)

LRV = Labor Rate Variance LEV = Labor Efficiency VarianceAH = Actual Hours SR = Standard Rate AR = Actual Rate AH = Actual HoursSR = Standard Rate SH = Standard Hours

Labor Rate and Efficiency Labor Rate and Efficiency VariancesVariances

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ManufacturingManufacturing Overhead Overhead VariancesVariances

Recall that overhead costs are applied to products and services using a

predetermined overhead rate (POHR):

POHR =

Applied Overhead = POHR × Standard Activity

Estimated total overhead costs

Estimated activity

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Budgeted Applied Actual Overhead at Overhead at Overhead Actual Activity Standard Hours

Spending Variance

VolumeVariance

Manufacturing Overhead Manufacturing Overhead VariancesVariances

Shows how economically overheadServices were purchased and howefficiently overhead services were

used. Contains both fixed andvariable costs.

A controllable variance.

Caused by producing ata level other than that

used for computing thestandard overhead rate.

Contains only fixedcosts.

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Standard Cost VariancesStandard Cost Variances

Close to:Cost of Goods Sold

Work in ProcessFinished GoodsCost of Goods Sold

Close byapportioning to:

Disposing of VariancesDisposing of Variances

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I am not responsible for this unfavorable material

quantity variance.

You purchased cheapmaterial, so my peoplehad to use more of it.

Evaluating Variances From Evaluating Variances From Different PerspectivesDifferent Perspectives

You used too much material because of poorly trained workers and poorly maintained equipment.

Also, your poor scheduling sometimes requires me to rush order material at a higher price,

causing unfavorable price variances.

Production Manager Purchasing Agent

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I am not responsible for the unfavorable labor

efficiency variance!

You purchased cheapmaterial, so it took more

time to process it.

Evaluating Variances From Evaluating Variances From Different PerspectivesDifferent Perspectives

Production Manager Purchasing Agent

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Summary of Variance Summary of Variance Computations and Manager Computations and Manager ResponsibilitiesResponsibilities

Variance Computation Manager ResponsibleMaterials

Price variance AQ × (SP – AP) Purchasing agentQuantity variance SP × (SQ – AQ) Production manager

LaborRate Variance AH × (SR – AR) Production managerEfficiency variance SR × (SH – AH) Production manager

OverheadSpending variance Budgeted OH at Actual Production Production manager for

Level – Actual OH the controllable costs.

Volume variance Actual OH at Standard Rate – None – A result of producing Budgeted OH at Actual Production Level at a level other than normal.

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End of Chapter 24End of Chapter 24