©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-1
Standard Costing,Variance Analysis, and
Kaizen Costing
Student Tutorial
16
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16-2
Using Standard-Costing Systemsfor Control
STANDARD COSTa budget for theproduction of
one unit of product or
service
STANDARD COSTa budget for theproduction of
one unit of product or
service
ACTUAL COSTused in the
production of the product or
service
ACTUAL COSTused in the
production of the product or
service
COST VARIANCE the differencebetween the
actual cost andthe standard cost
COST VARIANCE the differencebetween the
actual cost andthe standard cost
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16-3
Management by ExceptionTake the time to investigate only significant cost
variances
Take the time to investigate only significant costvariances
What is significant?What is significant?
Depends onthe Size of theOrganization
Depends onthe Size of theOrganization
Depends onthe Type of theOrganization
Depends onthe Type of theOrganization
Depends onthe Production
Process
Depends onthe Production
Process
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16-4
Setting StandardsAnalysis ofHistorical
Data
Analysis ofHistorical
Data
TaskAnalysis
TaskAnalysis
Used in a mature production Process
Used in a mature production Process
Analyze the processof manufacturing
the product
Analyze the processof manufacturing
the product
What DIDthe
productcost?
What DIDthe
productcost?
What SHOULD
the productcost?
What SHOULD
the productcost?
A CombinedApproach
A CombinedApproach
Analyze the process for the step thathas changed, but use historical datafor the steps that have not changed
Analyze the process for the step thathas changed, but use historical datafor the steps that have not changed
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-5Perfection Vs. Practical Standards:A Behavioural Issue
One that can only beattained under nearperfect conditions
One that can only beattained under nearperfect conditions
PERFECTIONSTANDARD
PERFECTIONSTANDARD
PRACTICAL ORATTAINABLESTANDARDS
PRACTICAL ORATTAINABLESTANDARDS
Tight as practical,but still are expected
to be attained
Tight as practical,but still are expected
to be attained
•Peak efficiency•Lowest possible
input prices•best-quality material
•no disruption in production
•Peak efficiency•Lowest possible
input prices•best-quality material
•no disruption in production
•Occasional machinebreakdowns
•Normal amountsof raw material
waste
•Occasional machinebreakdowns
•Normal amountsof raw material
waste
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16-6
Use Of StandardsStandards can be used by service firms, nonprofit
organizations, and governmental units
Standards can be used by service firms, nonprofit organizations, and governmental units
Implementing and maintaining cost standards canbe time-consuming, labour-intensive, and expensive.
Implementing and maintaining cost standards canbe time-consuming, labour-intensive, and expensive.
COSTBENEFITS
COSTBENEFITS
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16-7
The total delivered cost, after subtracting
any purchase discounts
Cost Variance Analysis
Standard quantity:
Fabric in finished product 11 sq. metersAllowance for normal waste 1 sq. meters
Total standard quantity required per tent 12 sq. meters
Purchase price per sq. meter of fabric (net of purchase discounts) $7.75
Transportation cost per sq. meter 0.25
Total standard price per sq. meter of fabric $8.00
Koala CampGear Company
Koala CampGear Company
DIRECT MATERIAL STANDARDSDIRECT MATERIAL STANDARDS
The total amount of materialnormally required to producea finished product includingallowances for normal waste
or efficiency
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16-8
DIRECT labour STANDARDSDIRECT labour STANDARDS
Standard quantity:Direct labour required per tent 2 hours
Standard rate:
Hourly wage rate $15Fringe benefits (20% of wages) 3
Total standard rate per hour $18
The number oflabour hours
normally neededto manufacture
one unit ofproduct
The total hourly cost of compensation, including
fringe benefits
Cost Variance Analysis
Koala CampGear Company
Koala CampGear Company
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-9
Direct labour:Direct labour cost per tent (2 hours x $18 per hour) $36Actual output X 3,000Total standard direct-labour cost $108,000
Standard Costs Given ActualOutput
Direct material:
Standard direct-material cost per tent (12 sq. meters x $8 pr sq. meter) $96Actual output x3,000Total standard direct-material cost $288,000
The standard cost forthe direct-material
and direct-labour inputsis based upon Koala’s
actual output of 3,000 tents
They should incura cost of $396,000
($288,000 + $108,000)to make 3,000 tents
Koala CampGear Company
Koala CampGear Company
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-10
Direct-Material Variances
Direct-material price variance = (PQ X AP) - (PQ X SP) = PQ(AP - SP) where: PQ = Quantity purchased
AP = Actual priceSP = Standard price
Direct-material price variance = (PQ X AP) - (PQ X SP) = PQ(AP - SP) where: PQ = Quantity purchased
AP = Actual priceSP = Standard price
Direct-material quantity variance = (AQ X SP) - (SQ X SP) = SQ(AQ - SQ)
where: SP = Standard Price AQ = Actual quantity used
SQ = Standard quantity allowed
Direct-material quantity variance = (AQ X SP) - (SQ X SP) = SQ(AQ - SQ)
where: SP = Standard Price AQ = Actual quantity used
SQ = Standard quantity allowed
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-11
40,000 sq.meters
purchased
$8.15 persq. meter
40,000 sq.meters
purchased
$8.00 persq. meter
36,000sq. meters
allowed
$8.00 per sq. meter
xx x
Compute the Materials PriceVariance.
