16-1
16
Standard Costing,
Variance Analysis, and
Kaizen Costing
Student Tutorial
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-2
Using Standard-Costing Systems
for Control
STANDARDCOST
COST
STANDARD
budget for
forthe
the
aabudget
productionof
of
production
oneunit
unit of
of
one
product or
or
product
service
service
ACTUALCOST
COST
ACTUAL
used in
in the
the
used
productionof
of
production
theproduct
product or
or
the
service
service
COSTVARIANCE
VARIANCE
COST
thedifference
difference
the
between the
the
between
actualcost
cost and
and
actual
thestandard
standard cost
cost
the
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-3
Management by Exception
Takethe
thetime
timeto
toinvestigate
investigateonly
onlysignificant
significant cost
cost
Take
variances
variances
Whatis
issignificant?
significant?
What
Dependson
on
Depends
theSize
Sizeof
of the
the
the
Organization
Organization
Dependson
on
Depends
theProduction
Production
the
Process
Process
Dependson
on
Depends
theType
Typeof
of the
the
the
Organization
Organization
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-4
Setting Standards
Analysis
Analysisof
of
Historical
Historical
Data
Data
What
WhatDID
DID
the
the
product
product
cost?
cost?
Task
Task
Analysis
Analysis
What
What
SHOULD
SHOULD
the
the product
product
cost?
cost?
AACombined
Combined
Approach
Approach
Irwin/McGraw-Hill Ryerson
Used
Usedin
inaamature
mature
production
productionProcess
Process
Analyze
Analyzethe
theprocess
process
of
ofmanufacturing
manufacturing
the
theproduct
product
Analyze
Analyzethe
theprocess
processfor
forthe
thestep
stepthat
that
has
haschanged,
changed,but
butuse
usehistorical
historicaldata
data
for
forthe
thesteps
steps that
thathave
havenot
notchanged
changed
©McGraw-Hill Ryerson Limited, 2001
Perfection Vs. Practical Standards:
A Behavioural Issue
16-5
PERFECTION
PERFECTION
STANDARD
STANDARD
PRACTICALOR
OR
PRACTICAL
ATTAINABLE
ATTAINABLE
STANDARDS
STANDARDS
Onethat
thatcan
canonly
onlybe
be
One
attainedunder
undernear
near
attained
perfectconditions
conditions
perfect
Tightas
aspractical,
practical,
Tight
butstill
stillare
areexpected
expected
but
tobe
beattained
attained
to
•Peakefficiency
efficiency
•Peak
•Lowestpossible
possible
•Lowest
inputprices
prices
input
•best-qualitymaterial
material
•best-quality
•nodisruption
disruptionin
in
•no
production
production
•Occasionalmachine
machine
•Occasional
breakdowns
breakdowns
•Normalamounts
amounts
•Normal
ofraw
rawmaterial
material
of
waste
waste
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-6
Use Of Standards
Standards
Standardscan
canbe
beused
usedby
byservice
servicefirms,
firms,nonprofit
nonprofit
organizations,
organizations,and
andgovernmental
governmentalunits
units
COST
COST
BENEFITS
BENEFITS
Implementing
Implementingand
andmaintaining
maintainingcost
coststandards
standardscan
can
be
betime-consuming,
time-consuming,labour-intensive,
labour-intensive,and
andexpensive.
expensive.
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-7
Cost Variance Analysis
DIRECT
DIRECTMATERIAL
MATERIAL STANDARDS
STANDARDS
The total amount of material
normally required to produce
a finished product including
allowances for normal waste
or efficiency
Koala
KoalaCamp
Camp
Gear
GearCompany
Company
The total delivered
cost, after
subtracting
any purchase
discounts
Irwin/McGraw-Hill Ryerson
Standard quantity:
Fabric in finished
product
11 sq. meters
Allow ance for
normal waste
1 sq. meters
Total standard
quantity required
per tent
12 sq. meters
Purchase price per sq.
meter of fa bric (ne t of
purcha se discounts)
$7.75
Tra nsporta tion cost pe r
sq. meter
0.25
Tota l standa rd price pe r
sq. meter of fa bric
$8. 00
©McGraw-Hill Ryerson Limited, 2001
16-8
Cost Variance Analysis
DIRECT
DIRECTlabour
labourSTANDARDS
STANDARDS
The number of
labour hours
normally needed
to manufacture
one unit of
product
The total hourly cost of
compensation, including
fringe benefits
Standard
quantity:
Direct labour
required per tent
Standard rate:
Hourly w age rate
Fringe benefits
(20% of w ages)
Total standard
rate per hour
2 hours
$15
3
$18
Koala
KoalaCamp
Camp
Gear
GearCompany
Company
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
Standard Costs Given Actual
Output
The standard cost for
the direct-material
and direct-labour inputs
is based upon Koala’s
actual output of
3,000 tents
They should incur
a cost of $396,000
($288,000 + $108,000)
to make 3,000 tents
Koala
KoalaCamp
Camp
Gear
GearCompany
Company
Irwin/McGraw-Hill Ryerson
16-9
Direct material:
Standard direct-material
cost per tent (12 sq.
meters x $8 pr sq. meter)
Actual output
Total standard directmaterial cost
Direct labour:
Direct labour cost
per tent (2 hours x
$18 per hour)
Actual output
Total standard
direct-labour cost
$96
x3,000
$288,000
$36
X 3,000
$108,000
©McGraw-Hill Ryerson Limited, 2001
16-10
Direct-Material Variances
Direct-material
Direct-materialprice
pricevariance
variance==(PQ
(PQXXAP)
AP)--(PQ
(PQXXSP)
SP)==PQ(AP
PQ(AP--SP)
SP)
where:
where: PQ
PQ==Quantity
Quantitypurchased
purchased
AP
AP==Actual
Actualprice
price
SP
SP==Standard
Standardprice
price
Direct-material
Direct-materialquantity
quantityvariance
variance==(AQ
(AQXXSP)
SP)--(SQ
(SQXXSP)
SP)
==SQ(AQ
SQ(AQ--SQ)
SQ)
where:
where:SP
SP==Standard
StandardPrice
Price
AQ
AQ==Actual
Actualquantity
quantityused
used
SQ
SQ==Standard
Standardquantity
quantityallowed
allowed
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-11
Analysis Of Material Variances
Koala Camp Gear
Actual
quantity
x
40,000 sq.
meters x
purchased
Actual
price
$8.15 per
sq. meter
Actual
quantity
x
Standard
price
40,000 sq.
