Standard Costing and Variance Analysis

UAA – ACCT 202 Principles of Managerial Accounting

Dr. Fred Barbee

PlanningPlanning

DecisionMaking

DecisionMaking

Organizing & DirectingOrganizing & Directing

ControllingControlling

EvaluatingEvaluating

The Work of Management

Establish Standards

Measure Actual

Compare Actual/Std.

Take Action

Revise?

The Control Process

Standard Costs

Standard Costs are

Predetermined Used for planning labor, material, and overhead

requirements

Benchmarks for measuring performance.

Used to simplify the accounting system.

Standard Costs

DirectMaterial

Managers focus on quantities and coststhat exceed standards, a practice known as

management by exception.

Type of Product Cost

Am

ou

nt

DirectLabor

ManufacturingOverhead

Standard

Accountants, engineers, personnel administrators, and production managers combine efforts to set standards

based on experience and expectations.

Setting Standard Costs

Setting Standard Costs

Should we usepractical standardsor ideal standards?

Engineer ManagerialAccountant

Setting Standard CostsPractical standards should be set at levels that are currently attainable with reasonable and

efficient effort.

Productionmanager

Setting Standard CostsI agree. Ideal standards,

based on perfection,are unattainable and

discourage mostemployees.

Human ResourcesManager

A Standard is . . .

A benchmark or “norm” for measuring performance.

They are “expected” levels of performance.

They are monetary measures to which actual costs are compared.

Standard Costs . . .

Are realistically predetermined costs for

Direct materials

Direct labor

Factory overhead

They are typically expressed as cost per unit of finished product.

Why Standard Costs?

They are useful in preparing operating budgets.

They make it easier to pinpoint production costs that must be controlled.

They are useful in evaluating performance of managers and workers.

Why Standard Costs?

They help in setting realistic prices.

They simplify accounting procedures for inventories and product costing.

Cost Assignment Approaches

Actual

Normal

Standard

Manufacturing Costs

Actual

Actual

Standard

DL

Actual

Actual

Standard

MOH

Actual

Budgeted

Standard

Cost System DM

Setting DM Standards

PriceStandards

Final, deliveredcost of materials,net of discounts.

QuantityStandards

Use product design specifications.

Setting DL Standards

RateStandards

Use wage surveys and

labor contracts.

TimeStandards

Use time and motion studies for

each labor operation.

Setting VOH Standards

RateStandards

The rate is the variable portion of the

predetermined overhead rate.

ActivityStandards

The activity is the base used to calculate

the predetermined overhead.

Standards vs. Budgets

Are standards the same as budgets?

A budget is set for total costs.

A standard is a per unit cost.

Standards are often used when

preparing budgets.

Standard Cost VariancesC

ost

Standard

This variance is unfavorablebecause the actual cost

exceeds the standard cost.

A standard cost variance is the amount by whichan actual cost differs from the standard cost.

HOTS, Inc.

To illustrate the use of standard costs, consider Herman O Thompson Sports, Inc. (HOTS, Inc.), a manufacturer of a popular jogging suit. The company wishes to have standard costs developed for the suit in terms of Direct Material, Direct Labor and Manufacturing Overhead.

Determining Standard Cost

The Quantity Decision – the amount of input to be used for a standard unit of output.

The Pricing Decision – the amount that should be paid for the quantity of the input to be used.

Standard DM Price/Unit

The standard price per unit for DM should be the final, delivered cost of materials.Specified quantity of materials,Quantity discounts,Transportation (freight) costs,Receiving and handling costs,Seasonal availability (if any).

Standard DM Price/Unit

A material known as crylon is used in the jogging suits. The standard price for a yard of crylon is determined as follows:

Purchase Price, Grade A Crylon $5.70

Freight, by Truck .40

Receiving & Handling .10

Less Discount (20,000 yard lots) (.20)

Standard Price Per Yard $6.00

Standard DM Quantity/Unit

The amount of materials that should go into each finished unit of product

Engineered (bill of materials) requirements,

Expected spoilage of RM,

Unavoidable waste,

DM in scrapped WIP (Rejects).

Standard DM Quantity/Unit

The standard quantity of crylon that goes into one jogging suit is computed as follows:

Bill of Materials Requirement 2.8 Yds

Allowance for Waste 0.6 Yds

Allowance for Rejects 0.1 Yds

Standard Quantity/Jogging Suit 3.5 Yds

Standard DM Quantity/Unit

Once the price and standard quantities have been set, the standard cost of materials (crylon) for one unit of finished product can be computed.

3.5 Yards per jogging suit x $6.00 per yard = $21.00

Standard Rate For DL Hour

The standard rate per hour for DL should include all costs associated with DL workers:

Hourly wage rates

Expected labor mix

Fringe benefits

Employment taxes

Standard DL Rate Per Hour

The standard rate per hour for the expected mix is determined by using average wage rates, fringe benefits, and employment taxes for the labor mix.

Average wage rate per hour $13

Average fringe benefits 4

Average employment taxes 1

Standard rate per DL hour $18.

Standard Hours Per Unit

Engineered labor time per unit.

Allowance for breaks, personal needs, and cleanup.

Allowance for setup and other machine downtime.

Allowance for rejects.

Standard DL Hours Per Unit

The standard hours determined to produce a jogging suit is determined as follows:

Basic labor time per unit 1.4 Hrs

Allowance for breaks & cleanup 0.1 Hrs

Allowance for setup and downtime 0.3 Hrs

Allowance for rejects 0.2 Hrs

Standard Hours Per Jogging Suit 2.0 Hrs

Standard DL Costs

Once the time and rate standards have been set, the standard cost of labor for one unit of product can be computed.

2.0 Hrs per Jogging Suit x $18 per Hour = $36 per Suit

Variable OH Standards

Standards exist for VOH and are typically expressed in terms of “rate” and “hours.”

The rate is the variable portion of the POR

The hours represent the base used to apply overhead to products.

Variable OH Standards

HOTS, Inc. applies MOH costs to products on the basis of DL hours.

The variable portion of the POR is $4 per DL hour.

Using this rate, the standard cost of variable overhead for one unit of product is (2 DL Hours x $4 per Hour = $8 per suit).

Standard Cost Card

After standards have been set for DM, DL and MOH, a standard cost card can be prepared.

The cost card indicates what the final, manufactured cost should be for a unit of product.

HOTS, Inc.Standard Cost Card For Jogging Suits

Direct Materials

Direct Labor

Variable Overhead

Standard Cost Per Unit

Quantity

3.5 Yds.

2.0 Hrs.

2.0 Hrs.

Price

$6/Yd.

18/Hr.

4/Hr.

Cost

$21

36

8

$65

A General Model For Variance AnalysisVariable Production Costs

AQ x AP AQ x SP SQ x SP

Total Variance

Variance Variance

DM Price Variance

DL Rate Variance

VOH Spending Var.

DM Quantity Var.

DL Efficiency Var.

VOH Efficiency Var.

DM Price Variances . . .

DM Quantity Variances . . .