1 / 36

ACT3132 MANAGEMENT ACCOUNTING II STANDARD COSTING

ACT3132 MANAGEMENT ACCOUNTING II STANDARD COSTING. Dr Nor Aziah Abu Kasim SEMESTER II 2005/6 Group 2. Definition: What are Standard Costs?. Standard costs are target costs for each operation; thus predetermined under efficient operating conditions

curran-tate
Download Presentation

ACT3132 MANAGEMENT ACCOUNTING II STANDARD COSTING

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. ACT3132 MANAGEMENT ACCOUNTING IISTANDARD COSTING Dr Nor Aziah Abu Kasim SEMESTER II 2005/6 Group 2

  2. Definition: What are Standard Costs? • Standard costs are target costs for each operation; thus predetermined under efficient operating conditions • Standard relates to cost on a per unit basis

  3. Standard Costs Per Unit • Standard manufacturing product costs consist of total of the standard costs of operations • Standard costs per unit of production in a manufacturing environment: • Direct material: Std qty x std price • Direct labour: Std hrs x std rate • Variable overhead (based DLH)Std hrs x std rate • Fixed overhead Std hrs x std rate • Total std costs Sum all std costs

  4. Establishing Cost Standards Two approaches: (1) past historical records • based on average past performance for same operations might include past inefficiencies (2) engineering studies • A detailed study of each operation is undertaken: • • direct material standards (standard quantity × standard prices) • • direct labour standards (standard quantity × standard prices) • • overhead standards

  5. Comparing Methods • Advantage of engineering methods over the historical method is that it focuses on finding the best combination of resources, production methods and product quality. • For this reason, engineering method is more widely used • Standards should always be reviewed to ensure standards reflect current targets

  6. Types of Standard Costs: Basic cost standards • unchanged over long periods • same standard for establishing efficiency trends • but basic standards do not represent current target costs if there are changes

  7. Types of Standard Costs: Ideal standards • represents perfect performance • minimum costs under the most efficient operating conditions • can have adverse impact on employee motivation, because might not be currently achieved.

  8. Types of Standard Costs: Currently attainable standards • represents costs that should be incurred under efficient operating conditions • difficult but are not impossible standards to achieve • makes allowances for normal spoilage, machine breakdowns and lost time • targets are achievable under efficient conditions • preferred for use in planning and control • but standards are not motivating higher performance

  9. Purposes of Standard Costing (1) To provide a prediction of future costs that can be used for decision-making. Standard costs are future target costs. (2) To provide a challenging target that individuals are motivated to achieve. Targets are defined quantitatively to motivate higher level of performance

  10. Purposes of Standard Costing (3) To assist in setting budgets and evaluating performance. Use standard costs in budgeting. (4) To act as a control device by highlighting those activities that do not conform to plan. Comparing differences between standard and actual costs provide feedback for corrective actions and controlling deviations.

  11. Purposes of Standard Costing (5) To simplify the task of tracing costs to products for inventory valuation and profit measurement. Valuing products and measuring profits relate to internal financial accounting purpose – allocate costs between inventory and cost of sales. Convert to actual cost by writing off all variances as period costs

  12. Calculation of Variances Direct Material Variances • Costs of materials are determined by both price and quantity used. • Thus, material price variance can be analysed by price and quantity. • Actual cost will differ from standard cost because of differences in price and/or quantity

  13. Material price variance • Formula: (SP – AP) × AQ • For Standard Price (SP), assumes that purchasing dept has searched for alternative suppliers, selected supplier who provides suitable quality at competitive prices • Should AQ be quantity purchased or quantity used? • Purchased because for effective control over costs, take action at the point of incurrence or at time of purchase.

  14. Material price variance • SP already incorporates advantages derived from most economical order quantity and quantity discounts, best method of delivery and the most favourable credit terms • Example: • Budgeted units of ABC are 10,000 • Std cost of Direct materials: • 2 kg of A at RM10 per kg • 1 kg of B at RM15 per kg

  15. Material price variance • Actual results for 9,000 units of ABC: Direct materials: • A: 19,000 kg at RM11 per kg • B: 10,100 kg at RM14 per kg • Material price variance: • (RM10 - RM11) x 19 000 = RM19 000A (Material A) • (RM15 - RM14) x 10 100 = RM10 100F (Material B)

  16. Material usage variance • Formula: (SQ – AQ) × SP • SQ = standard quantity allowed at actual production and AQ= actual quantity • Illustration: • (9 000 x 2 kg = 18 000 - 19 000) x RM10 = RM10 000A (Material A) • (9 000 x 1 kg = 9 000 - 10 000) x RM15 = RM16 500A (Material B) • Possible causes?

  17. Direct labour variance • Labour rate variance • Formula: (SR – AR) × AH • SR = standard rate, AR = actual rate, AH = actual hour • Example: • Standard cost for direct labour: • 3 hours at RM9 per hour per unit of ABC • Actual costs for direct labour: • 28,500 hours at RM9.60 per hour • Labour rate variance computation: • (RM9 - RM9.60) x 28 500 = RM17 100A • Possible causes?

  18. Direct labour variance • Labour efficiency variance • Formula: (SH – AH) × SR • SH = standard hours allowed at actual production • amount of time under efficient conditions • under efficient production methods • incorporate unavoidable delays due to machine breakdowns and routine maintenance

  19. Direct labour variance • Labour efficiency variance • Formula: (SH – AH) × SR • (9000x 3 hours = 27 000SHP - 28 500AH ) x RM9 = RM13 500A • Possible causes?