(see textbook for original datarelated to Koala Camp Gear)
Compute the Materials PriceVariance.
(see textbook for original datarelated to Koala Camp Gear)
ActualActualquantityquantity
ActualActualpriceprice
ActualActualquantityquantity
StandardStandardpriceprice
StandardStandardquantityquantity
StandardStandardpriceprice
xxxx xx
Analysis Of Material VariancesKoala Camp Gear
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-12
40,000 sq.meters
purchased
$8.15 persq. meter
40,000 sq.meters
purchased
$8.00 persq. meter
36,000sq. meters
allowed
$8.00 per sq. meter
$326,000 $320,000
$6,000U
xx x
Direct-material price variance
Compute the MaterialsQuantity Variance.
Compute the MaterialsQuantity Variance.
ActualActualquantityquantity
ActualActualpriceprice
ActualActualquantityquantity
StandardStandardpriceprice
StandardStandardquantityquantity
StandardStandardpriceprice
xxxx xx
Analysis Of Material VariancesKoala Camp Gear
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-13
40,000 sq.meters
purchased
$8.15 persq. meter
40,000 sq.meters
purchased
$8.00 persq. meter
36,000sq. meters
allowed
$8.00 per sq. meter
xx x
$326,000 $320,000
$6,000UDirect-material price variance
36,400 sq.meters
used
$8.00per sq.meter
$291,200 $3,200U
Direct-materialquantity variance
$288,000
ActualActualquantityquantity
ActualActualpriceprice
ActualActualquantityquantity
StandardStandardpriceprice
StandardStandardquantityquantity
StandardStandardpriceprice
xxxx xx
Analysis Of Material VariancesKoala Camp Gear
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-14
What caused Koala to spend more than the anticipated amount on direct material?
What caused Koala to spend more than the anticipated amount on direct material?
What caused Koala to spend more than the anticipated amount on direct material?
What caused Koala to spend more than the anticipated amount on direct material?
Analysis Of Material VariancesKoala Camp Gear
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-15
What caused Koala to spend more than the anticipated amount on direct material?
What caused Koala to spend more than the anticipated amount on direct material?
What caused Koala to spend more than the anticipated amount on direct material?
What caused Koala to spend more than the anticipated amount on direct material?
First, the company purchased fabric at a higher price ($8.15 persquare meter) than the standard price ($8.00 per square meter).
First, the company purchased fabric at a higher price ($8.15 persquare meter) than the standard price ($8.00 per square meter).
Analysis Of Material VariancesKoala Camp Gear
Second, the company used more fabric than the standard price.(36,400 sq. meters actually used, instead of the standard amount of
36,000 sq. meters)
Second, the company used more fabric than the standard price.(36,400 sq. meters actually used, instead of the standard amount of
36,000 sq. meters)
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-16
The material price variance isA. $24,500 (F)B. $25,000 (F)C. $25,000 (U)D. $25,500 (F)E. $25,500 (U)
The material price variance isA. $24,500 (F)B. $25,000 (F)C. $25,000 (U)D. $25,500 (F)E. $25,500 (U)
Direct-Material Variances - Question #1
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 ft used, 51,000 ft purchased at $9.50per foot
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 ft used, 51,000 ft purchased at $9.50per foot
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-17
The material price variance isA. $24,500 (F)B. $25,000 (F)C. $25,000 (U)D. $25,500 (F)E. $25,500 (U)
The material price variance isA. $24,500 (F)B. $25,000 (F)C. $25,000 (U)D. $25,500 (F)E. $25,500 (U)
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 ft used, 51,000 ft purchased at $9.50per foot
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 ft used, 51,000 ft purchased at $9.50per foot
The model is:
Actual Material Used × (ActualPrice - Standard Price)
Try again!
