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ACC3200

ACC3200. STANDARD COSTING. Learning Objectives. Describe the standard-setting process and explain how standard costs relate to budgets and variances. Prepare a flexible budget and show how total costs change with sales volume.

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ACC3200

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  1. ACC3200 STANDARD COSTING

  2. Learning Objectives • Describe the standard-setting process and explain how standard costs relate to budgets and variances. • Prepare a flexible budget and show how total costs change with sales volume. • Calculate and interpret the direct materials price and quantity variances. • Calculate and interpret the direct labor rate and efficiency variances. • Calculate and interpret the variable overhead rate and efficiency variances. • Calculate and interpret the fixed overhead spending variance.

  3. Standard Costs are Standard Cost Systems Based on carefullypredetermined amounts. Used for planning labor, materialand overhead requirements. The expected levelof performance. Benchmarks formeasuring performance. In a standard cost system, all manufacturing costsare recorded at standard rather than actual amounts.

  4. I recommend using attainablestandardsthat can be achieved with reasonableand efficient effort. Ideal versus Attainable Standards Should we useideal standards that require employees towork at 100 percent peak efficiency?

  5. Types of Standards

  6. 10-6 The Standard Cost Card

  7. 10-7 Master Budgets Versus Flexible Budgets The master budget is based on managers’ best estimate ofactivity (15,000 units) multiplied by the standard unit cost. The flexible budget shows how total costs are expected to change ifactivity is lower (12,000 units) or higher (18,000 units) than expected.

  8. 10-8 Flexible Budget as a Benchmark Planning Process Control Process Master Budget Flexible Budget Actual Results Based on estimated(budgeted)sales volume. Compare actual results to the flexiblebudget to evaluate performance, aftercontrolling for actual sales volume. A flexible budget for the actual activityis compared with actual results.

  9. 10-9 Flexible Budget as a Benchmark Cold Stone Creamery’s master budget of $7,500 for ice cream was based on a sales forecast of 15,000 units ($.50 per unit × 15,000 units). During the period, the amount spent for ice cream was $8,000, or $500 higher than the master budget. Did Cold Stone do a good job controlling ice cream costs? • There are two possible reasons why spending exceeded the master budget: • 1. Cold Stone may have spent more than $.50 on ice cream for each unit produced. • Cold Stone may have produced more than 15,000 units,requiring more ice cream than planned. Cold Stone actually produced 18,000 units for the period. Let’sprepare a flexible budget at 18,000 and evaluate performance.

  10. 10-10 Volume Variance versus Spending Variance ActualCost $8,000 FlexibleBudget$9,000 MasterBudget$7,500 Based on18,000 units Based on18,000 units Based on15,000 units SpendingVariance $1,000 F VolumeVariance1,500 U

  11. 10-11 Favorable versus Unfavorable Variances This variance is unfavorable because the actual costexceeds the standard cost. These variances are favorablebecause the actual costis less thanthe standard cost. Standard Amount DirectMaterial DirectLabor ManufacturingOverhead Type of Product Cost

  12. 10-12 Favorable versus Unfavorable Variances

  13. 10-13 Use of Flexible Budgets to Calculate Cost Variances • A standard is the expected cost for one unit. • A budget is the expected cost for all units produced. What is the difference between standards and budgets?

  14. 10-14 Calculation of Direct Cost Variances Spendingvariance ActualcostAP × AQ SP × AQ FlexiblebudgetSP × SQ MasterbudgetSQ × SP Price varianceAQ × (SP – AP) Quantity varianceSP × (SQ – AQ) SQ basedon budgetedunits AP = Actual price of inputAQ = Actual quantity of inputSP = Standard price of input SQ = Standard quantity of input allowed to achieve the actual units of output SQ basedon actualunits

  15. 10-15 Direct Materials Variances Cold Stone’s Standard Cost Information for Ice Cream • Cold Stone’s actual results for the period were: • 18,000 units produced and sold. • 200,000 ounces of ice cream purchased at a total cost of $8,000. • Actual Price (AP) = $8,000 ÷ 200,000 ounces = $.04 per ounce • Actual Quantity (AQ) = 200,000 ounces • Standard Price (SP) = $.05 per ounce • Standard Quantity (SQ) = 10 ounces per unit × 18,000 actual units = 180,000 ounces

  16. 10-16 Direct Materials Variances SQ =18,000 actual units × 10 ounces AP × AQ$.04 × 200,000 $8,000 AP × AQ SP × AQ$.05 × 200,000 $10,000 SP × AQ SP × SQ Price VarianceAQ × (SP – AP) Quantity VarianceSP × (SQ – AQ) Spending Variance

  17. 10-17 Purchasing Manager Production Manager Direct Materials Variances Materials Price Variance Materials Quantity Variance The standard price is used to compute the quantity varianceso that the production manager is not held responsible forthe purchasing manager’s performance.