$8.00 per
meters x
sq. meter
purchased
Standard
Standard
x
quantity
price
36,000
$8.00 per
sq. meters x
sq. meter
allowed
Compute
Computethe
theMaterials
MaterialsPrice
Price
Variance.
Variance.
(see
(seetextbook
textbook for
fororiginal
originaldata
data
related
relatedto
toKoala
KoalaCamp
CampGear)
Gear)
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-12
Analysis Of Material Variances
Koala Camp Gear
Actual
quantity
Actual
price
x
40,000 sq.
meters x
purchased
$8.15 per
sq. meter
$326,000
Actual
quantity
x
Standard
price
40,000 sq.
$8.00 per
meters x
sq. meter
purchased
Standard
Standard
x
quantity
price
36,000
$8.00 per
sq. meters x
sq. meter
allowed
$320,000
$6,000U
Direct-material price variance
Compute
Computethe
theMaterials
Materials
Quantity
QuantityVariance.
Variance.
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-13
Analysis Of Material Variances
Koala Camp Gear
Actual
quantity
Actual
price
x
40,000 sq.
meters x
purchased
$8.15 per
sq. meter
$326,000
Actual
quantity
Standard
price
x
40,000 sq.
$8.00 per
meters x
sq. meter
purchased
$320,000
Standard
Standard
x
quantity
price
36,000
$8.00 per
sq. meters x
sq. meter
allowed
$288,000
$6,000U
Direct-material price variance
36,400 sq.
meters
used
$8.00
per sq.
meter
$291,200
Irwin/McGraw-Hill Ryerson
$3,200U
Directmaterial
quantity
variance
©McGraw-Hill Ryerson Limited, 2001
16-14
Analysis Of Material Variances
Koala Camp Gear
What
Whatcaused
caused Koala
Koalato
tospend
spendmore
morethan
thanthe
the
anticipated
anticipatedamount
amounton
ondirect
direct material?
material?
What
Whatcaused
caused Koala
Koalato
tospend
spendmore
morethan
thanthe
the
anticipated
anticipatedamount
amounton
ondirect
direct material?
material?
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-15
Analysis Of Material Variances
Koala Camp Gear
What
Whatcaused
caused Koala
Koalato
tospend
spendmore
morethan
thanthe
the
anticipated
anticipatedamount
amounton
ondirect
direct material?
material?
First,
First,the
thecompany
companypurchased
purchasedfabric
fabricat
ataahigher
higherprice
price($8.15
($8.15per
per
square
squaremeter)
meter)than
thanthe
thestandard
standardprice
price($8.00
($8.00per
persquare
squaremeter).
meter).
What
Whatcaused
caused Koala
Koalato
tospend
spendmore
morethan
thanthe
the
anticipated
anticipatedamount
amounton
ondirect
direct material?
material?
Second,
Second,the
thecompany
companyused
usedmore
more fabric
fabricthan
thanthe
thestandard
standardprice.
price.
(36,400
(36,400sq.
sq.meters
metersactually
actuallyused,
used,instead
insteadof
ofthe
thestandard
standardamount
amountof
of
36,000
36,000sq.
sq.meters)
meters)
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-16
Direct-Material Variances - Question #1
Standards:
Standards:
Material
5.0feet
feetper
perunit
unit @
@$10.00
$10.00per
perfoot
foot
Material
5.0
Actual:
Actual:
Production 10,000
10,000units
units
Production
Material
49,000ftft used,
used,51,000
51,000ftft purchased
purchasedat
at $9.50
$9.50
Material
49,000
perfoot
foot
per
Thematerial
materialprice
pricevariance
varianceis
is
The
A. $24,500
$24,500(F)
(F)
A.
B. $25,000
$25,000(F)
(F)
B.
C. $25,000
$25,000(U)
(U)
C.
D. $25,500
$25,500(F)
(F)
D.
E. $25,500
$25,500(U)
(U)
E.
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-17
Direct-Material Variances - Question #1
Standards:
Standards:
Material
5.0feet
feetper
perunit
unit @
@$10.00
$10.00per
perfoot
foot
Material
5.0
Actual:
Actual:
Production 10,000
10,000units
units
Production
Material
49,000ftft used,
used,51,000
51,000ftft purchased
purchasedat
at $9.50
$9.50
Material
49,000
perfoot
foot
per
Thematerial
materialprice
pricevariance
varianceis
is
The
A. $24,500
$24,500(F)
(F)
A.
The
Themodel
model is:
is:
B. $25,000
$25,000(F)
(F)
B.
C. $25,000
$25,000(U)
(U) Actual Material Used × (Actual
C.
Actual Material Used × (Actual
D. $25,500
$25,500(F)
(F)
D.
Price
Price-- Standard
Standard Price)
Price)
E.
$25,500
(U)
E. $25,500 (U)
Try
Tryagain!
again!
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-18
Direct-Material Variances - Question #1
Standards:
Standards:
Material
5.0feet
feetper
perunit
unit @
@$10.00
$10.00per
perfoot
foot
Material
5.0
Actual:
Actual:
Production 10,000
10,000units
units
Production
Material
49,000ftft used,
used,51,000
51,000ftft purchased
purchasedat
at $9.50
$9.50
Material
49,000
perfoot
foot
per
Thematerial
materialprice
pricevariance
varianceis
is
The
A. $24,500
$24,500(F)
(F)
A.
The
Themodel
model is:
is:
B. $25,000
$25,000(F)
(F)
B.
C. $25,000
$25,000(U)
(U) Actual Material Used × (Actual
C.
