Mastering Standard Cost Systems: Foundations and Applications

1. Cost Accounting Foundations and Evolutions Kinney, Prather, Raiborn Chapter 7 Standard Costing and Variance Analysis

2. Learning Objectives (1 of 2) • Describe how standards are set for material, labor, and overhead • List the documents that are associated with standard cost systems and describe the information that those documents provide • Calculate and record material, labor, and overhead variances

3. Learning Objectives (2 of 2) • Explain why standard cost systems are used • Contrast the traditional labor and overhead elements to a single conversion element • (Appendix) Explain how multiple material and labor categories affect variances

4. Standards • Standard costs are budgeted costs to • manufacture a single unit of product, or • perform a single service • To develop standards identify • material and labor types, quantities, and prices • overhead types and behavior

5. Material Standards • Materials used • Types • Quantity • Quality • Cost • From • Product specifications, observation, inquiry • Bill of materials • Balance cost, quality, and projected sales price

6. Labor Standards • Labor used • Types • Production, setup, cleanup, and rework • Quantity • Cost • Include wages, payroll taxes, and fringe benefits • From • Time and motion studies, industrial engineering studies • Operations flow document

7. Overhead Standards • Variable and fixed manufacturing overhead • Estimated level of activity • Estimated costs • Predetermined factory overhead application rates

8. AP x AQ SP x SQ Total Variance Total Variance Inputs Outputs AP =actual cost/price per unit of materials or hours of labor AQ = actual quantity of materials or hours of labor SP = standard cost/price per unit of materials or hours of labor SQ = standard quantity of materials or hours of labor

9. AP x AQ SPx AQ SP x SQ MPV Total Variance Material Price Variance (MPV) What was paid What should have been paid (AP - SP) x AQ* *Favorable or unfavorable

10. Material Price Variance • Calculate Material Price Variance at • point of purchase, or • when materials used

11. AP x AQ SPx AQ SP x SQ MQV Total Variance Material Quantity Variance (MQV) What was used What should have been used for level of output (AQ - SQ) x SP* *Favorable or unfavorable

12. AP x AQ SPx AQ SP x SQ LRV Total Variance Labor Rate Variance (LRV) What was paid What should have been paid (AP - SP) x AQ* *Favorable or unfavorable

13. AP x AQ SPx AQ SP x SQ LEV Total Variance Labor Efficiency Variance (LEV) What was used What should have been used for level of output (AQ - SQ) x SP* *Favorable or unfavorable

14. Actual VOH Budgeted VOH Applied VOH Actual SPx AQ SP x SQ VOH Spending Variance VOH Efficiency Variance Total VOH Variance Variable Overhead Variances For actual hours used What should have been used for level of output

15. VOH Spending Variance • Caused by price differences • managers have little control over prices • Caused by shrinkage or waste • managers should be held accountable

16. Actual FOH Budgeted FOH Applied FOH SP x SQ FOH Spending Variance FOH Volume Variance Total FOH Variance Fixed Overhead Variances Constant Amount What should have been used for level of output

17. FOH Spending Variance • Calculate variance for each component • Caused by price differences • May reflect mismanagement of resources

18. FOH Volume Variance • Measures capacity utilization • Caused by producing at a level that differs from the capacity level used to compute the predetermined overhead rate • Also called the noncontrollable variance

19. Budgeted OH Actual OH Standard OH based on Actual Inputs based on Standard Quantity SP x SQ VOH & FOH Spending Variances VOH Efficiency Variance Volume Variance Total OH Variance Four Variance Approach Applied Overhead

20. Why Use Standard Cost Systems • Clerical efficiency • Motivation • Planning • Controlling - variance analysis • Decision making • Performance evaluation

21. Setting Standards • Appropriateness • Attainability • Expected standards • Practical standards • Ideal standards

22. Questions • How are standards set for material, labor, and overhead? • How is variance analysis used for control and performance evaluation? • Why are labor and overhead elements sometimes combined into a single conversion element?