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Understanding Standard Costs in Accounting

Explore the concept of standard costs in accounting, how they are used for planning labor and material requirements, and their importance in performance measurement through cost variances analysis.

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Understanding Standard Costs in Accounting

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  1. Pertemuan 7 Standard Costs

  2. Predetermined. Used for planning labor, materialand overhead requirements. Benchmarks formeasuring performance. Used to simplify the accounting system. Standard Costs Standard Costs are

  3. Managers focus on quantities and coststhat exceed standards, a practice known asmanagement by exception. Standard Costs Standard Amount DirectMaterial DirectLabor ManufacturingOverhead Type of Product Cost

  4. Setting Standard Costs Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations.

  5. Production Manager: “Practical standards should be set at levels that are currently attainable with reasonable and efficient effort.” Setting Standard Costs Engineer&Managerial Accountant: “Should we use practical standardsor ideal standards?” HRD: ”I agree.Ideal standards, based on perfection, are unattainable and discourage mostemployees.”

  6. PriceStandards QuantityStandards Final, deliveredcost of materials,net of discounts. Use product design specifications. Setting Direct Material Standards

  7. RateStandards TimeStandards Use wage surveys andlabor contracts. Use time and motion studies foreach labor operation. Setting Direct Labor Standards

  8. RateStandards ActivityStandards The rate is the variable portion of the predetermined overhead rate. The activity is the base used to calculate the predetermined overhead. Setting Variable Overhead Standards

  9. Standard Cost Card – Variable Production Cost A standard cost card for one unit of product might look like this:

  10. Astandardis a per unit cost. • Standards are often used when preparing budgets. Standards vs. Budgets Are standards the same as budgets? A budget is set for total costs.

  11. A standard cost variance is the amount by whichan actual cost differs from the standard cost. This variance isunfavorablebecause the actual costexceeds the standard cost. Standard Cost Variances Standard Cost

  12. First, they point to causes ofproblems and directionsfor improvement. Second, they trigger investigations in departments having responsibility for incurring the costs. I see that thereis an unfavorable variance. But why arevariances important to me? Standard Cost Variances

  13. Takecorrective actions Identifyquestions Receive explanations Conduct next period’s operations Analyze variances Variance Analysis Cycle Prepare standard cost performance report Begin

  14. Price Variance Quantity Variance The difference betweenthe actual price and thestandard price The difference betweenthe actual quantity andthe standard quantity Standard Cost Variances Standard Cost Variances

  15. Price Variance Quantity Variance Standard price is the amount that should have been paid for the resources acquired. A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

  16. Standard quantity is the quantity allowed for the actual good output. Standard input per unit of outputtimes amount of good output. A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance

  17. A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance AQ(AP - SP) SP(AQ - SQ) AQ = Actual QuantitySP= Standard PriceAP= Actual PriceSQ = Standard Quantity

  18. Standard Costs Let’s use the general model to calculate standard cost variances for direct material.

  19. Material VariancesExample Glacier Peak Outfitters has the following direct material standard for the fiberfill in 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.

  20. Price variance$21 favorable Quantity variance$50 unfavorable Material VariancesSummary 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

  21. $1,029  210 kgs = $4.90 per kg Material VariancesSummary 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 Price variance$21 favorable Quantity variance$50 unfavorable

  22. 0.1 kg per parka  2,000 parkas = 200 kgs Material VariancesSummary 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 Price variance$21 favorable Quantity variance$50 unfavorable

  23. Note: Using the formulas • 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

  24. Quick Check  Suppose only 190 kgs of fiberfill were used to make 2,000 parkas. What is the materials quantity variance? Remember that the standards call for 0.1 kg of fiberfill per parka at a cost of $5 per kg of fiberfill. a. $50 F b. $50 U c. $100 F d. $100 U • MQV = SP (AQ - SQ) • = $5.00/kg (190 kgs-(0.1 kg/parka 2,000 parkas)) • = $5.00/kg (190 kgs - 200 kgs) • = $5.00/kg (-10 kgs) • = $50 F

  25. Zippy Material VariancesExample 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.

  26. Zippy Quick Check  What is the actual price per poundpaid for the material? a. $4.00 per pound. b. $4.10 per pound. c. $3.90 per pound. d. $6.63 per pound.

  27. Zippy AP = $6,630 ÷ 1,700 lbs.AP = $3.90 per lb. Quick Check  What is the actual price per poundpaid for the material? a. $4.00 per pound. b. $4.10 per pound. c. $3.90 per pound. d. $6.63 per pound.

  28. Zippy Quick Check  Hanson’s material price variance (MPV)for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.

  29. Zippy MPV = AQ(AP - SP) MPV = 1,700 lbs. × ($3.90 - 4.00) MPV = $170 Favorable Quick Check  Hanson’s material price variance (MPV)for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.