Actual Material Used × (Actual
D. $25,500
$25,500(F)
(F)
D.
Price
Price-- Standard
Standard Price)
Price)
E.
$25,500
(U)
E. $25,500 (U)
Try
Tryagain!
again!
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-19
Direct-Material Variances - Question #1
Standards:
Standards:
Material
5.0feet
feetper
perunit
unit @
@$10.00
$10.00per
perfoot
foot
Material
5.0
Actual:
Actual:
Production 10,000
10,000units
units
Production
Material
49,000ftft used,
used,51,000
51,000ftft purchased
purchasedat
at $9.50
$9.50
Material
49,000
perfoot
foot
per
Thematerial
materialprice
pricevariance
varianceis
is
The
A. $24,500
$24,500(F)
(F)
A.
The
Themodel
model is:
is:
B. $25,000
$25,000(F)
(F)
B.
C. $25,000
$25,000(U)
(U)
C.
Actual
ActualMaterial
MaterialPurchased
Purchased××
D. $25,500
$25,500(F)
(F) (Actual Price - Standard Price)
D.
(Actual Price - Standard Price)
E.
$25,500
(U)
E. $25,500 (U)
Try
Tryagain!
again!
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-20
Direct-Material Variances - Question #1
Standards:
Standards:
Material
5.0feet
feetper
perunit
unit @
@$10.00
$10.00per
perfoot
foot
Material
5.0
Actual:
Actual:
Production 10,000
10,000units
units
Production
Material
49,000ftft used,
used,51,000
51,000ftft purchased
purchasedat
at $9.50
$9.50
Material
49,000
perfoot
foot
per
Thematerial
materialprice
pricevariance
varianceis
is
The
A. $24,500
$24,500(F)
(F)
A.
Direct-material
Direct-materialprice
pricevariance
variance==
B.
$25,000
(F)
B. $25,000 (F)
(PQ
XXAP)
--(PQ
XXSP)
==
(PQ
AP)
(PQ
SP)
C. $25,000
$25,000(U)
(U)
C.
(51,000
(51,000XX$9.50)
$9.50)--(51,000
(51,000XX$10.00)
$10.00)==
D. $25,500
$25,500(F)
(F)
$25,500
D.
$25,500FF
E. $25,500
$25,500(U)
(U)
E.
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-21
Direct-Material Variances - Question #1
Standards:
Standards:
Material
5.0feet
feetper
perunit
unit @
@$10.00
$10.00per
perfoot
foot
Material
5.0
Actual:
Actual:
Production 10,000
10,000units
units
Production
Material
49,000ftft used,
used,51,000
51,000ftft purchased
purchasedat
at $9.50
$9.50
Material
49,000
perfoot
foot
per
Thematerial
materialprice
pricevariance
varianceis
is
The
A. $24,500
$24,500(F)
(F)
A.
Didthey
theydo
dobetter
betterthan
thanbudget
budget
B. $25,000
$25,000(F)
(F) Did
B.
(F)or
orworse
worsethan
thanbudget
budget (U)?
(U)?
C. $25,000
$25,000(U)
(U) (F)
C.
D. $25,500
$25,500(F)
(F)
D.
Try
Tryagain!
again!
E.
$25,500
(U)
E. $25,500 (U)
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-22
Direct-Material Variances - Question #2
Standards:
Standards:
Material
5.0feet
feetper
perunit
unit @
@$10.00
$10.00per
perfoot
foot
Material
5.0
Actual:
Actual:
Production
10,000units
units
Production
10,000
Material
49,000feet
feet used,
used,51,000
51,000feet
feetpurchased
purchased
Material
49,000
at $9.50
$9.50per
perfoot
foot
at
Thematerial
materialquantity
quantityvariance
varianceis
is
The
A. $10,000
$10,000(F)
(F)
A.
B. $10,000
$10,000(U)
(U)
B.
C. $20,000
$20,000(U)
(U)
C.
D. $20,000
$20,000(F)
(F)
D.
E. $19,500
$19,500(U)
(U)
E.
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-23
Direct-Material Variances - Question #2
Standards:
Standards:
Material
5.0feet
feetper
perunit
unit @
@$10.00
$10.00per
perfoot
foot
Material
5.0
Actual:
Actual:
Production
10,000units
units
Production
10,000
Material
49,000feet
feet used,
used,51,000
51,000feet
feetpurchased
purchased
Material
49,000
at $9.50
$9.50per
perfoot
foot
at
Thematerial
materialquantity
quantityvariance
varianceis
is
The
A. $10,000
$10,000(F)
(F)
A.
(AQ
(AQXXSP)
SP)--(SQ
(SQXXSP)
SP)==
B.
$10,000
(U)
B. $10,000 (U)
(49,000
(49,000XX$10.00)
$10.00)--(50,000
(50,000XX$10.00)
$10.00)==
C. $20,000
$20,000(U)
(U)
C.
$10.00
$10.00(49,000
(49,000--50,000)
50,000)==
D. $20,000
$20,000(F)
(F)
$10,000
D.
$10,000(F)
(F)
E. $19,500
$19,500(U)
(U)
E.
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-24
Direct-Material Variances - Question #2
Standards:
Standards:
Material
5.0feet
feetper
perunit
unit @
@$10.00
$10.00per
perfoot
foot
Material
5.0
Actual:
Actual:
Production
10,000units
units
Production
10,000
Material
49,000feet
feet used,
used,51,000
51,000feet
feetpurchased
purchased
Material
49,000
at $9.50
$9.50per
perfoot
foot
at
Thematerial
materialquantity
quantityvariance
varianceis
is
The
A. $10,000
$10,000(F)
(F)
A.
The
model
is:
The
model
is:
B.
$10,000
(U)
B. $10,000 (U)
C. $20,000
$20,000(U)
(U)
Actual
C.
ActualPrice
Price×× (Actual
(ActualQty
Qty
D. $20,000
$20,000(F)
(F) Used
D.