  18. 10-18 Direct Labor Variances Direct laborvariances ActualcostAR × AH SR × AH FlexiblebudgetSR × SH Rate varianceAH × (SR – AR) Efficiency varianceSR × (SH – AH) AR = Actual hourly labor rateAH = Actual labor hoursSR = Standard hourly labor rate SH = Standard labor hours allowed to achieve the actual units of output SH Basedon actualunits produced

  19. 10-19 Direct Labor Variances Cold Stone’s Standard Cost Information for Direct Labor • Cold Stone’s actual results for the period were: • 18,000 units produced and sold. • Direct labor costs were $16,500 for 2,000 hours worked. • Actual Rate (AR) = $16,500 ÷ 2,000 hours = $8.25 per hour • Actual Hours (AH) = 2,000 hours • Standard Rate (SR) = $8.00 per hour • Standard Hours (SH) = 0.10 hours per unit × 18,000 actual units = 1,800 hours

  20. 10-20 Direct Labor Variances SH = 18,000 actual units × 0.10 hours AR × AH SR × AH SR × SH Rate varianceAH × (SR – AR) Efficiency varianceSR × (SH – AH) Spending variance

  21. 10-21 Mix of skill levelsassigned to work tasks. Level of employee motivation. Quality of production supervision. Production Manager Quality of training provided to employees. Responsibility for Labor Variances Production managers areusually held accountablefor labor variancesbecause they caninfluence the:

  22. 10-22 Manufacturing Overhead Cost Variances Contain fixed overheadthat remains constantas activity changes. Contain variable overheadthat increases asactivity increases. Overhead Rates Are a function of the activity levelchosen to determine the rate.

  23. 10-23 Variable Manufacturing Overhead Variances Flexible budgetSR × SH Actual VOHAR × AH SR × AH VOH rate varianceAH × (SR – AR) VOH efficiency varianceSR × (SH –AH) Variable overhead spending variances AR = Actual variable overhead rate SR = Standard variable overhead rate AH = Actual direct labor hoursSH = Standard direct labor hours allowed to achieve the actual units of output

  24. 10-24 Variable Manufacturing Overhead Variances Cold Stone’s Standard Cost Informationfor Variable Manufacturing Overhead • Cold Stone’s actual results for the period were: • 18,000 units produced and sold. • Actual VOH costs were $1,800 for 2,000 direct labor hours. • Actual Direct Labor Hours (AH) = 2,000 hours • Standard Direct Labor Hours (SH) = 0.10 hours per unit × 18,000 units = 1,800 hours • Actual Variable Overhead Rate (AR) = $1,800 ÷ 2,000 hours = $.90 per hour • Standard Variable Overhead Rate (SR) = 0.10 hours per unit × $1.00 per hour = $0.10 per unit

  25. 10-25 Variable Manufacturing Overhead Variances SH = 18,000 actual units × 0.10 hours Actual VOHAR × AH Flexible budgetSR × SH AR × SR VOH rate varianceAH × (SR – AR) VOH efficiency varianceSR × (SH –AH) Variable overhead spending variance

  26. Rate Variance Efficiency Variance 10-26 Variable Manufacturing Overhead Variances Results from paying moreor less than expected foroverhead items and from excessive usage ofoverhead items. A function of the selected allocation measure (direct labor hours). It does not reflect overhead control.

