Chapter 20:
Standard Costing: A Managerial
Control Tool
Cornerstones of
Financial and Managerial Accounting, 4e
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Unit Standards
►Budgets set standards that are used to control
and evaluate managerial performance.
►To determine the unit standard cost for a
particular input, two decisions must be made:
►The quantity decision: The amount of input that
should be used per unit of output
►The pricing decision: The amount that should be
paid for the quantity of the input to be used
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Quantity and Price Standards
►The quantity decision produces quantity
standards.
►The pricing decision produces price standards.
►The unit standard cost can be computed by
multiplying these two standards:
Standard cost per unit = Quantity standard x Price standard
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How Standards Are Developed
►Three potential sources of quantitative standards are as
follows:
►Historical experience: Historical experience can provide an
initial guideline for setting standards, but should be used with
caution because they can perpetuate existing inefficiencies.
►Engineering studies: Engineering studies can identify efficient
approaches rigorous guidelines, but engineered standards
often are too rigorous.
►Input from operating personnel: Since operating personnel
are accountable for meeting standards, they should have
significant input in setting standards.
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Types of Standards
►Standards are generally classified as either ideal or
currently attainable.
Ideal standards demand maximum
efficiency and can be achieved only if
everything operates perfectly. No machine
breakdowns, slack, or lack of skill (even
momentarily) are allowed.
Currently attainable standards can be
achieved under efficient operating
conditions. Allowance is made for normal
breakdowns, interruptions, less than
perfect skill, and so on. These standards
are demanding but achievable.
►Of the two types, currently attainable standards offer the
most behavioral benefits.
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Why Standard Cost Systems
Are Adopted
► Two reasons for adopting a standard cost system are frequently
mentioned:
►To improve planning and control
►Comparing actual costs with budgeted costs identifies variances, the
difference between the actual and planned costs for the actual level of
activity. Overall variances can be further broken down into a price
variance or a usage or efficiency variance if unit price or quantity
standards have been developed. This additional information is very
helpful for managers.
►To facilitate product costing
►Costs are assigned to products using quantity and price standards for
all three manufacturing costs: direct materials, direct labor, and
overhead.
► Standard costing and variance analysis for controlling cost and
evaluating performance can have strong ethical implications.
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Cost Assignment Approaches
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Standard Product Costs
►In manufacturing firms, standard costs are
developed for direct materials, direct labor, and
overhead.
►Using these costs, the standard cost per unit is
computed.
►The standard cost sheet provides the production
data needed to calculate the standard unit cost.
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The Standard Cost Sheet
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► The standard cost sheet also
shows the quantity of each
input that should be used to
produce one unit of output.
► A manager should be able to
compute the standard
quantity of materials
allowed (SQ) and the
standard hours allowed (SH)
for the actual output, where
and
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Variance Analysis:
General Description
►Actual input cost can be calculated as:
Actual cost = AP x AQ
► where
AP = Actual price per unit
AQ = Actual quantity of input used
►It is also possible to calculate the costs that should have
been incurred for the actual level of activity.
Planned cost = SP x SQ
► where
SP = Standard price per unit
SQ = Standard quantity of input allowed for the
actual output
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3 Variance Analysis: General Description
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Total Budget Variance
►The total budget variance is the difference between the
actual cost of the input and its planned cost:
► Because responsibility for deviations from planned prices tends
to be located in the purchasing or personnel department and
responsibility for deviations from planned usage of inputs tends
to be located in the production department, it is important to
separate the total variance into price and usage (quantity)
variances.
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Price and Usage Variances
►For labor, the price variance is usually called a rate variance.
►Price (rate) variance is the difference between the actual
and standard unit price of an input multiplied by the number
of inputs used:
Price variance = (AP - SP) x AQ
►The usage (quantity) variance is called an efficiency variance.
►Usage (efficiency) variance is the difference between the
actual and standard quantity of inputs multiplied by the
standard unit price of the input:
Usage variance = (AQ - SQ) x SP
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3
The Decision to Investigate
►As a general principle, an investigation
should be undertaken only if the expected
benefits are greater than the expected costs.
►Managers determine whether variances are
significant based on an acceptable range
that has top and bottom measures called
control limits.
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The Analysis of Variances
►The first step in variance analysis is to decide whether
the variance is significant.
►If so, what is its cause?
►Once the reason is known, corrective action can be
taken if necessary—and if possible.
►For example, if it is due to a supply shortage, no action
is needed and the company will simply have to wait
until market conditions improve.
►If the variance is judged insignificant, no further steps
are needed.
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4
Accounting and Disposition of
Materials Variances
►Recognizing the price variance for materials at the point
of purchase also means that the raw materials inventory
is carried at standard cost.
►In general, materials variances are not inventoried.
►Typically, materials variances are added to cost of goods
sold if unfavorable and are subtracted from cost of
goods sold if favorable.
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Additional
Cost Management Practices
► In addition to standard costing, some companies choose to
employ other cost management practices, such as kaizen costing
and target costing.
►Kaizen costing focuses on the continuous reduction of the
manufacturing costs of existing products and processes.
►Target costing focuses on the reduction of the design costs of
existing and future products and processes.
►A target cost is the difference between the sales price
needed to capture a predetermined market share and the
desired per-unit profit:
Target cost per unit = Expected sales price per unit - Desired
profit per unit
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Appendix 20A:
Accounting for Variances
►The accounts containing the variances between
applied standard costs and actual costs are
closed, which allows the amount of actual costs
to ultimately impact the final cost of goods sold
number that appears in the financial statements.
► In recording variances, unfavorable variances
always are debits, and favorable variances
always are credits.
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Disposition of
Materials and Labor Variances
►At the end of the year, the variances for
materials and labor usually are closed to Cost of
Goods Sold.
►If the variances are material, they must be
prorated among various accounts.
►Typically, materials variances are prorated on
the basis of the materials balances in each of
these accounts and the labor variances on the
basis of the labor balances in the accounts.
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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.