Used-- Standard
Standard Qty
QtyRequired)
Required)
E. $19,500
$19,500(U)
(U)
E.
Try
Tryagain!
again!
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-25
Direct-Material Variances - Question #2
Standards:
Standards:
Material
5.0feet
feetper
perunit
unit @
@$10.00
$10.00per
perfoot
foot
Material
5.0
Actual:
Actual:
Production
10,000units
units
Production
10,000
Material
49,000feet
feet used,
used,51,000
51,000feet
feetpurchased
purchased
Material
49,000
at $9.50
$9.50per
perfoot
foot
at
Thematerial
materialquantity
quantityvariance
varianceis
is
The
A. $10,000
$10,000(F)
(F)
A.
The
model
is:
The
model
is:
B.
$10,000
(U)
B. $10,000 (U)
C. $20,000
$20,000(U)
(U)
Actual
C.
ActualPrice
Price×× (Actual
(ActualQty
Qty
D. $20,000
$20,000(F)
(F) Used
D.
Used-- Standard
Standard Qty
QtyRequired)
Required)
E. $19,500
$19,500(U)
(U)
E.
Try
Tryagain!
again!
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-26
Direct-Material Variances - Question #2
Standards:
Standards:
Material
5.0feet
feetper
perunit
unit @
@$10.00
$10.00per
perfoot
foot
Material
5.0
Actual:
Actual:
Production
10,000units
units
Production
10,000
Material
49,000feet
feet used,
used,51,000
51,000feet
feetpurchased
purchased
Material
49,000
at $9.50
$9.50per
perfoot
foot
at
Thematerial
materialquantity
quantityvariance
varianceis
is
The
A. $10,000
$10,000(F)
(F)
A.
The
model
is:
The
model
is:
B.
$10,000
(U)
B. $10,000 (U)
C. $20,000
$20,000(U)
(U)
Actual
C.
ActualPrice
Price×× (Actual
(ActualQty
Qty
D. $20,000
$20,000(F)
(F) Used
D.
Used-- Standard
Standard Qty
QtyRequired)
Required)
E. $19,500
$19,500(U)
(U)
E.
Try
Tryagain!
again!
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-27
Direct-Material Variances - Question #2
Standards:
Standards:
Material
5.0feet
feetper
perunit
unit @
@$10.00
$10.00per
perfoot
foot
Material
5.0
Actual:
Actual:
Production
10,000units
units
Production
10,000
Material
49,000feet
feet used,
used,51,000
51,000feet
feetpurchased
purchased
Material
49,000
at $9.50
$9.50per
perfoot
foot
at
Thematerial
materialquantity
quantityvariance
varianceis
is
The
A. $10,000
$10,000(F)
(F)
A.
The
model
is:
The
model
is:
B.
$10,000
(U)
B. $10,000 (U)
C. $20,000
$20,000(U)
(U)
Actual
C.
ActualPrice
Price×× (Actual
(ActualQty
Qty
D. $20,000
$20,000(F)
(F) Used
D.
Used-- Standard
Standard Qty
QtyRequired)
Required)
E. $19,500
$19,500(U)
(U)
E.
Try
Tryagain!
again!
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-28
Direct-labour Variances
Direct-labour
Direct-labourrate
ratevariance
variance==(AH
(AHXXAR)
AR)--(AH
(AHXXSR)
SR)==
AH(AR
AH(AR--SR)
SR) where:
where:
AH
AH==Actual
Actualhours
hoursused
used
AR
AR==Actual
Actualrate
rateper
perhour
hour
SR
SR==Standard
Standardrate
rateper
perhour
hour
Direct-labour
Direct-labourefficiency
efficiencyvariance
variance==(AH
(AHXXSR)
SR)--(SH
(SHXXSR)
SR)==
SR(AH
SR(AH--SH)
SH)
where:
where:SR
SR==Standard
Standardrate
rateper
perhour
hour
AH
AH==Actual
Actualhours
hoursused
used
SH
SH==Standard
Standardhours
hoursallowed
allowed
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
Analysis Of Direct-labour
Variances
Koala Camp Gear
Actual labour Cost
Actual
Actual
X
hours
rate
5,900
hours
used
X
Irwin/McGraw-Hill Ryerson
$19
per
hour
Actual
hours
5,900
hours
used
X
X
Standard
price
$18
per
hour
16-29
Standard labour Cost
Standard
Standard
X
rate
rate
6,000
hours
allowed
X
$18
per
hour
©McGraw-Hill Ryerson Limited, 2001
Analysis Of Direct-labour
Variances
Koala Camp Gear
Actual labour Cost
Actual
Actual
X
hours
rate
5,900
hours
used
X
$19
per
hour
Actual
hours
5,900
hours
used
$112,100
X
Standard
price
X
$18
per
hour
$106,200
$5,900 Unfavourable
Direct-labour
rate variance
16-30
Standard labour Cost
Standard
Standard
X
rate
rate
6,000
hours
allowed
X
$18
per
hour
$108,000
$1,800 favourable
Direct-labour
efficiency variance
$4,100 Unfavourable
Irwin/McGraw-Hill Ryerson
Direct-labour variance
©McGraw-Hill Ryerson Limited, 2001
Analysis Of Direct-labour
Variances
Koala
Camp
Gear
What caused Koala to spend more than the
16-31
What caused Koala to spend more than the
anticipated
anticipatedamount
amounton
ondirect
direct labour?
labour?
What
Whatcaused
caused Koala
Koalato
tospend
spendmore
morethan
thanthe
the
anticipated
anticipatedamount
amounton
ondirect
direct labour?
labour?
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
Analysis Of Direct-labour
Variances
Koala
Camp
Gear
What caused Koala to spend more than the
16-32
What caused Koala to spend more than the
anticipated
anticipatedamount
amounton
ondirect
direct labour?
labour?
