Chapter 10 - Standard Costing PDF

10-1 Chapter 10 Standard Costing: A Managerial Control Tool LO 1  10-2 Standard Costs Standards are benchmarks or “norms” for measuring performance. Two types of standards are commonly used....

10-1 Chapter 10 Standard Costing: A Managerial Control Tool LO 1  10-2 Standard Costs Standards are benchmarks or “norms” for measuring performance. Two types of standards are commonly used. Quantity standards Cost (price) specify how much of an standards specify input should be used to how much should be make a product or paid for each unit provide a service. of the input. LO 1  10-3 Unit Standards Developing standards enhances control Determination of unit standard cost requires Quantity Pricing Decision Decision Quantity Price Standard 1 Standard 2 Quantity Standard × Price Standard = Standard Cost per unit LO1  10-4 Standard Costs Deviations from standards deemed significant are brought to the attention of management, a practice known as management by exception. Standard Amount Direct Material Direct Manufacturing Labour Overhead Type of Product Cost LO 1  Exhibit 10-5 10-1 Variance Analysis Cycle Take Identify Receive corrective questions explanations actions Conduct next Analyze period’s variances operations Prepare standard Begin cost performance report LO 1  10-6 Setting Standard Costs Accountants, engineers, purchasing agents, and production managers combine efforts to set standards that encourage efficient future production. Historical Experience/Engineering Studies/Input From Operating Personnel LO 1  10-7 Setting Standard Costs Should we use I recommend using Currently Ideal Standards that Attainable Standards that are require employees to achievable with reasonable work at 100% and efficient effort. peak efficiency? Engineer Managerial Accountant LO 1  10-8 Setting Direct Material Standards Standard Price Standard Quantity per Unit per Unit Final, delivered Summarized in cost of materials, a Bill of Materials. net of discounts. LO 1  10-9 Setting Direct Labour Standards Standard Rate Standard Hours per Hour per Unit Often a single Use time and rate is used that reflects motion studies for the mix of wages earned. each labour operation. LO 1  10-10 Setting Variable Overhead Standards Price Quantity Standards Standards The rate is the The quantity is the variable portion of the activity in the allocation predetermined overhead base used to calculate the rate. predetermined overhead. LO 1  10-11 Standard Cost Card – Variable Production Cost A standard cost card for one unit of product might look like this: A B A×B Standard Standard Standard Quantity Price Cost Inputs or Hours or Rate per Unit Direct materials 3.0 lbs. $ 4.00 per lb. $ 12.00 Direct labour 2.5 hours 14.00 per hour 35.00 Variable mfg. overhead 2.5 hours 3.00 per hour 7.50 Total standard unit cost $ 54.50 LO 1  10-12 Practice: Exercise 10-1 LO 1  10-13 Standards vs. Budgets Are standards the A standard is a per same as budgets? unit cost. A budget is set for Standards are often used when total costs. preparing budgets. LO 1  10-14 Price and Quantity Standards Price and quantity standards are determined separately for two reasons:   The The purchasing purchasing manager manager is is responsible responsible for for raw raw material material purchase purchase prices prices and and the the production production manager manager is is responsible responsible for for the the quantity quantity of of raw raw material material used. used.   The The buying buying and and using using activities activities occur occur atat different different times. times. Raw Raw material material purchases purchases may may bebe held held inin inventory inventory for for aa period period of of time time before before being being used used in in production. production. LO 1  10-15 A General Model for Variance Analysis Variance Analysis Price Variance Quantity Variance Difference between Difference between actual price and actual quantity and standard price standard quantity LO 1  10-16 A General Model for Variance Analysis Variance Analysis Price Variance Quantity Variance We will focus on Materials price/quantity variances Materials price variance Materials quantity variance Labour rate variance Labour efficiency variance VOH spending variance VOH efficiency variance LO 1  10-17 A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Spending Variance LO 1  10-18 A General Model for Variance Analysis Actual quantity is the amount of direct materials, direct labour, and variable manufacturing overhead actually used. Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Spending Variance LO 1  10-19 A General Model for Variance Analysis Standard quantity is the standard quantity allowed for the actual output of the period. Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Spending Variance LO 1  10-20 A General Model for Variance Analysis Actual price is the amount actually paid for the input used. Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Spending Variance LO 1  10-21 A General Model for Variance Analysis Standard price is the amount that should have been paid for the input used. Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Spending Variance LO 1  10-22 A General Model for Variance Analysis (AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Spending Variance LO 1  10-23 Favourable and Unfavourable Variances Variance Criteria Price or Favourable IF AP is less than Rate SP Variance Unfavourab IF AP is more than le SP Usage or Favourable IF AQ is less than Efficiency SQ Variance Copyright © 2015 by Nelson Unfavourab IF AQ is more than Education Ltd. 23  10-24 Practice: Exercise 10-3 Exercise 10-4 LO 1  10-25 Responsibility for Material Variances Materials Quantity Variance Materials Price Variance Production Manager Purchasing Manager The The standard standard price price is is used used to to compute compute the the quantity quantity variance variance so so that that the the production production manager manager isis not not held held responsible responsible for for the the purchasing purchasing manager’s manager’s performance. performance. LO 2  10-26 Responsibility for Material Variances Your poor scheduling I am not responsible for sometimes requires me to this unfavourable material rush order material at a quantity variance. higher price, causing You purchased cheap unfavourable price variances. material, so my people had to use more of it. LO 2  10-27 Responsibility for the Variances Price variance Quality belongs to Quantity discounts purchasing agent. Distance of the source Factors influencing prices are: from the plant Usage variance belongs to Scrap production Waste manager. Factors Rework influencing usage variance are:  10-28 Quick Check  Zippy Hanson Inc. has the following direct material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Last week, 1,700 pounds of material were purchased and used to make 1,000 Zippies. The material cost a total of $6,630. LO 2  10-29 Quick Check  Zippy Hanson’s Hanson’s material material price price variance variance (MPV) (MPV) for for the the week week was: was: a. a. $170$170 unfavourable. unfavourable. b. b. $170$170 favourable. favourable. c. c. $800$800 unfavourable. unfavourable. d. d. $800$800 favourable. favourable. LO 2  10-30 Quick Check  Zippy Hanson’s Hanson’s material material price price variance variance (MPV) (MPV) for for the the week week was: was: a. a. $170$170 unfavourable. unfavourable. b. b. $170$170 favourable. favourable. c. c. $800$800 unfavourable. unfavourable. MPV = AQ (AP – SP) d. d. $800$800 favourable. favourable. MPV = 1,700 lbs. × ($3.90 – 4.00) MPV = $170 favourable LO 2  10-31 Quick Check  Zippy Hanson’s Hanson’s material material quantity quantity variance variance (MQV) (MQV) for for the the week week was: was: a. a. $170$170 unfavourable. unfavourable. b. b. $170$170 favourable. favourable. c. c. $800$800 unfavourable. unfavourable. d. d. $800$800 favourable. favourable. LO 2  10-32 Quick Check  Zippy Hanson’s Hanson’s material material quantity quantity variance variance (MQV) (MQV) for for the the week week was: was: a. a. $170$170 unfavourable. unfavourable. b. b. $170$170 favourable. favourable. c. c. $800$800 unfavourable. unfavourable. d. d. $800$800 favourable. favourable. MQV = SP (AQ – SQ) MQV = $4.00 × (1,700 lbs – 1,500 lbs) MQV = $800 unfavourable LO 2  10-33 Quick Check  Zippy 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 Quantity variance $170 favourable $800 unfavourable $630 unfavourable LO 2  10-34 Direct Labour Variances Labour Rate Variance = LRV = (AR – SR) × AH  Computes the difference between what was paid to direct labourers and what should have been paid given the actual level of output. Labour Efficiency Variance = LEV = (AH – SH) × SR Total Labour  Measures Variance the difference = (AR × between AH) the – (SRhours labour × SH)that were actually used and the labour hours that should have been used.  10-35 Analysis of Labour Variances Causes of labour rate variance:  Labour rates are determined by external forces such as labour markets and union contracts.  Labour rates can vary when  more skilled workers are used for less skilled tasks, and unexpected overtime occurs  10-36 Analysis of Labour Variances Responsibility for the labour efficiency variance:  Production managers are responsible for the use of direct labour.  But, once the cause is discovered, responsibility may be assigned elsewhere.  10-37 Practice: Exercise 10-5 Exercise 10-6 Exercise 10-15 LO 1  10-38 Overhead Variances and Under- or Overapplied Overhead Cost In a standard cost system: Unfavourable Favourable variances are equivalent variances are equivalent to underapplied overhead. to overapplied overhead. The sum of the overhead variances equals the under- or overapplied overhead cost for a period. LO 6  10-39 Theoretical vs. Practical Capacity Theoretical capacity Practical capacity is the volume of represents what capacity if all available could be produced production time is with operations at used and no waste theoretical capacity occurs. less unavoidable (i.e. operations conducted downtime. 24 hours per day, 7 days per week, 365 days per year, with no downtime) LO 7  10-40 Variance Analysis and Management by Exception Larger variances, in How do I know dollar amount or as which variances to a percentage of the investigate? standard, are investigated first. LO 7  10-41 Exhibit 10-9 A Statistical Control Chart Warning signals for investigation Favourable Limit Desired Value Unfavourable Limit 1 2 3 4 5 6 7 8 9 Variance Measurements LO 7  10-42 Advantages of Standard Costs Management by Promotes economy exception and efficiency Advantages Enhances Simplified responsibility bookkeeping accounting LO 7  10-43 Potential Problems with Standard Costs Emphasizing standards Favourable may exclude other variances may important objectives. be misinterpreted. Potential Problems Standard cost Emphasis on reports may negative may not be timely. impact morale. Continuous Invalid assumptions improvement may about the relationship be more important between labour than meeting standards. cost and output. LO 7