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Standard Costs & Operating Performance Measures

Standard Costs & Operating Performance Measures. Standard Costs. Standards are “benchmarks” or “norms” for measuring performance. Two types of standards are commonly used. Price standards Specify how much should be paid for each unit of the input.

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Standard Costs & Operating Performance Measures

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  1. Standard Costs & Operating Performance Measures

  2. Standard Costs Standards are “benchmarks” or “norms”for measuring performance. Two typesof standards are commonly used. Price standards Specify how much should be paid for each unitof the input. Quantity standardsspecify how much of aninput should be used tomake a product.

  3. Standard Cost Card – Variable Production Cost A standard cost card for one unit of product might look like this: * Fixed cost will be discussed later.

  4. Setting Standard Costs Accountants, engineers, purchasingagents, and production managerscombine efforts to set standards that encourage efficient production.

  5. I recommend using practical standards that are currently attainable with reasonable and efficient effort. Should we useideal standards that require employees towork at 100 percent peak efficiency? Setting Standard Costs Engineer ManagerialAccountant

  6. Significant deviations from standards are brought to the attention of management, apractice known as management by exception. Standard Costs Standard Amount DirectMaterial DirectLabor ManufacturingOverhead Type of Product Cost

  7. Exhibit 10-1 Takecorrective actions Identify & askquestions Receive explanations Conduct next period’s operations Analyze variances Variance Analysis Cycle Prepare standard cost performance report Begin

  8. Price Variance Quantity Variance Difference betweenactual price and standard price Difference betweenactual quantity andstandard quantity A General Model for Variance Analysis Variance Analysis

  9. Price Variance Quantity Variance Materials price varianceLabor rate varianceVOH spending variance A General Model for Variance Analysis Variance Analysis Materials quantity variance Labor efficiency variance VOH efficiency variance

  10. A General Model for Variance Analysis Variance = Actual Cost (AC) – Standard Cost (SC) We have favorable (F) or unfavorable (U) variance as follows: Total Variance is F (U) if AC < (>) SC.

  11. A General Model for Variance Analysis Variance = Actual cost (AC) – Standard Cost (SC) Actual cost = AQ × AP AQ = Actual Quantity AP = Actual Price Standard cost = SP x SQ SP = Standard Price SQ = Standard Quantity

  12. A General Model for Variance Analysis Variance = Actual cost (AC) – Standard Cost (SC) = AQ × AP – SP x SQ = AQ x AP – AQ x SP + AQ x SP – SP x SQ = AQ(AP – SP) + (AQ – SQ)SP

  13. A General Model for Variance Analysis Variance = Actual cost (AC) – Standard Cost (SC) = AQ (AP – SP) + (AQ – SQ) SP In sum, we have a favorable (F) or unfavorable (U) variance as follows: Total Variance is F (U) if AC < (>) SC; Price (Rate, Spending) Variance is F (U) if AP < (>) SP; Quantity (Efficiency) Variance is F (U) if AQ < (>) SQ.

  14. Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance A General Model for Variance Analysis

  15. Actual Quantity Actual Quantity Standard Quantity× × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Actual quantity is the amount of direct materials, direct labor, and variable manufacturing overhead actually used. A General Model for Variance Analysis

  16. Actual Quantity Actual Quantity Standard Quantity× × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Standard quantity is the standard quantity allowed for the actual output of the period. A General Model for Variance Analysis

  17. Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance A General Model for Variance Analysis Actual price is the amount actuallypaid for the input used.

  18. Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance A General Model for Variance Analysis Standard priceis the amount that should have been paid for the input used.

  19. Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance A General Model for Variance Analysis AQ × (AP – SP) (AQ – SQ) × SP) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity

  20. Learning Objective 2 Compute the direct materials price and quantity variances and explain their significance.

  21. Material Variances Example Glacier Peak Outfitters has the following direct material standard for the fiberfill for its mountain parka. 0.1 kg of fiberfill per parka at $5.00 per kg Last month 210 kgs of fiberfill were purchased and used to make 2,000 parkas. The material cost a total of $1,029.

  22. Material Variances Summary Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg. = $1,029 = $1,050 = $1,000

  23. $1,029  210 kgs = $4.90 per kg Material Variances Summary Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg. = $1,029 = $1,050 = $1,000

  24. 0.1 kg per parka  2,000 parkas = 200 kgs Material Variances Summary Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg. = $1,029 = $1,050 = $1,000

  25. Price variance$21 favorable Quantity variance$50 unfavorable Material Variances Summary Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg. = $1,029 = $1,050 = $1,000

  26. Material Variances:Using the Factored Equations Materials price variance MPV = AQ (AP - SP) = 210 kgs ($4.90/kg - $5.00/kg) = 210 kgs (-$0.10/kg) = -$21 F Materials quantity variance MQV = SP (AQ - SQ) = $5.00/kg [210 kgs-(0.1 kg/parka  2,000 parkas)] = $5.00/kg (210 kgs - 200 kgs) = $5.00/kg (10 kgs) = $50 U

  27. Purchasing Manager Production Manager Responsibility for Material Variances Materials Price Variance Materials Quantity Variance The standard price is used to compute the quantity variance,so that the production manager is not held responsible forthe purchasing manager’s performance.