First,
First,the
thecompany
companyincurred
incurred aacost
costof
of$19
$19per
perhour
hourfor
fordirect
direct
labour
labourinstead
insteadof
ofthe
thestandard
standard amount
amountof
of$18
$18per
perhour
hour
What
Whatcaused
caused Koala
Koalato
tospend
spendmore
morethan
thanthe
the
anticipated
anticipatedamount
amounton
ondirect
direct labour?
labour?
On
Onthe
theother
otherhand,
hand,Koala
Koalaused
usedonly
only5,900
5,900hours
hoursof
ofdirect
directlabour,
labour,
which
whichis
isless
lessthan
thanthe
thestandard
standardquantity
quantityof
of6,000
6,000hours,
hours,given
given
actual
actualoutput
outputof
of3,000
3,000tents.
tents. This
Thisincreased
increasedefficiency
efficiencydoes
doesnot
not
fully
fullyoffset
offsetthe
theunexpectedly
unexpectedlyhigh
highwage
wagerate.
rate.
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-33
Direct-labour Variances - Question #3
Standards:
Standards:
labour
labour 22hours
hoursper
perunit
unit@
@$15.00
$15.00per
perhour
hour
Actual:
Actual:
Production
Production 10,000
10,000units
units
labour
labour21,000
21,000hours
hours@
@$14.50
$14.50per
perhour
hour
The
Thelabour
labourrate
ratevariance
varianceis
is
A.
A. $25,000
$25,000(U)
(U)
B.
B. $25,000
$25,000(F)
(F)
C.
C. $10,500
$10,500(U)
(U)
D.
D. $10,500
$10,500(F)
(F)
E.
E. $4,400
$4,400(F)
(F)
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-34
Direct-labour Variances - Question #3
Standards:
Standards:
labour
labour 22hours
hoursper
perunit
unit@
@$15.00
$15.00per
perhour
hour
Actual:
Actual:
Production
Production 10,000
10,000units
units
labour
labour21,000
21,000hours
hours@
@$14.50
$14.50per
perhour
hour
The
Thelabour
labourrate
ratevariance
varianceis
is
A.
A. $25,000
$25,000(U)
(U)
Remember,
Remember,the
thelabour
labour
B.
$25,000
(F)
B. $25,000 (F)
Rate
RateVariance
Varianceis
is
C.
computed
C. $10,500
$10,500(U)
(U)
computedas:
as:
(AH
D.
(AHXXAR)
AR)--(AH
(AHXXSR)
SR)
D. $10,500
$10,500(F)
(F)
TRY
TRYAGAIN!
AGAIN!
E.
E. $4,400
$4,400(F)
(F)
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-35
Direct-labour Variances - Question #3
Standards:
Standards:
labour
labour 22hours
hoursper
perunit
unit@
@$15.00
$15.00per
perhour
hour
Actual:
Actual:
Production
Production 10,000
10,000units
units
labour
labour21,000
21,000hours
hours@
@$14.50
$14.50per
perhour
hour
The
Thelabour
labourrate
ratevariance
varianceis
is
A.
A. $25,000
$25,000(U)
(U)
Remember,
Remember,the
thelabour
labour
B.
$25,000
(F)
B. $25,000 (F)
Rate
RateVariance
Varianceis
is
C.
computed
C. $10,500
$10,500(U)
(U)
computedas:
as:
(AH
D.
(AHXXAR)
AR)--(AH
(AHXXSR)
SR)
D. $10,500
$10,500(F)
(F)
TRY
TRYAGAIN!
AGAIN!
E.
E. $4,400
$4,400(F)
(F)
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-36
Direct-labour Variances - Question #3
Standards:
Standards:
labour
labour 22hours
hoursper
perunit
unit@
@$15.00
$15.00per
perhour
hour
Actual:
Actual:
Production
Production 10,000
10,000units
units
labour
labour21,000
21,000hours
hours@
@$14.50
$14.50per
perhour
hour
The
Thelabour
labourrate
ratevariance
varianceis
is
A.
A. $25,000
$25,000(U)
(U)
Remember,
Remember,the
thelabour
labour
B.
$25,000
(F)
B. $25,000 (F)
Rate
RateVariance
Varianceis
is
C.
computed
C. $10,500
$10,500(U)
(U)
computedas:
as:
(AH
D.
(AHXXAR)
AR)--(AH
(AHXXSR)
SR)
D. $10,500
$10,500(F)
(F)
TRY
TRYAGAIN!
AGAIN!
E.
E. $4,400
$4,400(F)
(F)
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-37
Direct-labour Variances - Question #3
Standards:
Standards:
labour
labour 22hours
hoursper
perunit
unit@
@$15.00
$15.00per
perhour
hour
Actual:
Actual:
Production
Production 10,000
10,000units
units
labour
labour21,000
21,000hours
hours@
@$14.50
$14.50per
perhour
hour
The
Thelabour
labourrate
ratevariance
varianceis
is
A.
A. $25,000
$25,000(U)
(U)
(AH
(AHXXAR)
AR)--(AH
(AHXXSR)
SR)==
B.
B. $25,000
$25,000(F)
(F)
(21,000
(21,000XX$14.50)
$14.50)--(21,000
(21,000XX$15.00)
$15.00)==
C.
21,000($14.50
C. $10,500
$10,500(U)
(U)
21,000($14.50--$15.00)
$15.00)==
$10,500
D.
$10,500(F)
(F)
D. $10,500
$10,500(F)
(F)
E.
E. $4,400
$4,400(F)
(F)
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-38
Direct-labour Variances - Question #3
Standards:
Standards:
labour
labour 22hours
hoursper
perunit
unit@
@$15.00
$15.00per
perhour
hour
Actual:
Actual:
Production
Production 10,000
10,000units
units
labour
labour21,000
21,000hours
hours@
@$14.50
$14.50per
perhour
hour
The
Thelabour
labourrate
ratevariance
varianceis
is
A.
A. $25,000
$25,000(U)
(U)
Remember,
Remember,the
thelabour
labour
B.
$25,000
(F)
B. $25,000 (F)
Rate
RateVariance
Varianceis
is
C.
computed
C. $10,500
$10,500(U)
(U)
computedas:
as:
(AH
D.
