chapter11-variance analysis & control
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KE1013 Chapter Eleven 1
Chapter Eleven
VARIANCE ANALYSIS
ANDSTANDARD COSTING
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KE1013 Chapter Eleven 2
Outline
The usage of standard costing
Setting of standard cost and types of
standard
Calculation of variance:
Direct material
Direct labor
Factory overhead
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KE1013 Chapter Eleven 3
Standard Costing
The cost that has been pre-determined afterconsidering other factors.
Those are estimated costs which are considered to
be ideal for each of the cost component ( directmaterial, direct labor and factory overhead ).
The standard cost system enable the managementto determine how much a product should cost.
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KE1013 Chapter Eleven 4
The usage of standard costing
Planning and controlling:
Product costing:
Compare actual cost & budgeted cost
Improve performance
Increase efficiency
Provide readily available unit cost
information
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KE1013 Chapter Eleven 5
Setting of Standard Cost
Analysis on the historical cost experience:
Provide initial guidelines for standard setting
Engineering studies:
Determine the most efficient way to operate
Input from operating personnel:Accountable for meeting the standards
Involve joint efforts on:
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KE1013 Chapter Eleven 6
Types of Standards
Ideal standard
Normal standard
Maximum efficiency
Can be achieved if everything operates perfectly.
Currently attainable standard
Allowance is made for breakdown, interruptions etc..
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KE1013 Chapter Eleven 7
Variance Analysis
Variances are the difference between the actual
manufacturing cost and the standard cost at the
actual level of production.
The significance of the variance for each element in
manufacturing cost needs further analysis todetermine the corrective actions.
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KE1013 Chapter Eleven 8
Calculation of variance
Direct material
Direct labor
Factory overhead
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KE1013 Chapter Eleven 9
Standard Cost
The expected cost per unit product
Illustration 1:
The followings are the standard cost for each unit
(bottle) of peanut butter produced by Syarikat Sedap
Selalu :
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KE1013 Chapter Eleven 10
Standard Standard Standard Cost
Price Usage RM
Direct material:
Peanut
Butter
Sugar
Direct labor:
Machine operator
Packaging
FactoryOH:
Variable costs
Fixed costs
Standard cost per unit
2.80/kg 0.15kg 0.42
2.70/kg 0.10kg 0.27
1.20/kg 0.25kg 0.30
0.99
4.00/hour 0.02hour
3.00/hour 0.01hour
0.08
0.030.11
5.00/hour 0.01hour
12.00/hour 0.01hour
0.05
0.120.17
1.27
2.80/0.15=
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KE1013 Chapter Eleven 11
If Wang Co. produces 10,000 bottles of peanut butter, the
expected total cost would be:
Direct material
Direct labor
Factory overhead
Total cost
10,000 x 0.99 9,900
10,000 x 0.11
10,000 x 0.17
1,100
1,700
12,700
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KE1013 Chapter Eleven 12
Calculation of variance
Cost element Actual cost Standard cost Variance
Direct material
Direct labor
Factory overhead
9,900
1,100
1,700
9,500 400 (F)
1,050 50 (F)
2,000 300 (U)
F = (Favorable) U = (Unfavorable)
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KE1013 Chapter Eleven 13
Direct Material Variance
Direct Material Price Variance
Direct Material Usage (Quantity) Variance
To measure the difference between the actual
cost and the standard cost of direct materials.
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KE1013 Chapter Eleven 14
1. Direct material price variance
(Actual Price x Actual Quantity) - (Standard Price x Actual Quantity)
Simplified to be:
Actual Quantity (Actual PriceStandard Price)
AQ ( APSP )
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KE1013 Chapter Eleven 15
2. Direct material usage (quantity) variance
(Standard Price x Actual Quantity) - (Standard Price x Standard Quantity)
Simplified to be:
Standard Price (Actual Quantity Standard Quantity)
SP ( AQSQ )
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KE1013 Chapter Eleven16
ctual Price x Actual Qty Std Price x Actual Qty Std Price x Std Qty
Price Variance Usage Variance
Direct material variance
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KE1013 Chapter Eleven 17
Illustration 2
The followings are the actual price and quantity for direct
material used by the company in producing 10,000 bottles ofpeanut butter:
Actual Price Actual Quantity
Peanut RM2.70/kg 1,400kg
Butter RM2.505/kg 1,200kg
Sugar RM1.18/kg 2,300kg
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KE1013 Chapter Eleven 18
Direct material price variance:
Peanut: 1,400 (2.702.80) = 140 (F)
Butter: 1,200 (2.5052.70) = 234 (F)
Sugar: 2,300 (1.181.20) = 46 (F)
420 (F)
AQ ( APSP )
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KE1013 Chapter Eleven 19
Direct material usage variance:
Peanut: 2.80 (1,4001,500) = 280(F)
Butter: 2.70 (1,2001,000)= 540 (U)
Sugar: 1.20 (2,300 2,500) = 240 (F)
20 (U)
Therefore ,
Total direct material variance = 420 (F) + 20 (U)
= 400 (F)
SP ( AQSQ )
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KE1013 Chapter Eleven 20
Direct Labor Variance
Direct Labor Rate Variance
Direct Labor Efficiency Variance
Measures the differences between the actual cost and
the cost that suppose to be paid to the labor.
