Standard Cost Systems

1. Chapter23 Standard Cost Systems

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

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

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

7. I agree. Ideal standards, that are based on perfection, areunattainable and therefore discouraging to most employees. Establishing and RevisingStandard Costs HumanResourcesManager

8. A standard is the expected cost for one unit. • A budget is the expected cost for all units. Use of Standard Costs in Developing Budgets Are standards the same as budgets?

9. Use competitivebids for the qualityand quantity desired. Use product design specifications. Direct Material Standards PriceStandards QuantityStandards

10. Direct Material Standards The standard material cost for one unit of product is: standard quantity standard price for of material one unit of material required for one unit of product ×

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

12. Setting Direct Labor Standards The standard labor cost for one unit of product is: standard number standard wage rate of labor hours for one hour for one unit of product ×

13. 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. Manufacturing Overhead Standards RateStandards ActivityStandards

14. The standard overhead cost for one unit of product is: standard variable standard number overhead rate for of activity units one unit of for one unit of activity product × Manufacturing Overhead Standards ×

15. Standard Cost Variances Price Variance Quantity Variance The difference betweenthe actual price and thestandard price The difference betweenthe actual quantity andthe standard quantity A General Model forVariance Analysis

16. A General Model forVariance 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.

17. A General Model forVariance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Standard quantity is the quantity that should have been used for the actual good output.

18. Standard Costs and Variance Analysis: An Illustration Let’s use the concepts of the general model to calculate standard cost variances, starting withdirect material.

19. Hanson Inc. has the following material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Records last week show 1,700 pounds of material were purchased on May 10 at a total cost of $6,630. The material was used to make 1,000 Zippies that were completed on May 15. Zippy Standard Costs and Variance Analysis: An Illustration

20. Material Price and Quantity Variances ActualQuantity ActualQuantityStandardQuantity× × × ActualPrice StandardPrice StandardPrice Price Variance Quantity Variance AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP= Standard PriceAP = Actual Price SQ = Standard Quantity Materials price variance Materials quantity varianceLabor rate variance Labor efficiency varianceVariable overhead Variable overhead spending variance efficiency variance

21. Theactual priceper pound paid forthe material was a. $4.00 per pound. b. $4.10 per pound. c. $3.90 per pound. d. $6.63 per pound. Zippy Material VariancesQuestion 1

22. Theactual price per pound paid forthe material was a. $4.00 per pound. b. $4.10 per pound. c. $3.90 per pound. d. $6.63 per pound. Zippy Material VariancesQuestion 1 AP = $6,630 ÷ 1,700 lbs.AP = $3.90 per lb.

23. Zippy Material VariancesQuestion 2 Hanson’s material price variance (MPV)for the week was a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.

24. Zippy Material VariancesQuestion 2 Hanson’s material price variance (MPV)for the week was a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. MPV = AQ(AP - SP) MPV = 1,700 lbs. × ($3.90 - 4.00) MPV = $170 favorable

25. Thestandard 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. Zippy Material VariancesQuestion 3

26. Thestandard 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. Zippy Material VariancesQuestion 3 SQ = 1,000 units × 1.5 lbs per unit SQ = 1,500 lbs

27. Zippy Material VariancesQuestion 4 Hanson’s material quantity variance (MQV) for the week was a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.

28. Zippy Material VariancesQuestion 4 Hanson’s material quantity variance (MQV) for the week was a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable

29. Zippy 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 Price variance$170 favorable Quantity variance$800 unfavorable

30. 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. Responsibility forMaterial Variances I am not responsible for this unfavorable materialquantity variance. You purchased cheapmaterial, so my peoplehad to use more of it.

31. Let’s turn our attention to labor variances. Labor Rate and Efficiency Variances

32. Zippy Standard Costs and Variance Analysis: An Illustration Hanson Inc. has the following labor standard to manufacture one Zippy: 1.5 standard hours per Zippy at $8.00 per hour Payroll records last week show 1,450 hours were worked at a total labor cost of $11,890 to make 1,000 Zippies that were completed on May 15.