(AHXXAR)
AR)--(AH
(AHXXSR)
SR)
D. $10,500
$10,500(F)
(F)
TRY
TRYAGAIN!
AGAIN!
E.
E. $4,400
$4,400(F)
(F)
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-39
Direct-labour Variances - Question #4
Standards:
Standards:
labour
labour 22hours
hoursper
perunit
unit@
@$15.00
$15.00per
perhour
hour
Actual:
Actual:
Production
Production 10,000
10,000units
units
labour
labour21,000
21,000hours
hours@
@$14.50
$14.50per
perhour
hour
The
Thelabour
labourefficiency
efficiencyvariance
varianceis
is
A.
A. $25,000
$25,000(U)
(U)
B.
B. $14,500
$14,500(F)
(F)
C.
C. $14,500
$14,500(U)
(U)
D.
D. $15,000
$15,000(F)
(F)
E.
E. $15,000
$15,000(U)
(U)
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-40
Direct-labour Variances - Question #4
Standards:
Standards:
labour
labour 22hours
hoursper
perunit
unit@
@$15.00
$15.00per
perhour
hour
Actual:
Actual:
Production
Production 10,000
10,000units
units
labour
labour21,000
21,000hours
hours@
@$14.50
$14.50per
perhour
hour
The
Thelabour
labourefficiency
efficiencyvariance
varianceis
is
A.
A. $25,000
$25,000(U)
(U)
Remember,
Remember,the
thelabour
labour
B.
$14,500
(F)
B. $14,500 (F)
Efficiency
EfficiencyVariance
Varianceis
is
C.
$14,500
(U)
computed
C. $14,500 (U)
computedas:
as:
D.
(AH
D. $15,000
$15,000(F)
(F)
(AHXXSR)
SR)--(SH
(SHXXSR)
SR)
TRY
E.
TRYAGAIN!
AGAIN!
E. $15,000
$15,000(U)
(U)
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-41
Direct-labour Variances - Question #4
Standards:
Standards:
labour
labour 22hours
hoursper
perunit
unit@
@$15.00
$15.00per
perhour
hour
Actual:
Actual:
Production
Production 10,000
10,000units
units
labour
labour21,000
21,000hours
hours@
@$14.50
$14.50per
perhour
hour
The
Thelabour
labourefficiency
efficiencyvariance
varianceis
is
A.
A. $25,000
$25,000(U)
(U)
Remember,
Remember,the
thelabour
labour
B.
$14,500
(F)
B. $14,500 (F)
Efficiency
EfficiencyVariance
Varianceis
is
C.
$14,500
(U)
computed
C. $14,500 (U)
computedas:
as:
D.
(AH
D. $15,000
$15,000(F)
(F)
(AHXXSR)
SR)--(SH
(SHXXSR)
SR)
TRY
E.
TRYAGAIN!
AGAIN!
E. $15,000
$15,000(U)
(U)
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-42
Direct-labour Variances - Question #4
Standards:
Standards:
labour
labour 22hours
hoursper
perunit
unit@
@$15.00
$15.00per
perhour
hour
Actual:
Actual:
Production
Production 10,000
10,000units
units
labour
labour21,000
21,000hours
hours@
@$14.50
$14.50per
perhour
hour
The
Thelabour
labourefficiency
efficiencyvariance
varianceis
is
A.
A. $25,000
$25,000(U)
(U)
Remember,
Remember,the
thelabour
labour
B.
$14,500
(F)
B. $14,500 (F)
Efficiency
EfficiencyVariance
Varianceis
is
C.
$14,500
(U)
computed
C. $14,500 (U)
computedas:
as:
D.
(AH
D. $15,000
$15,000(F)
(F)
(AHXXSR)
SR)--(SH
(SHXXSR)
SR)
TRY
E.
TRYAGAIN!
AGAIN!
E. $15,000
$15,000(U)
(U)
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-43
Direct-labour Variances - Question #4
Standards:
Standards:
labour
labour 22hours
hoursper
perunit
unit@
@$15.00
$15.00per
perhour
hour
Actual:
Actual:
Production
Production 10,000
10,000units
units
labour
labour21,000
21,000hours
hours@
@$14.50
$14.50per
perhour
hour
The
Thelabour
labourefficiency
efficiencyvariance
varianceis
is
A.
A. $25,000
$25,000(U)
(U)
Remember,
Remember,the
thelabour
labour
B.
$14,500
(F)
B. $14,500 (F)
Efficiency
EfficiencyVariance
Varianceis
is
C.
$14,500
(U)
computed
C. $14,500 (U)
computedas:
as:
D.
(AH
D. $15,000
$15,000(F)
(F)
(AHXXSR)
SR)--(SH
(SHXXSR)
SR)
TRY
E.
TRYAGAIN!
AGAIN!
E. $15,000
$15,000(U)
(U)
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-44
Direct-labour Variances - Question #4
Standards:
Standards:
labour
labour 22hours
hoursper
perunit
unit@
@$15.00
$15.00per
perhour
hour
Actual:
Actual:
Production
Production 10,000
10,000units
units
labour
labour21,000
21,000hours
hours@
@$14.50
$14.50per
perhour
hour
The
Thelabour
labourefficiency
efficiencyvariance
varianceis
is
A.
A. $25,000
$25,000(U)
(U)
(AH
(AH××SR)
SR)--(SH
(SH××SR)
SR)==
B.
$14,500
(F)
B. $14,500 (F)
(21,000
(21,000××$15.00)
$15.00)--(20,000
(20,000××$15.00)
$15.00)==
C.
(21,000
C. $14,500
$14,500(U)
(U)
(21,000--20,000)
20,000)××$15.00
$15.00==
D.
$15,000
D. $15,000
$15,000(F)
(F)
$15,000(U)
(U)
E.
