Management Accounting: The Cornerstone for Business Decisions Standard Costing: A Managerial Control Tool Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Learning Objectives 1. Explain how unit standards are set and why standard cost systems are adopted. 2. Explain the purpose of a standard cost sheet. 3. Describe the basic concepts underlying variance analysis and explain when variances should be investigated. 4. Compute the materials variances and explain how they are used for control. Learning Objectives 5. Compute the labor variances and explain how they are used for control. 6. (Appendix 9A) Prepare journal entries for materials and labor variances. 7. (Appendix 9B) Define kaizen and target costing and explain their relationship to traditional standard costing. What three ways are used to develop standards? Define Ideal and Currently Attainable Standards ◙ Ideal Standards Demands maximum efficiency and is achievable only when everything operates perfectly. There are no breakdowns, slack, or skill failures. ◙ Currently Attainable Standards Are achievable under efficient operating conditions, but allowances are made for breakdowns, interruptions, some mistakes and so on. Illustrate Types of Standards Why have a standard cost system? ◙ It enhances planning and control and improves performance measurement ◙ Allows comparison of actual and budget and analysis of variances (differences) ◙ Broken down into price and efficiency variances ◙ Managers over inputs than prices ◙ Standard cost systems are widely used Create a Table of Cost Assignment Approaches Manufacturing Costs Direct materials Direct labor Overhead Actual Costing Actual Actual Actual Normal Costing Actual Actual Budgeted Standard Standard Standard Standard Costing How to compute standard 9-1 quantities allowed (SQ & SH) Assume that 200,000 packages of corn chips are produced during first week of April. The unit quantity standard is 18 ounces of yellow corn per package. The unit quantity standard for machine operators is 0.01 DLH per package produced. REQUIRED: How much yellow corn and how many operator hours should have been used or the actual output of 200,000 packages? Calculation: Corn allowed SQ = Unit quantity standard x Actual output = 18 oz. x 200,000 = 3,600,000 oz. Operator hours allowed SH = Unit labor standard x Actual output = 0.01 DLH x 200,000 = 2,000 DLH Brief Describe the Total Budget Variance, Price & Efficiency Variance ◙ The actual cost – The planned cost = (AP x AQ) – (SP x SQ) It is also call the TOTAL VARIANCE ◙ The Price or Rate variance is the (Actual price – Standard Price) x Actual number of units used =(AP – SP) x AQ ◙ The Usage or Efficiency variance is the (Actual Quantity – Standard Quantity) x Standard Price = (AQ – SQ) x SP Draw the General Variance Model 1. AQ X AP (Actual Quantity Of input at Actual Price) 2. AQ X SP (Actual Quantity Of input at Standard Price) Price Variance (1 - 2) 3. SQ X SP (Standard Quantity Of input at Standard Price) Usage Variance (2 – 3) Total Variance (1 – 3) 9-2 How to use control limits to trigger a variance investigation Information: Standard costs: $100,000; allowable deviation +10,000; actual costs for six months: June $97,500 September $102,500 July 105,000 October 107,500 August 95,000 November 112,500 Required: Plot the actual costs over time against the upper and lower control lines. Determine when a variance should be investigated. Calculation: Appears on the following two slides. 9-2 Decisions to Investigate 9-2 Variance Investigation 9-3 How to calculate the total variance for materials Unit standards from Exhibit 9-3; the actual results from the first week of September are below: Actual production 97,000 bags of corn chips Actual cost of corn 1,560,000 oz. at $0.015 = $23,400 Actual cost of labor 720 hours at $8.35 = $6,012 REQUIRED: Calculate the total variances for corn and labor for the first week in September. Calculation: On the following slide 9-3 How to calculate the total variance for materials Actual Costs Budgeted Costs AQ x AP $ 23,400 SQ x SP $ 17,460 Total Variance AQ x AP - SQ x SP $ Corn: SQ = 18 x 97,000 = 1,746,000 oz. Corn: $0.01 x 1,746,000 = $17,460 5,940 9-4 How to calculate the total variance for materials Units standards from Exhibits 9-2, the actual results from the first week of September: Actual production 97,000 bags of corn chips Actual cost of corn 1,560,000 oz. @ $0.015 REQUIRED: Calculate the materials price and usage variances use the 3 pronged (columnar) and formula approaches. 9-4 How to calculate the total variance for materials Calculation: A. Formulas (recommended approach for materials variances because materials purchases may differ from materials used. MPV = (AP – SP)AQ = ($0.015 - $0.01)1,560,000 = $7,800 U MUV = (AQ –SQ)SP = (1,560,000 – 1,746,000)$0.01 = $1,860 F 9-4 How to calculate the total variance for materials 1. AQ X AP 2. AQ X SP 3. SQ X SP (Actual Quantity (Actual Quantity (Standard Quantity at Actual Price) At Standard Price) at Standard Price) 1,560,000 x 1,560,000 x 1,746,000 x $0.015 = $23,400 $0.01 = $15,600 $0.01 = $17,460 Price Variance (1 - 2) $7,800 U Usage Variance (2 – 3) $1,860 F Total Variance (1 – 3) $5,940 U Discuss Using Materials Variance Information ◙ Responsibility for materials price variance ◙ Usually with purchasing agents ◙ Analysis of materials price variance ◙ Is it significant or not? ◙ Responsibility for the materials usage variance ◙ Usually production manager is responsible ◙ Analysis of materials usage variance ◙ Who is it assignable to? 9-5 How to calculate the total variance for labor Unit standards from Exhibit 9-3; the actual results from the first week of September are below: Actual production 97,000 bags of corn chips Actual cost of labor 720 hours at $8.35 = $6,012 REQUIRED: Calculate the total variances for labor for the first week in September. Calculation: On the following slide How to calculate the total variance for materials 9-5 Actual Costs Budgeted Costs AQ x AP $ 6,012 SQ x SP $ 7,760 Total Variance AQ x AP - SQ x SP $ Labor: SQ = .01 x 97,000 = 970 hours Labor: $8.00 x 970 = $7,760 1,748 9-6 How to calculate the labor variances: formula & columnar approaches Units standards from Exhibits 9-3, the actual results from the first week of September: Actual production 97,000 bags of corn chips Actual cost of labor 720 hours @ $8.35 REQUIRED: Calculate the labor rate and efficiency variances use the 3 pronged (columnar) and formula approaches. 9-6 How to calculate the labor variances: formula & columnar approaches Calculation: LRV = (AR – SR)AH = ($8.35 - $8.00)720 = $252 U LEV = (AH –SH)SR = (720 – 970)$8.00 = $2,000 F 9-6 How to calculate the labor variances: formula & columnar approaches 1. AH X AR (Actual Quantity at Actual Price) 720 x $8.35 = $6,012 2. AH X SR 3. SH X SR (Actual Quantity (Standard Quantity At Standard Price) at Standard Price) 720 x $8.00 = 970 x $8.00 = $5,760 $7,760 Price Variance (1 - 2) $252 U Usage Variance (2 – 3) $2,000 F Total Variance (1 – 3) $1,748 F Discuss Using Labor Variance Information ◙ Responsibility for labor rate variance ◙ Determined primarily by external forces ◙ Affected by unions, labor contracts and seniority ◙ Analysis of labor rate variance ◙ Responsibility for labor efficiency variance ◙ Managers are responsible for the productive use of labor ◙ Analysis of labor efficiency variance