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Chapter 17

Chapter 17. Inventory & Control. What we will cover:. Standard costs Variance Analysis. Standard Cost. A “budget” for a single unit. A difference between standard & actual cost is a variance. Large variances can be investigated & hopefully corrected.

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Chapter 17

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  1. Chapter 17 Inventory & Control

  2. What we will cover: • Standard costs • Variance Analysis

  3. Standard Cost • A “budget” for a single unit. • A difference between standard & actual cost is a variance. • Largevariances can be investigated & hopefully corrected.

  4. Variances can be either favorable or unfavorable.

  5. Inventory Accounts are Increased by • Standard cost of raw materials • Standard cost of labor • Standard cost of factory overhead.

  6. Direct Materials • Price Standard: Cost incurred to acquire one unit of DM. • Includes invoice cost + shipping costs. • Quantity Standard: Number of DM units needed to produce a unit of product.

  7. Direct Materials Variances: • Price: (AP-SP) x AQ purchased. • Quantity: (AQ used -SQ allowed) x SP

  8. Direct Labor • Price (or Rate) Standard: Amount that should be paid per direct labor hour. • Quantity Standard: Amount of time that should be incurred to produce a product.

  9. Direct Labor Variances: • Price: (AP - SP) x AQ of hours • Efficiency: (AQ - SQ allowed) x SP

  10. Overhead: • Price standard: the predetermined OH rates (chpt.16) • Often have separate rates for variable and fixed. • Quantity standard: amount of volume (usually DLHs) allowed for production. • Creates a problem - if volume changes from amt. used to determine predetermined OH rate, you automatically have a variance! Use Normal Activity level.

  11. Overhead Variances: • Budget Variance: Actual OH - Flex. Budget OH • Volume Variance: Flex. Budget OH - Applied OH • Applies only to fixed OH! (Not a volume variance for variable OH)

  12. At end of accounting period: • Close out all variance accounts to CGS

  13. Points: • Variances indicate problems - some will need attention, some will not. • Managers who have control over the problems should take action. • Just because a variance is favorable does not mean that all is OK!

  14. The End

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