Standard/Budget
Advantage of
Standard Costs
Managerial Accounting
Standard Setting
Second Edition
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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Weygandt / Kieso / Kimmel
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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Performance Evaluation
Through Standard Costs
Standards
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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• Are common in business
• Those imposed by government are
regulations
– Fair Labor Standards Act
– Equal Employment Opportunity
• May extend to personnel matters
– Employee absenteeism
– Ethical codes of conduct
– Quality control standards
– Standard costs for goods and
services
Standard Costs vs Budgets
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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A standard is a unit amount.
A budget is a total amount.
Illustration 8-1
Setting Standard Costs Is Difficult
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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•
•
•
•
Requires input from all persons
who have responsibility for costs
and quantities.
Purchasing agents
Product managers
Quality control engineers
Production supervisors
Ideal Standards
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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Standards based on the
optimum level of
performance under perfect
operating conditions.
Normal Standards
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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Standards based on an efficient
level of performance that are
attainable under expected
operating conditions.
Normal Standards...
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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Should be rigorous but
attainable.
Illustration 8-2
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Unit
Purchase price, net of discounts
Freight
Receiving and handling
Standard direct materials price per pound
Income
Statement
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Direct Materials Price Standard
The cost per unit of direct
materials that should be
incurred, including amounts
for related costs such as
receiving, storing, handling.
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Price
$2.70
.20
.10
$3.00
Illustration 8-3
Direct Materials Quantity Standard
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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The quantity of direct material
that should be used per unit
of finished goods.
Quantity
Item
(Pounds)
Required materials
3.5
Allowance for waste
.4
Allowance for spoilage
.1
Standard direct materials quantity per unit
4.0
Illustration 8-3
Direct Materials Standard
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
$12.00 ($3.00 x 4.0 pounds).
Income
Statement
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• Is the standard direct materials price
times the standard direct materials
quantity.
• For Xonic the standard direct
materials cost per gallon is:
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Illustration 8-4
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Item
Hourly wage rate
COLA
Payroll taxes
Fringe benefits
Standard direct labor rate per pound
Income
Statement
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Direct Labor Price Standard
The rate per hour that should
be incurred for direct labor,
including allowances for
unavoidable wastes and
normal spoilage.
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Price
$7.50
.25
.75
1.50
$10.00
Illustration 8-5
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Direct Labor Quantity Standard
The time that should be
required to make one unit
of a product.
Manufacturing
Overhead Var.
Reporting
Variances
Item
Actual production time
Rest periods and cleanup
Setup and downtime
Standard direct labor hours per unit
Income
Statement
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Quantity
(Hours)
1.5
.2
.3
2.0
Illustration 8-3
Direct Labor Standard
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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• Is the standard direct labor rate times
the standard direct labor hours.
• For Xonic the standard direct labor cost
per gallon is
$20.00 ($10.00 x 2.0 hours).
Standard Hours Allowed
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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The hours that should have
been worked for the units
produced.
With standard costs,
manufacturing overhead
costs are applied to work in
process on the basis of
standard hours allowed.
Standard Predetermined Overhead Rate
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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An overhead rate determined
by dividing budgeted
overhead costs by an expected
standard activity index.
Illustration 8-6
Manufacturing Overhead
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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Budgeted
Overhead
Costs
Variable
Fixed
Total
Amount
$ 79,200
52,800
$132,000

Standard
Direct
Labor Hours
26,400
26,400
26,400
Overhead Rate
per Direct
=
Labor Hour
$3.00
2.00
$5.00
Illustration 8-7
Standard Cost per Gallon
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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A standard cost card is
prepared for each product.
Variances
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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The difference between total
actual costs and total
standard costs.
Illustration 8-10
Various Relationships
Total
Variance
=
Total
Materials
Variance
=
Total
Labor
Variance
=
Total
Overhead
Variance
=
Materials
Price
Variance
=
Labor
Price
Variance
=
Overhead
Controllable
Variance
+
Materials
Quantity
Variance
+
Labor
Quantity
Variance
+
Overhead
Volume
Variance
Total Materials Variance
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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The difference between the
actual quantity times the
actual price and the standard
quantity times the standard
price of materials.
Materials Price Variance
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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The difference between the
actual quantity times the
actual price and the
actual quantity times the
standard price
for material.
Materials Quantity Variance
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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The difference between the actual
quantity times the standard price
and the standard quantity times the
standard price for materials.
Total Labor Variance
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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The difference between actual
hours times the actual rate
and standard hours times the
standard rate for labor.
Labor Price Variance
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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The difference between the actual
hours times the actual rate and the
actual hours times the standard rate
for labor.
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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Labor Quantity Variance
The difference between
the actual hours times
the standard rate and
the standard
hours times
the standard
rate for
labor.
Overhead Controllable Variance
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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The difference between actual
overhead incurred and
overhead budgeted for the
standard hours allowed.
Overhead Volume Variance
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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The difference between
overhead budgeted for the
standard hours allowed and
the overhead applied.
Total Overhead Variance
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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The difference between actual
overhead costs and overhead
costs applied to work done.
Illustration 8-30
Reporting Variances
Standard/Budget
Advantage of
Standard Costs
Xonic, Inc.
Variance Report - Purchasing Department
For the Week June 8, 2002
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Type of
Quantity
Actual
Materials
Purchased
Price
Reporting
Variances
x 100
4,200 lbs.
x 142
x 85
Income
Statement
Standard
Price
Price
Variance
Explanation
$3.10
$3.00
$420 U
Rush order
1,200 units
2.75
2.80
60 F
Quantity discount
600 doz.
5.20
5.10
60 U
Regular supplier
on strike
Total price variance
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$420 U
Illustration 8-31
Statement Presentation of Variances
Standard/Budget
Advantage of
Standard Costs
Standard Setting
Direct MaterialsDirect Labor Var
Manufacturing
Overhead Var.
Reporting
Variances
Income
Statement
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Xonic, Inc.
Income Statement
For the Month Ended June 30, 2002
Sales
Cost of goods sold (at standard)
Gross profit (at standard)
Variances
Materials price
Materials quantity
Labor price
Labor quantity
Overhead controllable
Overhead volume
Total variance unfavorable
Gross profit (actual)
Selling and administrative expenses
Net income
$60,000
42,000
18,000
420
600
(420)
1,000
500
400
2,500
15,500
3,000
$12,500
Standard/Budget
COPYRIGHT
Advantage of
Standard Costs
Standard
Setting
Copyright
© 2002, John Wiley & Sons, Inc. All rights reserved.
Direct
MaterialsReproduction
or translation of this work beyond that permitted in
Direct Labor Var
Section 117 of the 1976 United States Copyright Act without the
Manufacturing
express
Overhead
Var. written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Reporting
Variances
Permissions Department, John Wiley & Sons, Inc. The purchaser
Income
may make back-up copies for his/her own use only and not for
Statement
distribution or resale. The Publisher assumes no responsibility
for errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
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