  30. Zippy Quick Check  The standard quantity of material thatshould have been used to produce1,000 Zippies is: a. 1,700 pounds. b. 1,500 pounds. c. 2,550 pounds. d. 2,000 pounds.

  31. Zippy SQ = 1,000 units × 1.5 lbs per unit SQ = 1,500 lbs Quick Check  The standard quantity of material thatshould have been used to produce1,000 Zippies is: a. 1,700 pounds. b. 1,500 pounds. c. 2,550 pounds. d. 2,000 pounds.

  32. Zippy Quick Check  Hanson’s material quantity variance (MQV)for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.

  33. Zippy Price variance$170 favorable Quantity variance$800 unfavorable Material VariancesSummary 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

  34. Zippy Material VariancesContinued 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.

  35. Zippy Price variance increases because quantity purchased increases. Price variance$280 favorable Material VariancesContinued Actual Quantity Actual Quantity Purchased Purchased × × Actual Price Standard Price 2,800 lbs. 2,800 lbs. × × $3.90 per lb. $4.00 per lb. = $10,920 = $11,200

  36. Zippy Quantity variance is unchanged because actual and standard quantities are unchanged. Quantity variance$800 unfavorable Material VariancesContinued Actual Quantity Used Standard Quantity × × Standard Price Standard Price 1,700 lbs. 1,500 lbs. × × $4.00 per lb. $4.00 per lb. = $6,800 = $6,000

  37. Note • Materials variances: • Material price variance • MPV = AQ (AP - SP) • Material quantity variance • MQV = SP (AQ - SQ) • Labor variances: • Labor rate variance • LRV = AH (AR - SR) • Labor efficiency variance • LEV = SR (AH - SH) Actual hours Actual rate Standard rate Standard hours allowed for the actual good output

  38. Zippy Labor Variances Example Hanson Inc. has the following direct labor standard to manufacture one Zippy: 1.5 standard hours per Zippy at $12.00 perdirect labor hour Last week 1,550 direct labor hours were worked at a total labor cost of $18,910to make 1,000 Zippies.

  39. Zippy Quick Check  What was Hanson’s actual rate (AR)for labor for the week? a. $12.20 per hour. b. $12.00 per hour. c. $11.80 per hour. d. $11.60 per hour.

  40. Zippy AR = $18,910 ÷ 1,550 hours AR = $12.20 per hour Quick Check  What was Hanson’s actual rate (AR)for labor for the week? a. $12.20 per hour. b. $12.00 per hour. c. $11.80 per hour. d. $11.60 per hour.

  41. Zippy Quick Check  Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable.

  42. Zippy LRV = AH(AR - SR) LRV = 1,550 hrs($12.20 - $12.00) LRV = $310 unfavorable Quick Check  Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable.

  43. Zippy Quick Check  The standard hours (SH) of labor thatshould have been worked to produce1,000 Zippies is: a. 1,550 hours. b. 1,500 hours. c. 1,700 hours. d. 1,800 hours.

  44. Zippy SH = 1,000 units × 1.5 hours per unit SH = 1,500 hours Quick Check  The standard hours (SH) of labor thatshould have been worked to produce1,000 Zippies is: a. 1,550 hours. b. 1,500 hours. c. 1,700 hours. d. 1,800 hours.

  45. Zippy Quick Check  Hanson’s labor efficiency variance (LEV)for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable.

  46. Zippy Quick Check  Hanson’s labor efficiency variance (LEV)for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. LEV = SR(AH - SH) LEV = $12.00(1,550 hrs - 1,500 hrs) LEV = $600 unfavorable

  47. Zippy Rate variance$310 unfavorable Efficiency variance$600 unfavorable Labor VariancesSummary Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 1,550 hours 1,550 hours 1,500 hours × × × $12.20 per hour $12.00 per hour $12.00 per hour = $18,910 = $18,600 = $18,000

  48. Insufficient demand Poorlytrainedworkers Poorqualitymaterials Poorsupervisionof workers Poorlymaintainedequipment Labor Efficiency Variance –A Closer Look UnfavorableEfficiencyVariance

  49. Note Actual hours of the allocation base • Labor variances: • Labor rate variance • LRV = AH (AR - SR) • Labor efficiency variance • LEV = SR (AH - SH) • Variable overhead variances: • Variable overhead spending variance • VOSV = AH (AR - SR) • Variable overhead efficiency variance • VOEV = SR (AH Quick Check  Actual variable overhead rate Standard variable overhead rate Standard hours allowed for the actual good output

  50. Zippy Quick Check  Hanson’s spending variance (VOSV) for variable manufacturing overhead forthe week was: a. $465 unfavorable. b. $400 favorable. c. $335 unfavorable. d. $300 favorable.

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