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Standard Costing: A Managerial Control Tool

Standard Costing: A Managerial Control Tool. CHAPTER. Objectives. 1. Tell how unit standards are set and why standard costing systems are adapted. 2. State the purpose of a standard cost sheet.

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Standard Costing: A Managerial Control Tool

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  1. Standard Costing: A Managerial Control Tool CHAPTER

  2. Objectives 1. Tell how unit standards are set and why standard costing systems are adapted. 2. State the purpose of a standard cost sheet. 3. Describe the basic concepts underlying variance analysis, and explain when variances should be investigated. 4. Compute the material and labor variances, and explain how they are used for control. After studying this chapter, you should be able to: Continued

  3. Objectives 5. Calculate the variable and fixed overhead variances, and give their definitions. 6. Appendix: Prepare journal entries for materials and labor variances, and show how to account for overhead variances.

  4. Why Standard Cost Systems Are Adopted • Standard costing systems enhance planning and control and improve performance measurement. • Standard costing systems facilitate product costing.

  5. Standard Cost Sheet for Corn Chips Standard Standard Standard Price Usage Cost Subtotal Description Direct materials: Yellow corn $0.006 18 oz. $0.108 Cooking oil 0.031 2 oz. 0.062 Salt 0.005 1 oz. 0.005 Lime 0.400 0.01 oz. 0.004 Bags 0.044 1 bag. 0.044 Total direct materials $0.223

  6. Standard Cost Sheet for Corn Chips Standard Standard Standard Price Usage Cost Subtotal Description Direct materials $0.223 Direct labor: Inspectors $7.000 0.0070 hr. $0.049 Machine operators 10.000 0.0008 hr. 0.008 Total direct labor 0.057 Overhead: Variable overhead 3.850 0.078 hr. $0.030 Fixed overhead 32.050 0.0078 hr. 0.250 Total overhead 0.280 Total standard unit cost$0.560

  7. During the first week of March, 100,000 packages of corn chips are produced. The standard quantity of yellow corn meal per package is 18 ounces.

  8. Standard Quantity of Materials Allowed SQ = Unit quantity standard x Actual output = 18 x 100,000 = 1,800,000 ounces Standard Hours Allowed SH = Unit labor standard x Actual output = 0.0008 x 100,000 = 80 direct labor hours

  9. Total variance = Price variance +Quantity variance = (AP – SP)AQ +(AQ – SQ)SP = [(AP x AQ) – (SP x AQ)] +[(SP x AQ) – (SP x SQ)] = (AP x AQ) – (SP x AQ)] +(SP x AQ) – (SP x SQ) = (AP x AQ) – (SP x SQ)

  10. 1. AP x AQ (Actual Quantity of Input at Actual Price) 2. SP x AQ (Actual Quantity of Input at Standard Price) 3. SP x SQ (Standard Quantity of Input at Standard Price) Price Variance (1-2) Quantity Variance (2-3) Budget Variance (1-3) Variance Analysis: General Description

  11. Unfavorable variances occur whenever actual prices or usage of inputs are greater than standard prices or usage. Favorable variances occur whenever the opposite occurs.

  12. Actual Costs Budgeted Costs Total Variance Corn $5,382.00 $5,238.00 $144.00 U Inspection labor 2,646.00 2,376.50 269.50 U Variance Analysis: Materials and Labor Actual production 48,500 bags of corn chips Actual cost of corn 780,000 ounces of $0.0069 = $5,382 Actual cost of inspection labor 360 hours at $7.35 = $2,646

  13. AQ x AP 780,000 x 0.0069 $5,382 AQ x SP 780,000 x $.0.0060 $4,680 SQ x SP 873,000 x $0.0060 $5,238 $702 U Price Variance $558 F Quantity Variance $144 U Total Variance Variance Analysis: Columnar Approach

  14. Material Price Variance MPV = (AP – SP)AQ The actual price per unit The standard price per unit The actual quantity of material used

  15. Material Price Variance MPV = (AP – SP)AQ = ($0.0069 – $0.0060)780,000 = $0.0009 x 780,000 = $702 U Percent of SP x SQ = $702/$4,680 = 15%

  16. Direct Materials Q’tity Variance QV = (AQ – SQ)SP The actual quantity of materials used The standard quantity of materials allowed for the actual output The standard price per unit