E. $15,000
$15,000(U)
(U)
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-45
Multiple Types Of Direct Material
Or Direct labour
When
Whenthere
thereare
areseveral
severaltypes
typesof
ofdirect
directmaterial
materialor
or
direct
directlabour,
labour,price
priceand
andquantity
quantityvariances
variancesare
arecomputed
computedfor
for
each
eachtype,
type,and
andthen
thenadded
addedto
toobtain
obtainaatotal
totalprice
price
variance
variance and
andaatotal
totalquality
qualityvariance
variance
Price
Quantity
Direct material X $1,500 F $1,900 U
Direct material Y 2,400 U
300 U
Direct material Z
900 U
400 F
Total variance
$1,800 U $1800 U
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
Allowance For Defects Of Spoilage
16-46
In some manufacturing processes, a certain amount of
defective production or spoilage is normal.
1,000 liters of chemicals are normally required in a chemical
process in order to obtain 800 liters of good output.
If total good output in February is 5,000 liters, what is the
standard allowed quantity of input?
Dividing both
sides of the
equation by 80%
Using the
numbers in
the illustration
Irwin/McGraw-Hill Ryerson
Good output quantity
= 80% X Input quantity
Good output quantity/80%
= Input quantity allowed
5,000 liters of good
output/80%
= 6,250 liters of
input allowed
©McGraw-Hill Ryerson Limited, 2001
Significance Of Cost Variances:
When To Follow Up
16-47
Management
Managementby
byException
Exception
What
Whatconstitutes
constitutesan
anexception?
exception?
How
Howdoes
doesaamanager
managerknow
knowwhen
whento
tofollow
followup
up
on
onaacost
costvariance
varianceand
andwhen
whento
toignore
ignoreit?
it?
Absolute
AbsoluteAmount
Amount
Size
Sizeof
ofVariance
Variance
Relative
RelativeAmount
Amount
RULE
RULEOF
OFTHUMB:
THUMB:
Investigate
Investigatevariances
variancesthat
thatare
areeither
eithergreater
greaterthan
than$10,000
$10,000or
or
greater
greaterthan
than10
10percent
percentof
ofstandard
standardcost
cost
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
Significance Of Cost Variances:
When To Follow Up
16-48
Recurring
RecurringVariances
Variances
MONTH
VARIANCE % OF STANDARD COST
September $6,000 F
6.0%
October
6,400 F
6.4%
November
3,200 F
3.6%
December
6,200 F
6.2%
None
Noneof
of the
thevariances
variancesare
aregreater
greaterthan
than
$10,000
$10,000or
or10%,
10%, but
butthis
thisvariance
variance
should
shouldbe
beinvestigated
investigatedbecause
becauseitithas
has
consistently
consistentlyoccurred
occurred at
at aareasonably
reasonably
high
highamount
amountfor
forfour
fourmonths
months
Irwin/McGraw-Hill Ryerson
Standard
direct
labour cost
is $100,000
©McGraw-Hill Ryerson Limited, 2001
Significance Of Cost Variances:
When To Follow Up
16-49
Trends
Trends
MONTH
VARIANCE % OF STANDARD COST
September
$250 U
0.25%
October
840 U
0.84%
November
4,000 U
4.0%
December
9,300 U
9.3%
None
Noneof
of the
thevariances
variancesare
aregreater
greater
than
than$10,000
$10,000or
or10%,
10%, but
butthis
this
variance
varianceshould
shouldbe
beinvestigated
investigated
because
becauseitit has
hasan
an increasingly
increasingly
unfavourable
unfavourabletrend.
trend.
Irwin/McGraw-Hill Ryerson
Standard
direct
labour
is $100,000
©McGraw-Hill Ryerson Limited, 2001
Significance Of Cost Variances:
When To Follow Up
16-50
Controllability
Controllability
AAmanager
manageris
ismore
morelikely
likelyto
toinvestigate
investigateaavariance
variancethat
thatis
is
controllable
controllableby
bysomeone
someonein
inthe
theorganization
organizationthan
thanone
onethat
thatis
isnot
not
favourable
favourableVariances
Variances
ItItis
isas
asimportant
importantto
toinvestigate
investigatesignificant
significantfavourable
favourablevariances
variances
as
assignificant
significantunfavourable
unfavourablevariances
variances
Cost
Costand
andBenefits
Benefitsof
ofInvestigation
Investigation
The
Thedecision
decisionwhether
whetherto
toinvestigate
investigateaavariance
variance is
isaa
cost
cost--benefit
benefitdecision
decision
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
Significance Of Cost Variances:
When To Follow Up
16-51
Statistical
StatisticalAnalysis
Analysis
AASTATISTICAL
STATISTICALCONTROL
CONTROLCHART
CHARTplots
plotscost
costvariances
variances
across
acrosstime
timeand
andcompares
comparesthem
themwith
withaastatistically
statistically
determined
determinedcritical
criticalvalue
valuethat
thattriggers
triggersan
aninvestigation
investigation
favourable
variances
Investigate
1 standard
deviation
Critical
value
1 standard
deviation
Unfavourable
variances
Irwin/McGraw-Hill Ryerson
X
X
X
Time
X
X
X
Jan.
Feb. March April
May
June
©McGraw-Hill Ryerson Limited, 2001
Behavioural Effects Of Standard
Costing
16-52
Standard
Standard costs,
costs,budgets,
budgets,and
andvariances
variancesare
areused
usedto
to
evaluate
evaluatethe
theperformance
performanceof
ofindividuals
individualsand
anddepartments
departments
They
Theycan
canprofoundly
profoundlyinfluence
influencebehaviour
behaviourwhen
whenthey
theyare
areused
usedto
to
determine
determinesalary
salaryincreases,
increases,bonuses,
bonuses,and
andpromotions
promotions
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-53
Controllability Of Variances
Which Managers
ManagersGenerally
GenerallyInfluence
InfluenceCost
CostVariances?
Variances?
Which
Direct-materialprice
pricevariance
variance
Direct-material
Thepurchasing
purchasingmanager
manager
The
Get the best prices available for purchased goods
and services through skillful purchasing practices
Direct-materialquantity
quantityvariance
variance
Direct-material
Theproduction
productionsupervisor
supervisor
The
Skillful supervision and motivation of production
employees, coupled with the careful use and handling
of materials, contribute to minimal waste.
