Cornerstones of Managerial
Accounting 2e
Chapter Nine
Standard Costing: A Managerial
Control Tool
Mowen/Hansen
Copyright © 2008 Thomson South-Western, a part of the Thomson Corporation.
Thomson, the Star logo, and South-Western are trademarks used herein under
license.
1
Objective # 1
Explain how units standards are
set and why standard cost
systems are adopted.
2
Unit Standards
Developing standards enhances control.
Need to determine the unit standard cost for a
particular input
Two decisions:
Quantity
decision
Pricing
decision
3
Quantity Decision
The amount of input that should be used
per unit of output
Called “Quantity Standard”
4
Price Decision
The amount that should be paid for the
quantity of input to be used.
Called “Price Standard”
Quantity Standard x Price Standard
= Unit Standard
5
Unit Standard
•
•
Used to enhance cost control
Are budgeted ‘unit’ costs
◦
Unlike budgets which contain aggregate
amounts of total revenue and total costs
6
Development of Standards
Quantity Standards are developed by:
• Historical experience
• Engineering studies
• Input from operating personnel
7
Development of Standards
Price Standards are the joint responsibility of:
• Operations
• Personnel
• Purchasing
• Accounting
8
Types of Standards
Ideal standards
---
Currently attainable
standards
--- can be achieved under
efficient operating
conditions
demand maximum
efficiency and can be
achieved only if
everything operates
perfectly
9
Why Standard Cost Systems Are
Adopted
Two reasons:
• To improve planning and control
• To facilitate product costing
10
Planning and Control
Standards:
• Enhance planning and control
• Improve performance management
• Fundamental requirement for a
flexible budgeting system
Actual costs are compared to budgeted
costs and variances are computed
11
Product Costing
Costs are assigned to products using standards
for:
• Direct materials quantity
• Direct labor quantity
• Direct materials price
• Direct labor price
• Overhead quantity
• Overhead price
12
Standard Costing
Advantages:
• Greater capacity for control
• Provides readily available unit cost
information
• Simplifies cost assignments in both
process and job costing systems
13
Objective # 2
Explain the purpose of a
standard cost sheet.
14
Example
Corn allowed:
SQ
=
Unit
Quantity
Standard
x
Actual
Output
Standard quantity of
materials allowed
15
Example
SQ =
SQ
=
Unit
Quantity
Standard
18
x
x
Actual
Output
100,000
SQ = 1,800,000 ounces
16
Example
Operator hours allowed:
SH =
Unit
Quantity
Standard
x
Actual
Output
Standard hours allowed
17
Example
Operator hours allowed:
SH =
SH
=
SH
Unit
Quantity
Standard
0.01
x
x
Actual
Output
100,000
= 1,000 direct labor hours
18
Objective # 3
Describe the basic concepts
underlying variance analysis,
and explain when variances
should be investigated.
19
Variance Analysis Components
SP = Standard unit price of an input
SQ = Standard quantity of input for the
actual output
AP = Actual price per unit of the input
AQ = Actual quantity of the input used
20
Total Budget Variance
Total
=
Variance
Actual
Cost
–
Planned
Cost
(AP x AQ)
–
(SP x SQ)
21
Price (Rate) Variance
Actual
Price
-
Standard
Price
Number of
x
inputs used
Favorable variance = Actual price is
less than standard price
Unfavorable variance = Actual price
is greater than standard price
22
Usage (Efficiency) Variance
Actual
Quantity
-
Standard
Quantity
x
Standard
Unit Price
Favorable variance = Actual quantity
is less than standard quantity
Unfavorable variance = Actual
quantity is greater than standard
quantity
23
The Decision to Investigate
• Performance rarely meets established
standards exactly
• Random variations around the standard are
expected
• Management should determine an acceptable
range of performance
24
Cornerstone 9-2
HOW TO Use Control Limits to
Trigger a Variance Investigation
25
Example
Information: Standard cost: $100,000; allowable
deviation: $10,000; actual costs for six months:
June
$97,500
September $102,500
July
105,000
October
107,500
November
112,500
August
95,000
Required: Plot the actual costs over time against
the upper and lower control limits. Determine
when a variance should be investigated.
26
Example
$120,000
110,000
100,000
Standard
Acceptable
Range
(Don’t
Investigate)
90,000
June July August September October November
27
Example
$120,000
Investigate
110,000
100,000
90,000
June July August September October November
28
Objective # 4
Compute the materials
variances, and explain how they
are used for control.
29
Direct Material Variances
Materials Price Variance
Measures the difference between what
should have been paid for raw materials
and what was actually paid
MPV
=
(AP –
SP) x AQ
30
Direct Material Variances
Materials Usage Variance
Measures the difference between the direct
materials actually used and the direct materials
that should have been used for the actual output
MUV
=
(AQ –
SQ) SP
31
Responsibility for the Materials
Price Variance
• Belongs to the purchasing agent
• Price can be influenced by:
◦ Quality
◦ Quantity discounts
◦ Distance of the source from the plant
32
Responsibility for the Materials
Usage Variance
• Belongs to the production manager
• Variance can be influenced by minimizing:
◦ Scrap
◦ Waste
◦ Rework
33
Analysis of the Variances
First step:
Decide whether the variance is
significant
Second step:
Find out why it occurred
34
Accounting and Disposition of
Materials Variances
Materials variances are ADDED to
cost of goods sold if they are
UNFAVORABLE.
Materials variances are
SUBTRACTED from cost of goods
sold if FAVORABLE
35
Direct Labor Variances
Labor Rate Variance
Computes the difference between what
was paid to direct laborers and what
should have been paid
LRV
=
(AR - SR) AH
36
Direct Labor Variances
Labor Efficiency Variance
Measures the difference between the labor
hours that were actually used and the labor
hours that should have been used
LEV =
(AH – SH) SR
37
Objective # 5
Compute the labor variances
and explain how they are used
for control.
38
Causes of Labor Rate Variance
• Labor rates are largely determined by such
external forces as labor markets and union
contracts.
• Labor rates can vary when:
◦ More skilled and more highly paid
laborers are used for less skilled tasks
◦ Unexpected overtime occurs
39
Responsibility for the Labor
Efficiency Variance
• Generally speaking, production managers
are responsible for the use of direct labor
• But once the cause is discovered,
responsibility may be assigned elsewhere.
40