33. Labor Rate and Efficiency Variances ActualHoursActualHoursStandardHours× × × ActualRate StandardRate StandardRate Rate Variance Efficiency Variance AH(AR - SR) SR(AH - SH) AH = Actual Hours SR= Standard RateAR = Actual Rate SH = Standard Hours Materials price variance Materials quantity varianceLabor rate variance Labor efficiency varianceVariable overhead Variable overhead spending variance efficiency variance

34. Zippy Labor VariancesQuestion 1 Hanson’sactual rate (AR) for laborfor the week was a. $8.20 per hour. b. $8.00 per hour. c. $7.80 per hour. d. $7.60 per hour.

35. Zippy Labor VariancesQuestion 1 Hanson’sactual rate (AR) for laborfor the week was a. $8.20 per hour. b. $8.00 per hour. c. $7.80 per hour. d. $7.60 per hour. AR = $11,890 ÷ 1,450 hours AR = $8.20 per hour

36. Zippy Labor VariancesQuestion 2 Hanson’s labor rate variance (LRV) forthe week was a. $290 unfavorable. b. $290 favorable. c. $400 unfavorable. d. $400 favorable.

37. Zippy Labor VariancesQuestion 2 Hanson’s labor rate variance (LRV) forthe week was a. $290 unfavorable. b. $290 favorable. c. $400 unfavorable. d. $400 favorable. LRV = AH(AR - SR) LRV = 1,450 hrs($8.20 - $8.00) LRV = $290 unfavorable

38. Zippy Labor VariancesQuestion 3 Thestandard 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.

39. Zippy Labor VariancesQuestion 3 Thestandard 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. SH = 1,000 units × 1.5 hours per unit SH = 1,500 hours

40. Zippy Labor VariancesQuestion 4 Hanson’s labor efficiency variance (LEV) for the week was a. $290 unfavorable. b. $290 favorable. c. $400 unfavorable. d. $400 favorable.

41. Zippy Labor VariancesQuestion 4 Hanson’s labor efficiency variance (LEV) for the week was a. $290 unfavorable. b. $290 favorable. c. $400 unfavorable. d. $400 favorable. LEV = SR(AH - SH) LEV = $8.00(1,450 hrs - 1,500 hrs) LEV = $400 favorable

42. Zippy Labor VariancesSummary Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 1,450 hours 1,450 hours 1,500 hours × × × $8.20 per hour $8.00 per hour $8.00 per hour $11,890 $11,600 $12,000 Rate variance$290 unfavorable Efficiency variance$400 favorable

43. Labor Rate Variance Using highly paid skilled workers toperform unskilled tasks results in anunfavorable rate variance. High skill,high rate Low skill,low rate Production managers who make work assignmentsare generally responsible for rate variances.

44. Poorlytrainedworkers Poorqualitymaterials Poorsupervisionof workers Poorlymaintainedequipment Labor Efficiency Variance UnfavorableEfficiencyVariance

45. You used too much time because of poorly trained workers and poor supervision. Responsibility for Labor Variances I am not responsible for the unfavorable laborefficiency variance! You purchased cheapmaterial, so it took moretime to process it.

46. Responsibility for Labor Variances Maybe I can attribute the laborand material variances to personnel for hiring the wrong peopleand training them poorly.

47. Let’s turn our attention to manufacturing overhead Manufacturing Overhead Variances

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

49. Manufacturing Overhead Variances Contains fixedoverhead thatremains constant asactivity changes. Contains variableoverhead thatincreases asactivity increases. Overhead Rate Function of activity levelchosen to determine rate.

50. Hanson, Inc. has the following manufacturing overhead at three different levels of activity: Zippy Manufacturing OverheadVariances Example Hanson applies overhead based on machine hour activity.