The model is:
Actual Material Used × (ActualPrice - Standard Price)
Try again!
Direct-Material Variances - Question #1
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-18
The material price variance isA. $24,500 (F)B. $25,000 (F)C. $25,000 (U)D. $25,500 (F)E. $25,500 (U)
The material price variance isA. $24,500 (F)B. $25,000 (F)C. $25,000 (U)D. $25,500 (F)E. $25,500 (U)
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 ft used, 51,000 ft purchased at $9.50per foot
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 ft used, 51,000 ft purchased at $9.50per foot
The model is:
Actual Material Used × (ActualPrice - Standard Price)
Try again!
The model is:
Actual Material Used × (ActualPrice - Standard Price)
Try again!
Direct-Material Variances - Question #1
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-19
The material price variance isA. $24,500 (F)B. $25,000 (F)C. $25,000 (U)D. $25,500 (F)E. $25,500 (U)
The material price variance isA. $24,500 (F)B. $25,000 (F)C. $25,000 (U)D. $25,500 (F)E. $25,500 (U)
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 ft used, 51,000 ft purchased at $9.50per foot
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 ft used, 51,000 ft purchased at $9.50per foot
The model is:
Actual Material Purchased ×(Actual Price - Standard Price)
Try again!
The model is:
Actual Material Purchased ×(Actual Price - Standard Price)
Try again!
Direct-Material Variances - Question #1
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-20
The material price variance isA. $24,500 (F)B. $25,000 (F)C. $25,000 (U)D. $25,500 (F)E. $25,500 (U)
The material price variance isA. $24,500 (F)B. $25,000 (F)C. $25,000 (U)D. $25,500 (F)E. $25,500 (U)
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 ft used, 51,000 ft purchased at $9.50per foot
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 ft used, 51,000 ft purchased at $9.50per foot
Direct-material price variance = (PQ X AP) - (PQ X SP) =(51,000 X $9.50) - (51,000 X $10.00) =$25,500 F
Direct-material price variance = (PQ X AP) - (PQ X SP) =(51,000 X $9.50) - (51,000 X $10.00) =$25,500 F
Direct-Material Variances - Question #1
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-21
The material price variance isA. $24,500 (F)B. $25,000 (F)C. $25,000 (U)D. $25,500 (F)E. $25,500 (U)
The material price variance isA. $24,500 (F)B. $25,000 (F)C. $25,000 (U)D. $25,500 (F)E. $25,500 (U)
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 ft used, 51,000 ft purchased at $9.50per foot
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 ft used, 51,000 ft purchased at $9.50per foot
Did they do better than budget(F) or worse than budget (U)?
Try again!
Did they do better than budget(F) or worse than budget (U)?
Try again!
Direct-Material Variances - Question #1
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-22
The material quantity variance isA. $10,000 (F)B. $10,000 (U)C. $20,000 (U)D. $20,000 (F)E. $19,500 (U)
The material quantity variance isA. $10,000 (F)B. $10,000 (U)C. $20,000 (U)D. $20,000 (F)E. $19,500 (U)
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 feet used, 51,000 feet purchasedat $9.50 per foot
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 feet used, 51,000 feet purchasedat $9.50 per foot
Direct-Material Variances - Question #2
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-23
The material quantity variance isA. $10,000 (F)B. $10,000 (U)C. $20,000 (U)D. $20,000 (F)E. $19,500 (U)
The material quantity variance isA. $10,000 (F)B. $10,000 (U)C. $20,000 (U)D. $20,000 (F)E. $19,500 (U)
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 feet used, 51,000 feet purchasedat $9.50 per foot
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 feet used, 51,000 feet purchasedat $9.50 per foot
Direct-Material Variances - Question #2
(AQ X SP) - (SQ X SP) = (49,000 X $10.00) - (50,000 X $10.00) =
$10.00 (49,000 - 50,000) =$10,000 (F)
(AQ X SP) - (SQ X SP) = (49,000 X $10.00) - (50,000 X $10.00) =
$10.00 (49,000 - 50,000) =$10,000 (F)
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-24
The material quantity variance isA. $10,000 (F)B. $10,000 (U)C. $20,000 (U)D. $20,000 (F)E. $19,500 (U)
The material quantity variance isA. $10,000 (F)B. $10,000 (U)C. $20,000 (U)D. $20,000 (F)E. $19,500 (U)
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 feet used, 51,000 feet purchasedat $9.50 per foot
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 feet used, 51,000 feet purchasedat $9.50 per foot
Direct-Material Variances - Question #2
The model is:
Actual Price × (Actual QtyUsed - Standard Qty Required)
Try again!
