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Cost Accounting Traditions and Innovations Barfield, Raiborn, Kinney. Chapter 10 Standard Costing. Learning Objectives (1 of 2). Explain why standard cost systems are used Describe how standards are set for material, labor, and overhead
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Cost Accounting Traditions and Innovations Barfield, Raiborn, Kinney Chapter 10 Standard Costing
Learning Objectives (1 of 2) • Explain why standard cost systems are used • Describe how standards are set for material, labor, and overhead • List the documents that are associated with standard cost systems • Explain the information that those documents provide • Calculate and record material, labor, and overhead variances
Learning Objectives (2 of 2) • Explain how variance analysis can be used for control and performance evaluation • Contrast the traditional labor and overhead elements to a single conversion element • (Appendix) Explain how multiple material and labor categories affect variances
Actual Costs Incurred Standard Cost Systems • Manufacturing • Service • Not-for-Profit • Record standard and actual costs in the accounting records
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
Material Standards • Types, quantity, quality of materials used • Product specifications, observation, inquiry • Bill of Materials • Balance cost, quality, and projected sales price Standard Material = Quantity * Unit Purchase Price Cost
Labor Standards • Types, quantity, cost of labor used • Production, setup, cleanup, and rework • Time and motion studies, industrial engineering studies • Operations Flow Document • Include wages, taxes, and fringe benefits Standard Labor = Hours * Wage Rate Cost
Overhead Standards • Predetermined factory overhead application rates Standard Standard Direct Materials Cost Standard Direct Labor Card Manufacturing Overhead
Actual price of actual production inputs Standard price of standard production inputs Total Variance* Total Variance Total actual cost incurred minus total standard cost applied to output produced *Favorable or unfavorable
AP x AQ SP x SQ Total Variance Total Variance Inputs Outputs AP =actual price per unit of materials or hours of labor AQ = actual quantity of materials or hours of labor SP = standard price per unit of materials or hours of labor SQ = standard quantity of materials or hours of labor
AP x AQ SPx AQ SP x SQ Price Variance Total Variance Price Variance What was paid What should have been paid (AP - SP) x AQ* *Favorable or unfavorable
AP x AQ SPx AQ SP x SQ Usage Variance Total Variance Usage Variance What was used What should have been used for level of output (AQ - SQ) x SP* *Favorable or unfavorable
AP x AQ SPx AQ SP x SQ MPV Total Variance Material Price Variance What was paid What should have been paid (AP - SP) x AQ* *Favorable or unfavorable
Material Price Variance • Calculate Material Price Variance at • point of purchase, or • when materials used
AP x AQ SPx AQ SP x SQ MQV Total Variance Material Quantity Variance What was used What should have been used for level of output (AQ - SQ) x SP* *Favorable or unfavorable
AP x AQ SPx AQ SP x SQ LRV Total Variance Labor Rate Variance What was paid What should have been paid (AP - SP) x AQ* *Favorable or unfavorable
AP x AQ SPx AQ SP x SQ LEV Total Variance Labor Efficiency Variance What was used What should have been used for level of output (AQ - SQ) x SP* *Favorable or unfavorable
Overhead Rates • Capacity Levels • Theoretical capacity • Practical capacity • Normal capacity • Expected capacity • Flexible budgets • Expected overhead costs at different activity levels
Variable Overhead Actual variable overhead is total of various ledger accounts SP = Predetermined variable overhead rate Fixed Overhead Actual fixed overhead is total of various ledger accounts SP = Predetermined fixed overhead rate Overhead Variances
Actual VOH Budgeted VOH Applied VOH AP X AQ 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
VOH Spending Variance • Caused by price differences • managers have little control over prices • Caused by shrinkage or waste • managers should be held accountable
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
FOH Spending Variance • Calculate variance for each component • Caused by price differences • May reflect mismanagement of resources
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
Alternative Overhead Variance Approaches • One variance • Two variance • Three variance • Four variance
Standard Cost of OH Actual OH SP x SQ Total OH Variance One Variance Approach
Actual OH Budgeted OH based on Standard Quantity Standard Cost of OH SP x SQ Budget Variance Volume Variance Total OH Variance Two Variance Approach
Budgeted OH Actual OH Standard OH based on Actual Inputs based on Standard Quantity SP x SQ OH Spending Variance OH Efficiency Variance Volume Variance Total OH Variance Three Variance Approach
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
Standard Cost Journal Entries • Variances recorded in accounting system • Favorable variances • Credits • Represent savings in production costs • Unfavorable variances • Debits • Represent excess production costs • Inventories are recorded at standard costs
Purchase of Materials(Point of Purchase Method) At Standard Cost Materials Price Variance Accts Pay Materials SP x AQ purchased U F AP x AQ purchased Debit - Unfavorable Credit - Favorable
Use of Materials At Standard Cost Materials Quantity Variance Materials WIP SP x AQ used SP x SQ allowed U F Debit - Unfavorable Credit - Favorable
Record Labor Labor Efficiency Variance At Standard Cost Labor Rate Variance U F U F Wages Pay WIP AP x AQ SP x SQ allowed Debit - Unfavorable Credit - Favorable
Apply Overhead Throughout the Year FOH VOH WIP SP x SQ Allowed SP x SQ Allowed SP x SQ Allowed
VOH Actual Applied --------------- Year-End Treatment for VOH VOH Efficiency Variance VOH Spending Variance Enter a debit or credit to bring balance to zero Debit - Unfavorable Credit - Favorable
Year-End Treatment for FOH FOH Spending Variance Volume Variance FOH Actual Applied ------------- Enter a debit or credit to bring balance to zero Debit - Unfavorable Credit - Favorable
Material Price Variance Raw Materials WIP Finished Goods Cost of Goods Sold All other variances WIP Finished Goods Cost of Goods Sold Year-End Treatment of Variances Immaterial - Adjust Cost of Goods Sold Material - Prorate variances to
Why Use Standard Cost Systems • Clerical Efficiency • Motivation • Planning • Controlling - variance analysis • Decision Making • Performance Evaluation
Setting Standards • Appropriateness • Attainability • Expected standards • Practical standards • Ideal standards
Trends in Standards • Ideal Standards and Theoretical Capacity • Adjusting standards • Price variance on purchase versus usage • Decline in direct labor content
Conversion Costs • Combine direct labor and manufacturing overhead • Variances • Spending variance for overhead • Efficiency variances for machinery and production costs • Volume variances for production
Mix and Yield Variances • Mix Variance measures effect of changing the mix of materials or labor • Yield Variance measures the difference between actual and standard inputs for the output achieved • Mix Variance plus Yield Variance equals the Quantity Variance
Material Mix and Yield Variances AM x AQ x AP SM x AQ x SP SM x SQ x SP AM x AQ x SP Material Yield Variance Material Mix Variance Material Price Variance What should have been used for level of output AM - Actual Mix SM - Standard Mix
Labor Mix and Yield Variances AM x AH x AR SM x SH x SR SM x AH x SR AM x AH x SR Labor Yield Variance Labor Mix Variance Labor Rate Variance M - Mix H - Hours R - Rate What should have been used for level of output
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?