  17. Direct Materials Q’tity Variance QV = (AQ – SQ)SP = (780,000 – 873,000)($0.006) = 93,000 x $0.006 = $558 F Percent of SQ x SP = $558/$5,238 = 10.7%

  18. Labor Rate Variances LRV = (AR – SR)AH The actual hourly wage rate The standard hourly wage rate The actual direct labor hours used

  19. Labor Rate Variances LRV = (AR – SR)AH = ($7.35 – $7.00)360 = $0.35 x 360 = $126 U Percent of SR x SH = $126/$2,520 = 5%

  20. AH x SR 360 x $7.00 $2,520 AH x AR 360 x $735 $2,646 SH x SR 339.5 x $7.00 $2,376.50 $126 U Rate Variance $143.50 U Efficiency Variance $269.50 U Total Variance Labor Variances: Columnar Approach

  21. Labor Efficiency Variances LEV = (AH – SH) SR The actual direct labor hours used The standard direct labor hours that should have been used The standard hourly wage rate

  22. Labor Efficiency Variances LEV = (AH – SH)SR = (360 – 339.5)$7 = 20.5 x $7 = $143.50 U Percent of SH x SR = $143.50/$2,376.50 = 6%

  23. Variable Overhead Variances Variable overhead rate (standard) $3.85/DLH Actual variable overhead costs $1,600 Actual hours worked 400 Bags of chips produced 48,500 Hours allowed for production 373.3 Applied variable overhead $1,456

  24. VO Rate x Actual Hours $1,540 Actual VO $1,600 VO Rate x Standard Hours $1,456 $60 U Spending Variance $84 U Efficiency Variance $144 U Total Variance Variable Overhead Variances: Columnar Approach

  25. Variable Overhead Spending Variances VOSV = (AVOR x AH) – (SVOR x AH) = (AVOR – SVOR)AH = ($4.00 – $3.85)400 = $60 U

  26. Crunch Chips, Inc. Flexible Budget Performance Report For the Week Ended March 8, 2004 Cost Formula Actual Costs Spending Variance Budget Gas $3.00 $1,190 $1,200 $10 F Electricity 0.78 385 312 73 U Water 0.07 25 28 3 F Total cost $3.85 $1,600 $1,540 $60 U

  27. Crunch Chips, Inc. Performance Report For the Week Ended March 8, 2004 Budget for Standard Hours Actual Costs Spending Variance Cost Formula EfficiencyVariance Budget Gas $3.00 $1,190 $1,200 $10 F Electricity 0.78 385 312 73 U Water 0.07 25 28 3 F Total cost $3.85 $1,600 $1,540 $60 U • $1,135 $65 U • 295 17 U • 26 2 U • $1,456 $84 U

  28. Hours allowed to produce 3,000,000 bags of chips: 0.078 x 3,000,000 = $23,400 Fixed Overhead Variances Budgeted or Planned Items Budgeted fixed overhead $749,970 Practical activity 23,400 direct labor hours Standard fixed overhead rate $32.05 Actual Results Actual production 2,750,000 bags of chips Actual fixed overhead cost $749,000 Standard hours allowed for actual production 21,450

  29. Total fixed overhead variance $749,000 – $687,473 = Total Fixed Overhead Variances Applied fixed overhead Standard fixed overhead rate x Standard hours = = $32.05 x 21,450 = $687,473 (rounded) = $61,527 underapplied

  30. Budgeted FO $749,970 Actual FO $749,000 Applied FO $687,473 $970 F Spending Variance $62,497 U Volume Variance $61,527 U Total Variance Fixed Overhead Variances: Columnar Approach

  31. Crunch Chips, Inc. Performance Report For the Year Ended 2004 Actual Costs Budgeted Cost Fixed Overhead Items Variance Depreciation $530,000 $530,000 $ ---- Salaries 159,370 159,970 600 F Taxes 50,500 50,000 500 U Insurance 9,130 10,000870 F Total fixed overhead $749,000 $749,970 $970 F

  32. Volume Variance Volume variance = $32.05(23,400 – 21,450) = ($32.05 x 23,400) – ($32.05 x 21,450) = $749,970 – $687,473 = Budgeted fixed overhead – Applied fixed overhead = $62,497 U

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