  27. 10-27 Fixed Manufacturing Overhead Spending Variance Fixed OverheadSpending Variance BudgetedFixed Overhead ActualFixed Overhead = ‒ Cold Stone budgeted $6,000 for fixed manufacturing overhead butactually incurred $6,300 in fixed manufacturing overhead costs. Fixed OverheadSpending Variance$300 U $6,000 $6,300 = ‒

  28. 10-28 Summary of Spending Variances • Variances are always calculated by comparing actual results to budgeted, or standard, results. • Companies try to hold specific managers responsible for specific variances, while removing the effects of factors that are beyond managers’ control. • The formulas for variances allow only one factor, such as price, quantity or volume to change, while holding everything else constant at either actual or standard values (depending on the type of variance). • The driving factor for a variance always appears in parentheses in the formula, as well as in the name of the variance. For example, the formula for the direct materials price variance is AQ X (SP - AP). • Try not to memorize rules or rely on the formulas to determine whether a variance is favorable or unfavorable; just think about it. Spending or using more of a variable resource is unfavorable. Using more of a fixed resource is favorable, because it drives down the fixed cost per unit.

  29. 10-29 Summary of Spending Variances ActualCosts FlexibleBudget Spending Variances Ice Cream$8,000 DM Price$2,000 F DM Quantity$1,000 U Ice Cream$9,000 Mix-Ins $4,200 DM Price$700 U DM Quantity$100 F Mix-Ins$3,600 Direct Labor $16,500 DL Rate$500 U DL Efficiency$1,600 U Direct Labor$14,400 Variable OH $1,800 VOH Rate$200 F VOH Efficiency$200 U Variable OH$1,800 Fixed OH $6,300 FOH Budget$300 U Fixed OH$6,000 Actual Cost $36,800 Total Spending Variance$2,000 U Budgeted Cost$34,800

  30. 10-30 Supplement 10A – Fixed Manufacturing Overhead Volume and Capacity Variances Fixed Overhead Rate Based on Budgeted Volume Budgeted Fixed Overhead Rate BudgetedFixed Overhead Budgeted Volume = ÷ Cold Stone budgeted $6,000 for fixed manufacturing overhead for a budgeted volume of 15,000 units. Cold Stone’s budgetedfixed manufacturing overhead rate is: Budgeted Fixed Overhead Rate$0.40 per unit $6,000 15,000 units = ÷

  31. 10-31 Fixed Manufacturing Overhead Volume Variance Applied FOH FOH Rate×Actual Volume Budgeted FOH FOH Rate×Budgeted Volume Fixed Overhead Volume Variance ‒ = FOH Rate×(Actual Volume ‒ Budgeted Volume) Fixed Overhead Volume Variance = Fixed Overhead Volume Variance$1,200 Favorable $0.40×(18,000 units ‒ 15,000 units) =

  32. 10-32 Fixed Manufacturing Overhead Spending and Volume Variances ActualFOH Budgeted FOHFOH Rate × BU Applied FOH FOH Rate × AU FOH Spending VarianceBudgeted – Actual FOH FOH Volume VarianceFOH Rate × (AU – BU) Over- or UnderappliedFixed Overhead AU = Actual UnitsBU = Master Budget UnitsFOH = Fixed manufacturing overhead FOH Rate = Budgeted FOH cost ÷ Budgeted units

  33. 10-33 Fixed Manufacturing Overhead Variances Cold Stone’s Standard Cost Informationfor Fixed Manufacturing Overhead • Cold Stone’s budget for fixed overhead was: • 15,000 units to be produced and sold. • Budgeted FOH costs were $6,000. • Cold Stone’s actual results for the period were: • 18,000 units produced and sold. • Actual FOH costs were $6,300.

  34. 10-34 Fixed Manufacturing Overhead Spending and Volume Variances Actual FOH Applied FOH FOHR × AU Budgeted FOH FOH Rate × BU FOH Spending VarianceBudgeted – Actual FOH FOH Volume Variance FOH Rate × (AU – BU) Over- or UnderappliedFixed Overhead

  35. 10-35 Fixed Overhead Rate Based on Practical Capacity Practical capacity is the number of units that could be produced under normal operating conditions. FixedOverhead Rate BudgetedFixed Overhead PracticalCapacity = ÷ Cold Stone budgeted $6,000 for fixed manufacturing overhead andhas a practical capacity of 20,000 units. Cold Stone’s fixed manufacturing overhead rate is: FixedOverhead Rate$0.30 per unit $6,000 20,000 units = ÷

  36. 10-36 Fixed Overhead Capacity Variances The expected capacity variance is computed before the period begins. FOH Rate×Budgeted Volume – Practical Capacity ExpectedCapacity Variance = $0.30×15,000 units – 20,000 units ExpectedCapacity Variance $1,500Unfavorable = =