  20. Overhead Variances • Variable overhead expenditure variance • Formula: (AH × SR or flexed budget allowance) – Actual cost • assumes variable overhead will vary with direct labour hours • Standard Rate (SR) • is similar to predetermined overhead rate • normally based on rate per direct labour hour or machine hour of input

  21. Overhead Variances • Variable overhead efficiency variance • Formula: (SH – AH) × SR • SH= standard direct labour hours allowed • AH= actual direct labour hours • SR= standard variable overhead rate per hour

  22. Calculation of overhead variances • Variable overhead expenditure variance • Flexed budget allowance (AH × SR) – Actual cost • (28500 x RM2 = RM57 000) - RM52 000 = RM5 000F • Possible causes? • Variable overhead efficiency variance • (SH – AH) × SR • (9 000 x 3 hours = 27 000SHP - 28 500AH) x RM2 = RM3 000A • Possible causes? (note similarity to labour efficiency because variable overhead varies with direct labour hours)

  23. Overhead Variance • Fixed overhead expenditure (spending) variance • Under variable costing method • Formula: Budgeted Fixed Overhead (BFO) – Actual Fixed Overhead (AFO) • Example: • Annual budgeted fixed overheads are RM1,440,000 and are assumed to be incurred evenly throughout the year. The company uses a variable costing system. Actual monthly fixed overhead is RM116,000. • FOH Expenditure Variance: • (RM1 440 000/12 = RM120 000 - RM116 000 = RM4000F

  24. Production cost variances: Summary Material Price RM 8,900A Material Usage 26,500A 35,400 A Labour Rate RM17,100A Labour Efficiency 13,500A 30,600A Manufacturing overhead variances: Fixed overhead expenditure 4,000F Variable overhead expenditure 5,000F Variable overhead efficiency 3,000A 6,000F Total production cost variance RM60,000A

  25. Standard Absorption Costing System • For financial accounting (stock valuation) fixed overheads must be allocated to products. • If actual production is different from budgeted production, a volume variance will arise.

  26. Production Volume Variance • Fixed Overhead Volume variance = (AP – BP) × SR • AP = Actual production • BP = Budgeted production • SR = standard fixed overhead rate per unit

  27. FOH Volume Variance • Computation of Fixed overhead rate = budgeted fixed overhead/budgeted activity • RM120,000/10 000 units = RM12 per unit • or • RM120 000 /30 000 hours = RM4 per standard hour = RM12 per unit (3 ×RM4). • Volume variance = (9,000 – 8,000) RM12 = RM12 000A

  28. FOH Volume Variances Volume variances are not useful for cost control since fixed costs are sunk costs. • Sometimes fixed overhead production volume variances are analysed into two sub-variances called capacity and efficiency • Budgeted hours of input and output = 30 000 • Actual hours of input = 28 500 • Standard hours allowed for actual output = 27 000 • Volume variance = (A – C) X SR = 3 000 hours X RM 4 per hour =RM12 000A

  29. FOH Variances • Volume variance = (A – C) X SR = 3 000 hours X RM 4 per hour =RM12 000A • Capacity variance= (A – B) X SR = 1 500 hours X RM 4 per hour = RM6 000A • Actual labor hours as the measure of capacity utilisation caused this difference • Efficiency variance = (B– C) X SR = 1 500 hours X RM4 per hour = RM6 000A

  30. Production Volume Variances • Production volume variances = Capacity variance + Efficiency variance • Some companies interpret the fixed overhead efficiency variance as a measure of the inefficient use,or misuse, of capacity. This interpretation has some appeal when direct labor time represents the main constraint on productive capacity.

  31. FOH Efficiency Variance • However, this efficiency variance represents nothing more than the difference between applied fixed overhead in normal historical costing and applied fixed overhead standard costing. • In addition, the term "fixed overhead efficiency variance" is misleading because it appears to imply that direct labor efficiency can influence actual fixed overhead costs although actual costs are not involved in the calculation.

  32. Recording Standards Costs in the Accounts • Purchase of materials (Material A) Dr Stores ledger control account (AQ × SP) 190 000 Dr Materials price variance 19 000 Cr Creditors control 209 000 • Issue of materials (Material A) Dr Work in progress (SQ ×SP) 180 000 Dr Material usage variance 10 000 Cr Stores ledger control account (AQ × SP) 190 000

  33. Recording Standards Costs in the Accounts 3. Recording of wages due Dr Wages control account (actual cost) 273 600 Cr Wages accrued account 273 600 4. The wages control account is cleared as follows: Dr Work in Progress (SQ ×SP) 243 000 Cr Wages control account 243 000 Dr Wage rate variance 17 100 Dr Labour efficiency variance 13 500 Cr Wages control account 30 600

  34. Recording Standards Costs in the Accounts 5. Manufacturing overhead cost incurred Dr Factory variable overhead control A/C 52 000 Dr Factory fixed overhead control A/C 116 000 Cr Expense creditors 168 000 6. Absorption of fixed manufacturing overhead Dr Work in progress (SQ ×SP) 108 000 Dr Volume variance 12 000 Cr Factory fixed overhead control account 120 000 Dr Factory fixed overhead control account 4 000 Cr Fixed overhead expenditure variance 4 000

  35. Recording Standards Costs in the Accounts 7. Variable manufacturing overhead Dr Work in progress (SQ ×SP) 54 000 Dr Variable overhead efficiency variance 3 000 Cr Factory variable overhead control account 57 000 Dr Factory variable overhead control account 5 000 Cr Variable overhead expenditure variance account 5 000 8. Completion of production Dr Finished stock account 720 000 Cr Work in progress 720 000 • Variances are transferred to the profit and loss account at the end of the period.

  36. To be continued … Thank You

More Related