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Standard Costs and Variances Chapter 10 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 10-2 Standard Costs Standards are benchmarks or “norms” for measuring performance. In managerial accounting, two types of standards are commonly used. Quantity standards specify how much of an input should be used to make a product or provide a service. Price standards specify how much should be paid for each unit of the input. 10-3 Standard Costs Amount Deviations from standards deemed significant are brought to the attention of management, a practice known as management by exception. Standard Direct Labor Direct Material Manufacturing Overhead Type of Product Cost 10-4 Variance Analysis Cycle 10-5 Setting Standard Costs Should we use ideal standards that require employees to work at 100 percent peak efficiency? Engineer I recommend using practical standards that are currently attainable with reasonable and efficient effort. Managerial Accountant 10-6 Using Standards in Flexible Budgets Standard costs per unit for direct materials, direct labor, and variable manufacturing overhead can be used to compute activity and spending variances. Spending variances become more useful by breaking them down into quantity and price variances. 10-7 A General Model for Variance Analysis Variance Analysis Quantity Variance Price Variance Difference between actual quantity and standard quantity Difference between actual price and standard price 10-8 A General Model for Variance Analysis Variance Analysis Quantity Variance Price Variance Materials quantity variance Labor efficiency variance VOH efficiency variance Materials price variance Labor rate variance VOH rate variance 10-9 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance Standard Quantity × Standard Price Quantity Variance 10-10 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance Standard Quantity × Standard Price Quantity Variance Actual quantity is the amount of direct materials, direct labor, and variable manufacturing overhead actually used. 10-11 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance Standard Quantity × Standard Price Quantity Variance Standard quantity is the standard quantity allowed for the actual output of the period. 10-12 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance Standard Quantity × Standard Price Quantity Variance Actual price is the amount actually paid for the input used. 10-13 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance Standard Quantity × Standard Price Quantity Variance Standard price is the amount that should have been paid for the input used. 10-14 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance Standard Quantity × Standard Price Quantity Variance (AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP) AQ = Actual Quantity AP = Actual Price SP = Standard Price SQ = Standard Quantity 10-15 Material Variances Example Glacier Peak Outfitters has the following direct material standard for the fiberfill in its mountain parka. 0.1 kg. of fiberfill per parka at $5.00 per kg. Last month 210 kgs of fiberfill were purchased and used to make 2,000 parkas. The material cost a total of $1,029. 10-16 Material Variances Summary Actual Quantity × Actual Price Actual Quantity × Standard Price 210 kgs. × $4.90 per kg. 210 kgs. × $5.00 per kg. = $1,029 Price variance $21 favorable = $1,050 Standard Quantity × Standard Price 200 kgs. × $5.00 per kg. = $1,000 Quantity variance $50 unfavorable 10-17 Material Variances Summary Actual Quantity × Actual Price 210 kgs. × $4.90 per kg. Actual Quantity × Standard Price 210 kgs. $1,029 × 210 kgs $5.00per perkg kg. = $4.90 = $1,029 Price variance $21 favorable = $1,050 Standard Quantity × Standard Price 200 kgs. × $5.00 per kg. = $1,000 Quantity variance $50 unfavorable 10-18 Material Variances Summary Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price 210 kgs. 210 kgs. 200 kgs. × × 0.1 kg per parka× 2,000 parkas $4.90 per kg. $5.00 $5.00 per kg. = 200 per kgs kg. = $1,029 Price variance $21 favorable = $1,050 = $1,000 Quantity variance $50 unfavorable 10-19 Material Variances: Using the Factored Equations Materials price variance MPV = AQ (AP - SP) = 210 kgs ($4.90/kg - $5.00/kg) = 210 kgs (-$0.10/kg) = $21 F Materials quantity variance MQV = SP (AQ - SQ) = $5.00/kg (210 kgs-(0.1 kg/parka 2,000 parkas)) = $5.00/kg (210 kgs - 200 kgs) = $5.00/kg (10 kgs) = $50 U 10-20 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. 10-21 Zippy Quick Check Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price 1,700 lbs. × $3.90 per lb. 1,700 lbs. × $4.00 per lb. 1,500 lbs. × $4.00 per lb. = $6,630 = $ 6,800 = $6,000 Price variance $170 favorable Quantity variance $800 unfavorable 10-22 Labor Variances Example Glacier Peak Outfitters has the following direct labor standard for its mountain parka. 1.2 standard hours per parka at $10.00 per hour Last month, employees actually worked 2,500 hours at a total labor cost of $26,250 to make 2,000 parkas. 10-23 Labor Variances Summary Actual Hours × Actual Rate Actual Hours × Standard Rate 2,500 hours × $10.50 per hour 2,500 hours × $10.00 per hour. = $26,250 = $25,000 Rate variance $1,250 unfavorable Standard Hours × Standard Rate 2,400 hours × $10.00 per hour = $24,000 Efficiency variance $1,000 unfavorable 10-24 Labor Variances Summary Actual Hours × Actual Rate 2,500 hours × $10.50 per hour = $26,250 Actual Hours × Standard Rate Standard Hours × Standard Rate 2,500 hours 2,400 hours × 2,500 hours × $26,250 $10.00 per hour. = $10.50 per hour $10.00 per hour = $25,000 Rate variance $1,250 unfavorable = $24,000 Efficiency variance $1,000 unfavorable 10-25 Labor Variances Summary Actual Hours × Actual Rate Actual Hours × Standard Rate Standard Hours × Standard Rate 2,500 hours 2,500 hours 2,400 hours × × 1.2 hours per ×parka 2,000 $10.50 per hour parkas $10.00 per hour. $10.00 per hour = 2,400 hours = $26,250 = $25,000 Rate variance $1,250 unfavorable = $24,000 Efficiency variance $1,000 unfavorable 10-26 Labor Variances: Using the Factored Equations Labor rate variance LRV = AH (AR - SR) = 2,500 hours ($10.50 per hour – $10.00 per hour) = 2,500 hours ($0.50 per hour) = $1,250 unfavorable Labor efficiency variance LEV = SR (AH - SH) = $10.00 per hour (2,500 hours – 2,400 hours) = $10.00 per hour (100 hours) = $1,000 unfavorable 10-27 Quick Check Zippy Hanson Inc. has the following direct labor standard to manufacture one Zippy: 1.5 standard hours per Zippy at $12.00 per direct labor hour Last week, 1,550 direct labor hours were worked at a total labor cost of $18,910 to make 1,000 Zippies. 10-28 Zippy Quick Check Actual Hours × Actual Rate Actual Hours × Standard Rate 1,550 hours × $12.20 per hour 1,550 hours × $12.00 per hour = $18,910 = $18,600 Rate variance $310 unfavorable Standard Hours × Standard Rate 1,500 hours × $12.00 per hour = $18,000 Efficiency variance $600 unfavorable 10-29 Variance Analysis and Management by Exception How do I know which variances to investigate? Larger variances, in dollar amount or as a percentage of the standard, are investigated first. 10-30 A Statistical Control Chart Warning signals for investigation Favorable Limit • Desired Value • • • • • • Unfavorable Limit 1 2 3 4 5 6 7 Variance Measurements • 8 • 9 10-31 Advantages of Standard Costs Management by exception Promotes economy and efficiency Advantages Simplified bookkeeping Enhances responsibility accounting 10-32 Potential Problems with Standard Costs Emphasizing standards may exclude other important objectives. Standard cost reports may not be timely. Invalid assumptions about the relationship between labor cost and output. Potential Problems Favorable variances may be misinterpreted. Emphasis on negative may impact morale. Continuous improvement may be more important than meeting standards.