The model is:
Actual Price × (Actual QtyUsed - Standard Qty Required)
Try again!
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-25
The material quantity variance isA. $10,000 (F)B. $10,000 (U)C. $20,000 (U)D. $20,000 (F)E. $19,500 (U)
The material quantity variance isA. $10,000 (F)B. $10,000 (U)C. $20,000 (U)D. $20,000 (F)E. $19,500 (U)
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 feet used, 51,000 feet purchasedat $9.50 per foot
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 feet used, 51,000 feet purchasedat $9.50 per foot
Direct-Material Variances - Question #2
The model is:
Actual Price × (Actual QtyUsed - Standard Qty Required)
Try again!
The model is:
Actual Price × (Actual QtyUsed - Standard Qty Required)
Try again!
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-26
The material quantity variance isA. $10,000 (F)B. $10,000 (U)C. $20,000 (U)D. $20,000 (F)E. $19,500 (U)
The material quantity variance isA. $10,000 (F)B. $10,000 (U)C. $20,000 (U)D. $20,000 (F)E. $19,500 (U)
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 feet used, 51,000 feet purchasedat $9.50 per foot
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 feet used, 51,000 feet purchasedat $9.50 per foot
Direct-Material Variances - Question #2
The model is:
Actual Price × (Actual QtyUsed - Standard Qty Required)
Try again!
The model is:
Actual Price × (Actual QtyUsed - Standard Qty Required)
Try again!
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-27
The material quantity variance isA. $10,000 (F)B. $10,000 (U)C. $20,000 (U)D. $20,000 (F)E. $19,500 (U)
The material quantity variance isA. $10,000 (F)B. $10,000 (U)C. $20,000 (U)D. $20,000 (F)E. $19,500 (U)
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 feet used, 51,000 feet purchasedat $9.50 per foot
Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 feet used, 51,000 feet purchasedat $9.50 per foot
Direct-Material Variances - Question #2
The model is:
Actual Price × (Actual QtyUsed - Standard Qty Required)
Try again!
The model is:
Actual Price × (Actual QtyUsed - Standard Qty Required)
Try again!
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-28
Direct-labour rate variance = (AH X AR) - (AH X SR) = AH(AR - SR) where:
AH = Actual hours used AR = Actual rate per hour
SR = Standard rate per hour
Direct-labour rate variance = (AH X AR) - (AH X SR) = AH(AR - SR) where:
AH = Actual hours used AR = Actual rate per hour
SR = Standard rate per hour
Direct-labour Variances
Direct-labour efficiency variance = (AH X SR) - (SH X SR) = SR(AH - SH)
where: SR = Standard rate per hour AH = Actual hours used
SH = Standard hours allowed
Direct-labour efficiency variance = (AH X SR) - (SH X SR) = SR(AH - SH)
where: SR = Standard rate per hour AH = Actual hours used
SH = Standard hours allowed
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-29
X X X5,900 hoursused
$19per
hour
5,900hoursused
$18per
hour
6,000 hours
allowed
$18 per
hour
Actual labour Cost Standard labour CostActualhours
Standardprice
Actualrate
Actualhours
Standardrate
Standardrate
XXX
Analysis Of Direct-labourVariances
Koala Camp Gear
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-30
X X X5,900 hoursused
$19per
hour
5,900hoursused
$18per
hour
6,000 hours
allowed
$18 per
hour
$112,100 $106,200 $108,000
$5,900 Unfavourable $1,800 favourableDirect-labourrate variance
Direct-labourefficiency variance
$4,100 Unfavourable
Direct-labour variance
Actual labour Cost Standard labour CostActualhours
Standardprice
Actualrate
Actualhours
Standardrate
Standardrate
XXX
Analysis Of Direct-labourVariances
Koala Camp Gear
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-31
What caused Koala to spend more than the anticipated amount on direct labour?
What caused Koala to spend more than the anticipated amount on direct labour?
What caused Koala to spend more than the anticipated amount on direct labour?
What caused Koala to spend more than the anticipated amount on direct labour?