  37. 10-37 Fixed Overhead Capacity Variances The unexpected capacity variance iscomputed after the period is over. FOH Rate×Actual Volume – Budgeted Volume UnexpectedCapacity Variance = $0.30×18,000 units – 15,000 units UnexpectedCapacity Variance $900favorable = =

  38. 10-38 Fixed Manufacturing Overhead Spending and Capacity Variances Cold Stone’s Cost Informationfor Fixed Manufacturing Overhead • Practical capacity is 20,000 units. • Cold Stone’s budget for fixed overhead was: • 15,000 units to be produced and sold. • Budgeted FOH costs were $6,000. • Cold Stone’s actual results for the period were: • 18,000 units produced and sold. • Actual FOH costs were $6,300.

  39. 10-39 Fixed Manufacturing Overhead Spending and Capacity Variances Budgeted Cost of Capacity FOH Rate × PC Cost of Capacity Used FOHR × AU Actual FOH FOH Spending Variance Budgeted – Actual FOH FOH Capacity Variance FOH Rate × (AU – PC) Over- or UnderappliedFixed Overhead

  40. 10-40 Supplement 10B – Recording Standard Costs and Variances in a Standard Cost System Common Rules • The initial debit to an inventory account (Raw Materials, Work in Process, or Finished Goods) and the eventual debit to Cost of Goods Sold should be based on the standard cost, not the actual cost. • Cash, payables, or other accounts, such as accumulated depreciation or prepaid assets, should be credited for the actual cost incurred. • The difference between the standard cost (a debit) and the actual cost (a credit) should be recorded as the cost variance. • Unfavorable variances should appear as debit entries; favorable variances should appear as credit entries. • At the end of the accounting period, all the variances should be closed to the Cost of Goods Sold account to adjust the standard cost up or down to the actual cost.

  41. 10-41 Recording Standard Costs for Cold Stone Creamery Standard Direct MaterialCost Standard Direct Laborand ManufacturingOverhead Costs No Work in Process or Finished Goods Inventory RawMaterialsInventory Cost of Goods Sold

  42. 10-42 Direct Materials Costs Cold Stone’s Standard Cost Information for Direct Materials • Cold Stone’s actual results for the period were: • 200,000 ounces of ice cream were purchased on account for a total of $8,000, at an average actual price of $.04 per ounce. • All 200,000 ounces of ice cream were used to make and sell 18,000 units. The journal entry to record the direct materials purchase is:

  43. 10-43 Direct Materials Costs Cold Stone’s Standard Cost Information for Direct Materials • Cold Stone’s actual results for the period were: • 200,000 ounces of ice cream were purchased on account for a total of $8,000, at an average actual price of $.04 per ounce. • All 200,000 ounces of ice cream were used to make and sell 18,000 units. The journal entry to record the direct materials use is:

  44. 10-44 Direct Labor and Manufacturing Overhead Costs Cold Stone’s Standard Cost Information for Direct Labor • Cold Stone’s actual results for the period were: • 18,000 units produced and sold. • Direct labor costs were $16,500 for 2,000 hours worked. The journal entry to record direct labor is:

  45. 10-45 Direct Labor and Manufacturing Overhead Costs Cold Stone’s Standard Cost Informationfor Variable Manufacturing Overhead • Cold Stone’s actual results for the period were: • 18,000 units produced and sold. • Actual VOH costs were $1,800 for 2,000 direct labor hours. The journal entry to record variable manufacturing overhead is:

  46. 10-46 Direct Labor and Manufacturing Overhead Costs Cold Stone’s Standard Cost Informationfor Fixed Manufacturing Overhead • Cold Stone’s budget for fixed overhead: • 15,000 units to be produced and sold. • Budgeted FOH costs were $6,000. • Cold Stone’ actual results for the period: • 18,000 units produced and sold. • Actual FOH costs were $6,300. The journal entry to record fixed manufacturing overhead costs is:

  47. 10-47 Cost of Goods Sold and Cost Variance Summary Recall the following from the summary of cost variances: Cost of Goods Sold Cost Variance Summary Balance = 800 AppliedStandardCost ActualCost = 36,800 = 36,000 Balance = 0 Actual Cost $36,800 Total Cost Variance$800 U Standard Cost$36,000

  48. 10-48 Cost of Goods Sold and Cost Variance Summary The entry to close the variance accounts to the Cost of Goods Sold is:

  49. End of Topic 4

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