PowerPoint
Presentations for
Cornerstones of
Cost Accounting
First Canadian Edition
Adapted by
George Gekas
Ryerson University
Copyright © 2013 Nelson Education Ltd.
Standard Costing:
A Functional-Based
Control Approach
9
9-2
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Developing Unit Input
Standards
1
• Price standards specify how much should be
paid per quantity unit of the input to be used.
• Quantity standards specify how much of the
input should be used per unit of output.
• Unit standard cost is the product of these
two standards:
Standard price × Standard Quantity (SP × SP)
9-3
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Developing Unit Input
Standards
1
• Ideal Standards
• Demand maximum efficiency and can be achieved
only if everything operates perfectly.
• Attainable Standards or Practical Standards
• Can be achieved under current efficient operating
conditions
• May be tight but attainable
• Allowances for breakdown, resting time, and the
like are permissible
• Normal inefficiencies are acceptable
9-4
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Developing Unit Input
Standards
1
• Kaizen Standards
• Continuous improvement standards
• Considered to be a currently attainable standard
and focuses on planned improvement and cost
reduction
• As improvements are made KS are constantly
changing
9-5
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Developing Unit Input
Standards
1
• Standard Costing Systems are used for:
• Cost management
• Planning and control
• Decision making
• Product costing
9-6
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Developing Unit Input
Standards
1
9-7
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2
Standard Cost Sheets
See Cornerstone 9-1
9-8
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Variance Analysis for Direct
Materials and Direct Labour
3
• A flexible budget is constructed using AQ multiplied
by Standard Price. It can be used to identify the direct
material or direct labour input costs that should have
been incurred for the actual level of activity.
• Total budget variance: The difference between the
actual cost of the input and its standard cost
Total budget cost = (AP × AQ) – (SP × SQ)
9-9
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Variance Analysis for Direct
Materials and Direct Labour
3
Price (Rate) Variance
Difference between actual and standard unit prices of
an input multiplied by actual quantity of inputs
Usage (Efficiency) Variance
Difference between actual and standard quantity of
inputs multiplied by standard unit price of the input
Unfavourable (U) Variance
Occurs whenever actual prices or usage of inputs are greater
than standard prices or usage
Favourable (F) Variance
Occurs whenever actual prices or usage of inputs are less than
standard prices or usage
9-10
Copyright © 2013 Nelson Education Ltd.
Variance Analysis for Direct
Materials and Direct Labour
3
Direct Materials Price Variance (MPV)
Difference between what was actually paid for direct
materials and what should have been paid for the
actual quantity bought at the standard price
MPV = (AP × AQ) – (SP × AQ)
 If the actual price is greater than standard, the MPV
is unfavourable
 If the actual price is less than the standard price, the
MPV is favourable
9-11
Copyright © 2013 Nelson Education Ltd.
Variance Analysis for Direct
Materials and Direct Labour
3
Direct Materials Usage Variance (MUV)
Difference between the amount of materials actually
used and what should have been used for the actual
quantity of units produced multiplied by the standard
price
MUV = (SP X AQ) – (SP X SQ)
If the actual quantity is greater than standard, the
MUV is unfavourable
If the actual quantity is less than the standard
quantity, the MUV is favourable
See Cornerstone 9-2
9-12
Copyright © 2013 Nelson Education Ltd.
Variance Analysis for Direct
Materials and Direct Labour
3
Timing of the Direct Material Variance Computation
Direct materials variance can be computed at one
of two points:
1. When materials are purchased (price and quantity
variance)
2. When direct materials are issued for use in
production (price and USAGE variance)
9-13
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Variance Analysis for Direct
Materials and Direct Labour
3
9-14
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Variance Analysis for Direct
Materials and Direct Labour
3
Accounting Entries for the
Direct Materials Price and Usage Variances
assuming unfavourable variances
Materials
Direct Materials Price Variance
Accounts Payable
(SP × AQ)
(AP – SP)AQ
Work in Process
Direct Materials Usage Variance
Materials
(SQ × SP)
(AQ – AQ)SP
(AP × AQ)
(AQ× SP)
9-15
Copyright © 2013 Nelson Education Ltd.
Variance Analysis for Direct
Materials and Direct Labour
3
Direct Labour Rate Variance (LRV)
Computes difference between what was paid to direct
labourers and what should have been paid
LRV = (AR × AH) – (SR × AH)
Direct Labour Efficiency Variance (LEV)
Measures difference between the direct labour hours
that were actually used and the direct labour hours
that should have been used
LEV = (AH × SR) – (SH × SR)
See Cornerstone 9-3
9-16
Copyright © 2013 Nelson Education Ltd.