Analysis Of Direct-labourVariances
Koala Camp Gear
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-32
What caused Koala to spend more than the anticipated amount on direct labour?
What caused Koala to spend more than the anticipated amount on direct labour?
First, the company incurred a cost of $19 per hour for directlabour instead of the standard amount of $18 per hour
First, the company incurred a cost of $19 per hour for directlabour instead of the standard amount of $18 per hour
What caused Koala to spend more than the anticipated amount on direct labour?
What caused Koala to spend more than the anticipated amount on direct labour?
On the other hand, Koala used only 5,900 hours of direct labour,which is less than the standard quantity of 6,000 hours, given
actual output of 3,000 tents. This increased efficiency does notfully offset the unexpectedly high wage rate.
On the other hand, Koala used only 5,900 hours of direct labour,which is less than the standard quantity of 6,000 hours, given
actual output of 3,000 tents. This increased efficiency does notfully offset the unexpectedly high wage rate.
Analysis Of Direct-labourVariances
Koala Camp Gear
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-33
The labour rate variance isA. $25,000 (U)B. $25,000 (F)C. $10,500 (U)D. $10,500 (F)E. $4,400 (F)
The labour rate variance isA. $25,000 (U)B. $25,000 (F)C. $10,500 (U)D. $10,500 (F)E. $4,400 (F)
Direct-labour Variances - Question #3
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-34
The labour rate variance isA. $25,000 (U)B. $25,000 (F)C. $10,500 (U)D. $10,500 (F)E. $4,400 (F)
The labour rate variance isA. $25,000 (U)B. $25,000 (F)C. $10,500 (U)D. $10,500 (F)E. $4,400 (F)
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Direct-labour Variances - Question #3
Remember, the labourRate Variance iscomputed as:(AH X AR) - (AH X SR)TRY AGAIN!
Remember, the labourRate Variance iscomputed as:(AH X AR) - (AH X SR)TRY AGAIN!
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-35
The labour rate variance isA. $25,000 (U)B. $25,000 (F)C. $10,500 (U)D. $10,500 (F)E. $4,400 (F)
The labour rate variance isA. $25,000 (U)B. $25,000 (F)C. $10,500 (U)D. $10,500 (F)E. $4,400 (F)
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Direct-labour Variances - Question #3
Remember, the labourRate Variance iscomputed as:(AH X AR) - (AH X SR)TRY AGAIN!
Remember, the labourRate Variance iscomputed as:(AH X AR) - (AH X SR)TRY AGAIN!
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-36
The labour rate variance isA. $25,000 (U)B. $25,000 (F)C. $10,500 (U)D. $10,500 (F)E. $4,400 (F)
The labour rate variance isA. $25,000 (U)B. $25,000 (F)C. $10,500 (U)D. $10,500 (F)E. $4,400 (F)
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Direct-labour Variances - Question #3
Remember, the labourRate Variance iscomputed as:(AH X AR) - (AH X SR)TRY AGAIN!
Remember, the labourRate Variance iscomputed as:(AH X AR) - (AH X SR)TRY AGAIN!
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16-37
The labour rate variance isA. $25,000 (U)B. $25,000 (F)C. $10,500 (U)D. $10,500 (F)E. $4,400 (F)
The labour rate variance isA. $25,000 (U)B. $25,000 (F)C. $10,500 (U)D. $10,500 (F)E. $4,400 (F)
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Direct-labour Variances - Question #3
(AH X AR) - (AH X SR) =(21,000 X $14.50) - (21,000 X $15.00) =21,000($14.50 - $15.00) =$10,500 (F)
(AH X AR) - (AH X SR) =(21,000 X $14.50) - (21,000 X $15.00) =21,000($14.50 - $15.00) =$10,500 (F)
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16-38
The labour rate variance isA. $25,000 (U)B. $25,000 (F)C. $10,500 (U)D. $10,500 (F)E. $4,400 (F)
The labour rate variance isA. $25,000 (U)B. $25,000 (F)C. $10,500 (U)D. $10,500 (F)E. $4,400 (F)
Remember, the labourRate Variance iscomputed as:(AH X AR) - (AH X SR)TRY AGAIN!
Remember, the labourRate Variance iscomputed as:(AH X AR) - (AH X SR)TRY AGAIN!