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KE1013 Chapter Eleven 21
(Actual Hour x Actual Rate) - (Actual Hour x Standard Rate)
Actual Hour ( Actual Rate Standard Rate )
AH ( ARSR )
Direct Labor Rate Variance
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KE1013 Chapter Eleven 22
(Standard Rate x Actual Hour) - (Standard Rate x Standard Hour)
Standard Rate ( Actual HourStandard Hour )
SR ( AHSH )
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KE1013 Chapter Eleven 23
Actual Hour x Actual Rate Std Hour x Actual Rate Std Hour x Std Rate
Rate Variance Efficiency Variance
Direct Labor Variance
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KE1013 Chapter Eleven 24
Illustration 3:
The followings are actual rate and labor hourin the production of 10,000 bottles of peanut
butter:
Actual labor rate Actual labor hour
Machine operator RM3.90/hour 190 hours
Packaging RM2.81/hour 110 hours
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KE1013 Chapter Eleven 25
Direct Labor Rate Variance:
Machine Operator: 190 (3.904.00 ) = 19 (F)
Packaging: 110 (2.81 3.00) = 21 (F)
40 (F)
AH ( AR
SR )
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KE1013 Chapter Eleven 26
Direct Labor Efficiency Variance:
Machine Operator: 4.00 (190200) = 40 (F)
Packaging: 3.00 (110100) = 30 (U)
10 (F)
SR ( AH
SH )
otal direct labor variance: = 40 (M) + 10 (M) = 50 (M)
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KE1013 Chapter Eleven 27
Factory Overhead Variance
Variable Factory Overhead Controllable Variance
Fixed Factory Overhead Volume Variance
Measures the differences between
the actual cost and the supposed related
cost of factory overhead.
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KE1013 Chapter Eleven 28
Western Rider Inc.Factory Overhead Cost Budget
For the Month Ended June 30, 2003
Direct Labor Hours4,000 4,500 5,00080% 90% 100%
Overhead is applied at $6.00 per direct laborhour based on estimated 5,000 total hours.
Total variable costs $14,400 $16,200 $18,000Variable costs per hour $ 3.60 $ 3.60 $3.60
Total fixed costs $12,000 $12,000 $12,000
Fixed costs per hour $ 3.00 $ 2.67 $ 2.40
Total costs per hour $ 6.60 $ 6.27 $ 6.00
% of Normal Capacity
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KE1013 Chapter Eleven 29
Western Rider Inc.Factory Overhead Variances
For the Month Ended June 30, 2003
Variable costs $14,400 $10,400 $4,000 F
($3.60 x 4,000 hours)Fixed costs 9,600 12,000 2,400 U
($2.40 x 4,000 hours)
Total costs $24,000 $22,400 $1,600 F
Revised ActualBudget Costs Variance
Factory overhead applied at$6.00 per direct labor hourbased on 4,000 actual hours.
Actual factoryoverhead pergeneral ledger.
Actual Hour
4,000
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KE1013 Chapter Eleven 30
Western Rider Inc.Factory Overhead Variances
For the Month Ended June 30, 2003
Revised ActualBudget Costs Variance
Variable costs $14,400 $10,400 $4,000 F
($3.60 x 4,000 hours)Fixed costs 9,600 12,000 2,400 U
($2.40 x 4,000 hours)
Total costs $24,000 $22,400 $1,600 F
Controllable variancebased on variable costs
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KE1013 Chapter Eleven 31
Western Rider Inc.Factory Overhead Variances
For the Month Ended June 30, 2003
Revised ActualBudget Costs Variance
Volume variancebased on fixed costs
Variable costs $14,400 $10,400 $4,000 F
($3.60 x 4,000 hours)Fixed costs 9,600 12,000 2,400 U
($2.40 x 4,000 hours)
Total costs $24,000 $22,400 $1,600 F
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KE1013 Chapter Eleven 32
Variable Factory Overhead Controllable VarianceFor the Month Ended June 30, 2003
Actual variable overhead $10,400Budgeted variable overhead 14,400(4,000 actual hours x $3.60)Favorable controllable variance $(4,000)
Controllable variancemeasures the efficiencyof using variableoverhead resources.
A revisedbudgetbased onthe actualhours used
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KE1013 Chapter Eleven 33
Fixed Factory Overhead Volume VarianceFor the Month Ended June 30, 2003
Budgeted volume (direct labor hours) 5,000Actual volume (direct labor hours) 4,000Capacity not used (direct labor hours) 1,000Standard fixed rate x $2.40Unfavorable volume variance $2,400
Volume variance measuresthe utilization of fixedoverhead resources.
Rate basedon 5,000direct laborhours.
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KE1013 Chapter Eleven 34
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KE1013 Chapter Eleven 35