Standard costingStandard costingvariance analysisvariance analysis

kaizen costingkaizen costing

Chapter 16

StandardsStandards

≠ Predetermined amount for what should Predetermined amount for what should happenhappen

≠ Quantity standardQuantity standard

≠ Quantity of the resource that should be Quantity of the resource that should be consumedconsumed

≠ Cost standardCost standard

≠ Cost per unit that should be paid for the resourceCost per unit that should be paid for the resource

≠ Provides a context for evaluating actual Provides a context for evaluating actual amountsamounts

StandardsStandards

≠ AdvantagesAdvantages

≠ Provides a context for evaluating actual Provides a context for evaluating actual amountsamounts

≠ Standard costs do not fluctuateStandard costs do not fluctuate

≠ Simplified accountingSimplified accounting

≠ Less expensive than actual costingLess expensive than actual costing

Setting standardsSetting standards

≠ Quantity standardsQuantity standards

≠ How much should be consumed?How much should be consumed?

≠ Product/process analysisProduct/process analysis

≠ Allowance for normal, unavoidable Allowance for normal, unavoidable inefficienciesinefficiencies

≠Historical dataHistorical data

≠ Is it still relevant?Is it still relevant?

Setting standardsSetting standards

≠ Cost standardsCost standards

≠ What should a unit of the resource cost?What should a unit of the resource cost?

≠ Normal qualityNormal quality

≠ Normal quantityNormal quantity

≠ Regular supplierRegular supplier

≠ Same shipping methodSame shipping method

≠ Etc.Etc.

Setting standardsSetting standards

≠ Other issuesOther issues

≠ What is normal?What is normal?

≠ Practical or perfection?Practical or perfection?

≠Who determines the standard?Who determines the standard?

≠Who is most familiar with the usage?Who is most familiar with the usage?

≠Who is most familiar with the cost?Who is most familiar with the cost?

Variance analysis

≠ Comparison of standard to actual results

≠ Quantity

≠Material quantity variance

≠ Labor efficiency variance

≠ Cost

≠Material cost variance

≠ Labor rate variance

Variance analysis

≠ Quantity variance formula

≠ Standard price * (actual – standard quantity)

≠Notice what is in the parentheses

≠ Cost variance formula

≠ Actual quantity * (actual – standard cost)

≠Notice what is in the parentheses

≠ I pay for the actual amount I purchase

Variance analysis

≠ Favorable or unfavorable?

≠ Favorable if actual is less than standard

≠ Implies efficiency or cost savings

≠ Unfavorable if actual is greater than standard

≠ Implies waste or excessive cost

≠ Does not mean “good” or “bad”

≠Any variance is a deviation from what was supposed to happen

Variance analysis

≠ Responsibility

≠Why did the variance occur?

≠Usage issue

≠ Efficiency or inefficiency

≠Quality issue

≠Different material or labor mix

≠Quantity issue

≠Discount or surcharge

Variance analysis

Standard quantity per finished unit 12 Standard cost per unit 3.80$

Actual output (finished units) 500

Actual quantity used 5,942 Actual cost per unit 3.75$

Variance analysis

Quantity variance

= 3.80$ * ( 5,942 - ( 500 * 12 ))

= 220.40$ Favorable

Price variance

= 5,942 *( 3.75$ - 3.80 )

= 297.10$ Favorable

Variance analysis

Standard hours per finished unit 2 Standard rate per hour 12.40$

Actual output (finished units) 500

Actual hours used 1,085 Total actual labor cost 13,237$

Variance analysis

Quantity variance

=

=

Price variance

=

=

Variance analysis

≠ Now what?

≠ Investigation of variances

≠ Variance size

≠Cost/benefit of analysis

≠Offsetting variances

≠Controllability

≠ Interactions and tradeoffs

≠Recurring variances

Variance analysis≠ Criticisms

≠ Variances can be too aggregated

≠Work best in stable, mass production environment

≠ Focus on cost minimization, not qualitative issues

≠ Greater automation reduces variances

≠ Standards are often relevant for only a short time

Standard cost accountingStandard cost accounting

≠ Use of standard costs reduces period-to-period Use of standard costs reduces period-to-period fluctuationsfluctuations

≠ Standard costs are debited to inventory and Standard costs are debited to inventory and CofGS accountsCofGS accounts

≠ Variance is the difference between the debit to Variance is the difference between the debit to inventory and the creditinventory and the credit

≠ Variances are closed to CofGS at end of periodVariances are closed to CofGS at end of period

≠ Favorable variances decrease CoGSFavorable variances decrease CoGS

≠ Unfavorable variances increase CofGSUnfavorable variances increase CofGS

Kaizen costingKaizen costing

≠ Form of continuous improvementForm of continuous improvement

≠ ProcessProcess

≠ Cost reduction goal is establishedCost reduction goal is established

≠ Actual costs are compared to goalActual costs are compared to goal

≠ Actual cost achieved by year end becomes Actual cost achieved by year end becomes the base for next year’s reduction targetthe base for next year’s reduction target