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Direct-labour Variances - Question #3
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-39
The labour efficiency variance isA. $25,000 (U)B. $14,500 (F)C. $14,500 (U)D. $15,000 (F)E. $15,000 (U)
The labour efficiency variance isA. $25,000 (U)B. $14,500 (F)C. $14,500 (U)D. $15,000 (F)E. $15,000 (U)
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Direct-labour Variances - Question #4
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-40
The labour efficiency variance isA. $25,000 (U)B. $14,500 (F)C. $14,500 (U)D. $15,000 (F)E. $15,000 (U)
The labour efficiency variance isA. $25,000 (U)B. $14,500 (F)C. $14,500 (U)D. $15,000 (F)E. $15,000 (U)
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Direct-labour Variances - Question #4
Remember, the labourEfficiency Variance iscomputed as:(AH X SR) - (SH X SR)TRY AGAIN!
Remember, the labourEfficiency Variance iscomputed as:(AH X SR) - (SH X SR)TRY AGAIN!
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-41
The labour efficiency variance isA. $25,000 (U)B. $14,500 (F)C. $14,500 (U)D. $15,000 (F)E. $15,000 (U)
The labour efficiency variance isA. $25,000 (U)B. $14,500 (F)C. $14,500 (U)D. $15,000 (F)E. $15,000 (U)
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Direct-labour Variances - Question #4
Remember, the labourEfficiency Variance iscomputed as:(AH X SR) - (SH X SR)TRY AGAIN!
Remember, the labourEfficiency Variance iscomputed as:(AH X SR) - (SH X SR)TRY AGAIN!
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-42
The labour efficiency variance isA. $25,000 (U)B. $14,500 (F)C. $14,500 (U)D. $15,000 (F)E. $15,000 (U)
The labour efficiency variance isA. $25,000 (U)B. $14,500 (F)C. $14,500 (U)D. $15,000 (F)E. $15,000 (U)
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Direct-labour Variances - Question #4
Remember, the labourEfficiency Variance iscomputed as:(AH X SR) - (SH X SR)TRY AGAIN!
Remember, the labourEfficiency Variance iscomputed as:(AH X SR) - (SH X SR)TRY AGAIN!
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-43
The labour efficiency variance isA. $25,000 (U)B. $14,500 (F)C. $14,500 (U)D. $15,000 (F)E. $15,000 (U)
The labour efficiency variance isA. $25,000 (U)B. $14,500 (F)C. $14,500 (U)D. $15,000 (F)E. $15,000 (U)
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Direct-labour Variances - Question #4
Remember, the labourEfficiency Variance iscomputed as:(AH X SR) - (SH X SR)TRY AGAIN!
Remember, the labourEfficiency Variance iscomputed as:(AH X SR) - (SH X SR)TRY AGAIN!
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-44
The labour efficiency variance isA. $25,000 (U)B. $14,500 (F)C. $14,500 (U)D. $15,000 (F)E. $15,000 (U)
The labour efficiency variance isA. $25,000 (U)B. $14,500 (F)C. $14,500 (U)D. $15,000 (F)E. $15,000 (U)
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour
Direct-labour Variances - Question #4
(AH × SR) - (SH × SR) =(21,000 × $15.00) - (20,000 × $15.00) =(21,000 - 20,000) × $15.00 =$15,000 (U)
(AH × SR) - (SH × SR) =(21,000 × $15.00) - (20,000 × $15.00) =(21,000 - 20,000) × $15.00 =$15,000 (U)
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-45
Price QuantityDirect material X $1,500 F $1,900 UDirect material Y 2,400 U 300 UDirect material Z 900 U 400 FTotal variance $1,800 U $1800 U
When there are several types of direct material ordirect labour, price and quantity variances are computed for
each type, and then added to obtain a total price variance and a total quality variance
When there are several types of direct material ordirect labour, price and quantity variances are computed for
each type, and then added to obtain a total price variance and a total quality variance
Multiple Types Of Direct MaterialOr Direct labour
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-46
Allowance For Defects Of SpoilageIn some manufacturing processes, a certain amount of
defective production or spoilage is normal.
1,000 liters of chemicals are normally required in a chemicalprocess in order to obtain 800 liters of good output.
If total good output in February is 5,000 liters, what is thestandard allowed quantity of input?
Dividing bothsides of the
equation by 80%
Using the numbers in
the illustration
Good output quantity = 80% X Input quantity
Good output quantity/80% = Input quantity allowed
5,000 liters of good output/80%
= 6,250 liters of input allowed
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-47
How does a manager know when to follow up on a cost variance and when to ignore it?
How does a manager know when to follow up on a cost variance and when to ignore it?
