Standard Cost Systems

1. Standard Cost Systems Chapter 24

2. Standard Costs are Standard Cost Systems Based on carefullypredetermined amounts. Used for planning labor, materialand overhead requirements. The expected levelof performance. Benchmarks formeasuring performance.

3. Standard Cost Systems A standard cost varianceis the amount by whichan actual cost differs fromthe standard cost. Standard cost Amount DirectMaterial DirectLabor ManufacturingOverhead Type of Product Cost

4. Standard Cost Systems This variance isfavorable becausethe actual costis less than thestandard cost. This variance is unfavorable because the actual cost exceeds the standard cost. Amount DirectMaterial DirectLabor ManufacturingOverhead Type of Product Cost

5. Actual and Standard Quantities and Costs

6. Normal standards should beset at levels that are currentlyattainable with reasonable and efficient effort. Should we usenormal standardsor ideal standards? Establishing and Revising Standard Costs Productionmanager ManagerialAccountant Engineer

7. Direct Materials Standards PriceStandards QuantityStandards Use competitivebids for the qualityand quantity desired. Use product design specifications.

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

9. Manufacturing Overhead Standards RateStandards ActivityStandards The rate is basedon an estimate of totaloverhead at the normallevel of activity. The activity is the cost driver used to calculate the overhead rate.

10. A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity× × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Standard price is the amount that should have been paidfor the resources acquired. Standard quantity is the quantity that should have been used for the actual good output.

11. A General Model for Variance Analysis ActualQuantity ActualQuantityStandardQuantity× × × ActualPrice StandardPrice StandardPrice Material Price Variance Material Quantity Variance MPV =AQ(AP - SP) MQV = SP(AQ - SQ) MPV = Price Variance MQV= Quantity Variance AQ = Actual Quantity SP= Standard PriceAP = Actual Price AQ = Actual Quantity SP= Standard Price SQ = Standard Quantity

12. Labor Rate and Efficiency Variances ActualHoursActualHoursStandardHours × × × ActualRate StandardRate StandardRate Labor Rate Variance Labor Efficiency Variance LRV = AH(AR - SR) LEV = SR(AH - SH) LRV = Labor Rate Variance LEV= Labor Efficiency VarianceAH = Actual Hours SR= Standard Rate AR = Actual Rate AH = Actual Hours SR= Standard Rate SH = Standard Hours

13. Recall that overhead costs are applied to products and services using a predetermined overhead rate (POHR): Estimated total overhead costsEstimated activity Manufacturing Overhead Variances Applied Overhead = POHR × Standard Activity POHR =

14. Manufacturing Overhead Variances Budgeted Applied Actual Overhead at Overhead at Overhead Actual Activity Standard Hours Spending Variance VolumeVariance Shows how economically overhead Services were purchased and how efficiently overhead services were used. Contains both fixed andvariable costs. A controllable variance. Caused by producing ata level other than thatused for computing thestandard overhead rate. Contains only fixedcosts.

15. Immaterial Amounts Material Amounts Disposing of Variances Standard Cost Variances Close byapportioning to: Close to:Cost of Goods Sold • Work in Process • Finished Goods • Cost of Goods Sold

16. You used too much material because of poorly trained workers and poorly maintained equipment. Also, your poor scheduling sometimes requires me to rush order material at a higher price, causing unfavorable price variances. Evaluating Variances From Different Perspectives I am not responsible for this unfavorable materialquantity variance. You purchased cheapmaterial, so my peoplehad to use more of it. Production Manager Purchasing Agent

17. You used too much time because of poorly trained workers and poor supervision. Evaluating Variances From Different Perspectives I am not responsible for the unfavorable laborefficiency variance! You purchased cheapmaterial, so it took moretime to process it. Production Manager Purchasing Agent

18. Summary of Variance Computations and Manager Responsibilities

19. End of Chapter 24