Variance Analysis for Direct
Materials and Direct Labour
3
Accounting Entry for the
Direct Labour Rate and Efficiency Variance
(assuming a favourable direct labour rate variance and an
unfavourable labour efficiency variance)
Work in Process
(SH × SR)
Direct Labour Efficiency Variance (AH –SH)SR
Direct Labour Rate Variance
Wages Payable
(AH – SR) AH
(AH × AR)
9-17
Copyright © 2013 Nelson Education Ltd.
Variance Analysis for Direct
Materials and Direct Labour
3
Investigating Direct Materials and Labour
Variances
• Random variations around the standard are expected
•
Management should establish an acceptable range of
performance and/or a minimum absolute amount or a
percentage deviation over which investigation is warranted
• Acceptable range is the standard, plus or minus one
allowable deviation
•
Upper control limit is the standard plus the allowable
deviation and the lower control limit is the standard minus
the allowable deviation
See Cornerstone 9-4
9-18
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Variance Analysis for
Overhead Costs
4
Variable Overhead Spending Variance
•
Measures the aggregate effect of differences in the actual
variable overhead rate and the standard variable
overhead rate
VOSV = (AVOR × AH) – (SVOR × AH)
(Variable overhead is assumed to vary as production volume changes—variable
overhead changes in proportion to changes in the direct labour hours used)
Variable Overhead Efficiency Variance
•
Measures change in variable overhead consumption that
occur because of efficient/inefficient use of direct labour
VOEV = (SVOR × AH) – (SVOR × SH)
See Cornerstone 9-7
9-19
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Variance Analysis for
Overhead Costs
4
9-20
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Variance Analysis for
Overhead Costs
4
9-21
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Variance Analysis for
Overhead Costs
4
• Fixed Overhead Spending Variance
• Difference between the actual fixed
overhead and the budgeted fixed
overhead
FOSV = AFOH – BFOH
• If less (more) is spent on fixed overhead
items than was budgeted, the spending
variance is favourable (unfavourable)
See Cornerstone 9-8
9-22
Copyright © 2013 Nelson Education Ltd.
Variance Analysis for
Overhead Costs
4
• Fixed Overhead Volume Variance
•
Difference between budgeted fixed overhead and
applied fixed overhead
Volume variance = Budgeted fixed overhead
– Applied fixed overhead
•
If actual production is less than budgeted production,
the volume variance will be unfavourable
• If actual production is more than budgeted production,
the volume variance will be favourable
• The difference is due solely to the differences in
production or planned utilization of capacity
See Cornerstone 9-8
9-23
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Variance Analysis for
Overhead Costs
4
9-24
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Variance Analysis for
Overhead Costs
4
Accounting Entries for Overhead Variances
1. To recognize the incurrence of actual overhead:
Variable Overhead Control
Fixed Overhead Control
Miscellaneous Accounts
2. To recognize the variances:
Fixed Overhead Control
Variable Overhead Efficiency Variance
Fixed Overhead Spending Variance
Variable Overhead Control
Variable Overhead Spending Variance
Fixed Overhead Volume Variance
9-25
Copyright © 2013 Nelson Education Ltd.
Variance Analysis for
Overhead Costs
4
Accounting Entries for Overhead Variances
(continued)
3. To close the variances to Cost of Goods Sold:
Fixed Overhead Volume Variance
Variable Overhead Spending Variance
Cost of Goods Sold
Cost of Goods Sold
Variable Overhead Efficiency Variance
Fixed Overhead Spending Variance
9-26
Copyright © 2013 Nelson Education Ltd.
Variance Analysis for
Overhead Costs
4
9-27
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Variance Analysis for
Overhead Costs
4
9-28
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Mix and Yield Variances:
Materials and Labour
5
• Mix Variance
• Created whenever the actual mix of inputs
differs from the standard mix
• Yield Variance
• Occurs whenever the actual yield (output)
differs from the standard yield
9-29
Copyright © 2013 Nelson Education Ltd.
Mix and Yield Variances:
Materials and Labour
5
Direct Materials Mix Variance
• Difference in the standard cost of the actual mix of
inputs use and the standard cost of the mix of
inputs that should have been used
• If relatively more of a more expensive input is
used, the mix variance will be unfavourable. If
relatively more of a less expensive input is used,
the mix variance will be favourable.
Mix Variance =
 ( AQi  SMi)SPi
See Cornerstone 9-9
9-30
Copyright © 2013 Nelson Education Ltd.
Mix and Yield Variances:
Materials and Labour
5
Direct Materials Yield Variance
• Designed to show the extent to which the amount of
input resulted in the expected amount of output
Yield variance = (Standard yield – Actual yield) SPy
where:
Standard yield – Yield ratio × Total actual inputs
Yield ratio = Total output/Total input
SPy = Standard cost of the yield
(similar equations for labour)
See Cornerstone 9-10
9-31
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End of
Chapter 9
9-32