What constitutes an exception?What constitutes an exception?
Significance Of Cost Variances:When To Follow Up
Management by ExceptionManagement by Exception
Size of VarianceSize of VarianceAbsolute AmountAbsolute Amount Relative AmountRelative Amount
RULE OF THUMB:Investigate variances that are either greater than $10,000 or
greater than 10 percent of standard cost
RULE OF THUMB:Investigate variances that are either greater than $10,000 or
greater than 10 percent of standard cost
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-48
None of the variances are greater than$10,000 or 10%, but this variance
should be investigated because it hasconsistently occurred at a reasonably
high amount for four months
None of the variances are greater than$10,000 or 10%, but this variance
should be investigated because it hasconsistently occurred at a reasonably
high amount for four months
Significance Of Cost Variances:When To Follow Up
MONTH VARIANCE % OF STANDARD COSTSeptember $6,000 F 6.0%October 6,400 F 6.4%November 3,200 F 3.6%December 6,200 F 6.2%
Recurring VariancesRecurring Variances
Standarddirect
labour costis $100,000
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-49Significance Of Cost Variances:When To Follow Up
TrendsTrends
None of the variances are greaterthan $10,000 or 10%, but this
variance should be investigatedbecause it has an increasingly
unfavourable trend.
None of the variances are greaterthan $10,000 or 10%, but this
variance should be investigatedbecause it has an increasingly
unfavourable trend.
Standarddirect labour
is $100,000
MONTH VARIANCE % OF STANDARD COSTSeptember $250 U 0.25%October 840 U 0.84%November 4,000 U 4.0%December 9,300 U 9.3%
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-50Significance Of Cost Variances:When To Follow Up
ControllabilityControllability
favourable Variancesfavourable Variances
Cost and Benefits of Investigation Cost and Benefits of Investigation
A manager is more likely to investigate a variance that iscontrollable by someone in the organization than one that is not
A manager is more likely to investigate a variance that iscontrollable by someone in the organization than one that is not
It is as important to investigate significant favourable variances as significant unfavourable variances
It is as important to investigate significant favourable variances as significant unfavourable variances
The decision whether to investigate a variance is a cost - benefit decision
The decision whether to investigate a variance is a cost - benefit decision
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-51Significance Of Cost Variances:When To Follow Up
Statistical AnalysisStatistical Analysis
1 standarddeviation
1 standarddeviation
X
XX
XX
X
Time
Jan. Feb. March April May June
favourablevariances
Unfavourablevariances
Criticalvalue
Investigate
A STATISTICAL CONTROL CHART plots cost variancesacross time and compares them with a statistically
determined critical value that triggers an investigation
A STATISTICAL CONTROL CHART plots cost variancesacross time and compares them with a statistically
determined critical value that triggers an investigation
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-52
Behavioural Effects Of StandardCosting
Standard costs, budgets, and variances are used to evaluate the performance of individuals and departments
Standard costs, budgets, and variances are used to evaluate the performance of individuals and departments
They can profoundly influence behaviour when they are used to determine salary increases, bonuses, and promotions
They can profoundly influence behaviour when they are used to determine salary increases, bonuses, and promotions
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-53
Controllability Of VariancesWhich Managers Generally Influence Cost Variances?Which Managers Generally Influence Cost Variances?
Direct-material price varianceDirect-material price variance The purchasing manager The purchasing manager
Get the best prices available for purchased goodsand services through skillful purchasing practices
Direct-material quantity varianceDirect-material quantity variance The production supervisorThe production supervisor
Skillful supervision and motivation of productionemployees, coupled with the careful use and handling
of materials, contribute to minimal waste.
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
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Controllability Of Variances
Direct-labour rate varianceDirect-labour rate variance The production supervisorThe production supervisor
Direct- labour efficiency varianceDirect- labour efficiency variance The production supervisorThe production supervisor
Generally results from using a different mix ofemployees than that anticipated when the standard
were set
Motivating employees toward production goalsand effective work schedules improves
efficiency
Which Managers Generally Influence Cost Variances?Which Managers Generally Influence Cost Variances?