  28. Your poor scheduling sometimes requires me to rush order material at a higher price, causing unfavorable price variances. I am not responsible for this unfavorable materialquantity variance. You purchased cheapmaterial, so my peoplehad to use more of it. Responsibility for Material Variances

  29. The price variance is computed on the entire quantitypurchased. • The quantity variance is computed only on the quantityused. Material Variances How are the material variances computed if the amount purchased differs from the amount used?

  30. Zippy Quick Check  Hanson Inc. has the following direct material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Last week, 1,700 pounds of material were purchased and used to make 1,000 Zippies. The material cost a total of $6,630.

  31. Zippy Price variance$170 favorable Quantity variance$800 unfavorable Quick Check  Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 1,700 lbs. 1,700 lbs. 1,500 lbs. × × × $3.90 per lb. $4.00 per lb. $4.00 per lb. = $6,630 = $ 6,800 = $6,000

  32. Zippy Quick Check  Continued Hanson Inc. has the following material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Last week, 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700 pounds were used to make 1,000 Zippies.

  33. Zippy Price variance increases because quantity purchased increases. Price variance$280 favorable Quick Check  Continued Actual Quantity Actual QuantityPurchased Purchased× ×Actual Price Standard Price 2,800 lbs. 2,800 lbs. × × $3.90 per lb. $4.00 per lb. = $10,920 = $11,200

  34. Zippy Quantity variance is unchanged because actual and standard quantities are unchanged. Quantity variance$800 unfavorable Quick Check  Continued Actual QuantityUsed Standard Quantity × × Standard Price Standard Price 1,700 lbs. 1,500 lbs. × × $4.00 per lb. $4.00 per lb. = $6,800 = $6,000

  35. Learning Objective 3 Compute the direct labor rate and efficiency variances and explaintheir significance.

  36. Labor Variances Example Glacier Peak Outfitters has the following direct labor standard for its mountain parka. 1.2 standard hours per parka at $10.00 per hour Last month, employees actually worked 2,500 hours at a total labor cost of $26,250 to make 2,000 parkas.

  37. Rate variance$1,250 unfavorable Efficiency variance$1,000 unfavorable Labor Variances Summary Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × ×$10.50 per hour $10.00 per hour. $10.00 per hour = $26,250 = $25,000 = $24,000

  38. $26,250  2,500 hours = $10.50 per hour Rate variance$1,250 unfavorable Efficiency variance$1,000 unfavorable Labor Variances Summary Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × ×$10.50 per hour $10.00 per hour. $10.00 per hour = $26,250 = $25,000 = $24,000

  39. 1.2 hours per parka  2,000 parkas = 2,400 hours Rate variance$1,250 unfavorable Efficiency variance$1,000 unfavorable Labor Variances Summary Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × ×$10.50 per hour $10.00 per hour. $10.00 per hour = $26,250 = $25,000 = $24,000

  40. Labor Variances:Using the Factored Equations Labor rate variance LRV = AH (AR - SR) = 2,500 hours ($10.50 per hour – $10.00 per hour) = 2,500 hours ($0.50 per hour) = $1,250 unfavorable Labor efficiency variance LEV = SR (AH - SH) = $10.00 per hour (2,500 hours – 2,400 hours) = $10.00 per hour (100 hours) = $1,000 unfavorable

  41. 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:

  42. I think it took more time to process the materials because the Maintenance Department has poorly maintained your equipment. I am not responsible for the unfavorable laborefficiency variance! You purchased cheapmaterial, so it took moretime to process it. Responsibility forLabor Variances

  43. Learning Objective 4 Compute the variable manufacturing overhead spending and efficiency variances.

  44. Variable Manufacturing Overhead Variances Example Glacier Peak Outfitters has the following variable manufacturing overhead standard for its mountain parka. 1.2 standard hours per parka at $4.00 per hour Last month, employees actually worked 2,500 hours to make 2,000 parkas. Actual variable manufacturing overhead for the month was $10,500.

  45. Spending variance$500 unfavorable Efficiency variance$400 unfavorable Variable Manufacturing Overhead Variances Summary Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × × $4.20 per hour $4.00 per hour $4.00 per hour = $10,500 = $10,000 = $9,600

  46. $10,500  2,500 hours = $4.20 per hour Spending variance$500 unfavorable Efficiency variance$400 unfavorable Variable Manufacturing Overhead Variances Summary Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × × $4.20 per hour $4.00 per hour $4.00 per hour = $10,500 = $10,000 = $9,600

  47. 1.2 hours per parka  2,000 parkas = 2,400 hours Spending variance$500 unfavorable Efficiency variance$400 unfavorable Variable Manufacturing Overhead Variances Summary Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × × $4.20 per hour $4.00 per hour $4.00 per hour = $10,500 = $10,000 = $9,600

  48. Variable Manufacturing Overhead Variances: Using Factored Equations Variable manufacturing overhead spending variance VMOSV = AH (AR - SR) = 2,500 hours ($4.20 per hour – $4.00 per hour) = 2,500 hours ($0.20 per hour) = $500 unfavorable Variable manufacturing overhead efficiency variance VMOEV = SR (AH - SH) = $4.00 per hour (2,500 hours – 2,400 hours) = $4.00 per hour (100 hours) = $400 unfavorable

  49. Learning Objective 5 Compute the predetermined overhead rate and apply overheadto products in a standard cost system.

  50. Overhead Rates and Overhead Analysis Recall that overhead costs are applied to products using apredetermined overhead rate: Applied Overhead = POHR × Activity Level Flexible budget overhead for thedenominator level of activity POHR = Denominator level of activity

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