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-55
Interaction Among Variances
Researchand
develop-ment
Design Supply Produc-
tion Marketing
Distri- bution
Customer service
HumanresourcesHuman
resources
PhysicalresourcesPhysical
resources
Variances in one part of the value chain can be due to root causes in another part of the chain
Variances in one part of the value chain can be due to root causes in another part of the chain
Interaction among variances often occur making it difficult to determine the responsibility for a particular variance
Interaction among variances often occur making it difficult to determine the responsibility for a particular variance
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-56Using Standard Costs ForProduct Costing
Flow of Product Costs Through Manufacturing Accounts(All Costs are Standard Costs)
Flow of Product Costs Through Manufacturing Accounts(All Costs are Standard Costs)
Work-in-Process Inventory
Direct-material cost
Direct-labour cost
Manufacturing Overhead
Finished-Goods Inventory
Cost of Goods Sold Income Summary
Product cost transferredwhen product is finished
Product cost transferred when product is sold
Expense closed into
Income Summary at endof accounting period
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16-57
Disposition Of Variances
Variances aretemporary
accounts, likerevenue and
expenseaccounts, and
they are closedout at the end ofthe accounting
period.
Variances aretemporary
accounts, likerevenue and
expenseaccounts, and
they are closedout at the end ofthe accounting
period.
Cost of Goods Sold
Unfavourablevariancesrepresentcosts of
operatinginefficiently,
relative to thestandards, and
thus cause the Cost ofGoods Sold
to be higher
favourablevariancesrepresentcosts of
operatingefficiently,
relative to thestandards, and
thus cause the Cost ofGoods Sold
to be lower
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
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How Information TechnologyImpacts Standard Costs
Use of Bar CodesUse of Bar Codes
Computer-Aided DesignComputer-Aided Design
In real-time shop floor data-collection systems, production can record the time they begin working on a particular job order
by scanning the bar code on their employee ID badge
In real-time shop floor data-collection systems, production can record the time they begin working on a particular job order
by scanning the bar code on their employee ID badge
When raw materials arrive at the production facility, their bar code is scanned and the event is recorded, automatically updating
inventory records
When raw materials arrive at the production facility, their bar code is scanned and the event is recorded, automatically updating
inventory records
Standard cost of material and labour are stored in the computer data base where
they can be easily accessed to assist engineers in the product design process
Standard cost of material and labour are stored in the computer data base where
they can be easily accessed to assist engineers in the product design process
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-59
Standard Costing: Advantages
! Allows managers to usemanagement by exception
! Provides a basis for sensiblecost comparisons
! Provides a means ofperformance evaluation andrewards for employees
! Allows managers to usemanagement by exception
! Provides a basis for sensiblecost comparisons
! Provides a means ofperformance evaluation andrewards for employees
! Provides motivation foremployees to adhere to
standards
! Results in more stableproduct costs
! Is less expensive thanactual- or normal- costing
systems
! Provides motivation foremployees to adhere to
standards
! Results in more stableproduct costs
! Is less expensive thanactual- or normal- costing
systems
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-60Criticisms Of Standard Costing InToday’s Environment
! Shorter product life cyclesmean that standards are onlyrelevant for a short time
! Too much focus on costminimization rather thanincreasing product quality orcustomer service
! Automated manufacturingprocesses tend to be moreconsistent in meetingproduction specificationsminimizing variances
! Not defined broadly enoughto capture important aspectof ownership
! Shorter product life cyclesmean that standards are onlyrelevant for a short time
! Too much focus on costminimization rather thanincreasing product quality orcustomer service
! Automated manufacturingprocesses tend to be moreconsistent in meetingproduction specificationsminimizing variances
! Not defined broadly enoughto capture important aspectof ownership
! Variances too aggregated inthat they are not tied tospecific product lines,production batches, orflexible management systemcells
! Variances too late to beuseful
! Standard costing out of stepwith the philosophy of costmanagement systems andactivity-based management
! Too much focus on the costand efficiency of direct labour
! Variances too aggregated inthat they are not tied tospecific product lines,production batches, orflexible management systemcells
! Variances too late to beuseful
! Standard costing out of stepwith the philosophy of costmanagement systems andactivity-based management
! Too much focus on the costand efficiency of direct labour
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-61
Kaizen Costing
KAIZEN COSTING is the process of cost reduction during the manufacturing phase of a product
KAIZEN COSTING is the process of cost reduction during the manufacturing phase of a product
Improvement is the goal and responsibility of each workerImprovement is the goal and responsibility of each worker
Cost per product unit
12/31/x0 12/31/x1
Time
Cost basefor next
year
Actual costreductionachieved
Current yearcost base
Kaizen goal:cost reduction
rate
Actual costperformance
of the current year
©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson
16-62
END OF CHAPTER
16
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