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-54
Controllability Of Variances
Which Managers
ManagersGenerally
GenerallyInfluence
InfluenceCost
CostVariances?
Variances?
Which
Direct-labourrate
ratevariance
variance
Direct-labour
Theproduction
productionsupervisor
supervisor
The
Generally results from using a different mix of
employees than that anticipated when the standard
were set
Direct-labour
labourefficiency
efficiencyvariance
variance
Direct-
Theproduction
productionsupervisor
supervisor
The
Motivating employees toward production goals
and effective work schedules improves
efficiency
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-55
Interaction Among Variances
Interactionamong
amongvariances
variancesoften
oftenoccur
occurmaking
makingititdifficult
difficultto
to
Interaction
determinethe
theresponsibility
responsibilityfor
foraaparticular
particularvariance
variance
determine
Variancesin
inone
onepart
partof
ofthe
thevalue
valuechain
chaincan
canbe
bedue
dueto
toroot
rootcauses
causes
Variances
inanother
anotherpart
partof
ofthe
thechain
chain
in
Human
Human
resources
resources
Physical
Physical
resources
resources
Research
and
development
Irwin/McGraw-Hill Ryerson
Design
Supply
ProducDistriMarketing
tion
bution
Customer
service
©McGraw-Hill Ryerson Limited, 2001
Using Standard Costs For
Product Costing
16-56
Flowof
ofProduct
ProductCosts
CostsThrough
ThroughManufacturing
ManufacturingAccounts
Accounts
Flow
(AllCosts
Costsare
areStandard
StandardCosts)
Costs)
(All
Work-in-Process Inventory
Finished-Goods Inventory
Direct-material cost
Direct-labour cost
Manufacturing
Overhead
Product cost transferred
when product is finished
Product cost transferred when product is sold
Cost of Goods Sold
Income Summary
Expense closed into
Income Summary at end
of accounting period
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-57
Disposition Of Variances
Cost of Goods Sold
Variances
Variancesare
are
temporary
temporary
accounts,
accounts, like
like
revenue
revenueand
and
expense
expense
accounts,
accounts, and
and
they
theyare
areclosed
closed
out
out at
at the
theend
endof
of
the
theaccounting
accounting
period.
period.
Irwin/McGraw-Hill Ryerson
Unfavourable
variances
represent
costs of
operating
inefficiently,
relative to the
standards, and
thus cause
the Cost of
Goods Sold
to be
higher
favourable
variances
represent
costs of
operating
efficiently,
relative to the
standards, and
thus cause
the Cost of
Goods Sold
to be
lower
©McGraw-Hill Ryerson Limited, 2001
16-58
How Information Technology
Impacts Standard Costs
Useof
ofBar
BarCodes
Codes
Use
Inreal-time
real-timeshop
shopfloor
floordata-collection
data-collectionsystems,
systems,production
productioncan
can
In
record the
thetime
timethey
theybegin
beginworking
workingon
onaaparticular
particularjob
joborder
order
record
byscanning
scanningthe
thebar
bar code
code on
ontheir
theiremployee
employeeID
IDbadge
badge
by
Whenraw
rawmaterials
materialsarrive
arriveat
atthe
theproduction
productionfacility,
facility,their
theirbar
barcode
code
When
isscanned
scannedand
andthe
theevent
eventis
isrecorded,
recorded,automatically
automaticallyupdating
updating
is
inventoryrecords
records
inventory
Computer-AidedDesign
Design
Computer-Aided
Standardcost
costof
ofmaterial
materialand
andlabour
labourare
are
Standard
storedin
inthe
thecomputer
computerdata
database
basewhere
where
stored
theycan
canbe
beeasily
easilyaccessed
accessedto
toassist
assist
they
engineers in
inthe
the product
productdesign
designprocess
process
engineers
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001
16-59
Standard Costing: Advantages
!! Allows
Allowsmanagers
managersto
touse
use
!!
!!
management
managementby
byexception
exception
Provides
Providesaabasis
basisfor
forsensible
sensible
cost
costcomparisons
comparisons
Provides
Providesaameans
meansof
of
performance
performanceevaluation
evaluationand
and
rewards
rewardsfor
foremployees
employees
Irwin/McGraw-Hill Ryerson
!! Provides
Providesmotivation
motivationfor
for
employees
employeesto
toadhere
adhereto
to
standards
standards
!! Results
Resultsin
inmore
morestable
stable
product
productcosts
costs
!! Is
Isless
lessexpensive
expensivethan
than
actualactual-or
ornormalnormal-costing
costing
systems
systems
©McGraw-Hill Ryerson Limited, 2001
Criticisms Of Standard Costing In
Today’s Environment
Variancestoo
tooaggregated
aggregatedin
in
!! Variances
!!
!!
!!
thatthey
theyare
arenot
nottied
tiedto
to
that
specificproduct
productlines,
lines,
specific
productionbatches,
batches,or
or
production
flexiblemanagement
managementsystem
system
flexible
cells
cells
Variancestoo
toolate
lateto
tobe
be
Variances
useful
useful
Standardcosting
costingout
outof
ofstep
step
Standard
withthe
thephilosophy
philosophyof
ofcost
cost
with
managementsystems
systemsand
and
management
activity-basedmanagement
management
activity-based
Toomuch
muchfocus
focuson
onthe
thecost
cost
Too
andefficiency
efficiencyof
ofdirect
directlabour
labour
and
Irwin/McGraw-Hill Ryerson
16-60
Shorterproduct
productlife
lifecycles
cycles
!! Shorter
!!
!!
!!
meanthat
thatstandards
standardsare
areonly
only
mean
relevantfor
foraashort
shorttime
time
relevant
Toomuch
muchfocus
focuson
oncost
cost
Too
minimizationrather
ratherthan
than
minimization
increasingproduct
productquality
qualityor
or
increasing
customerservice
service
customer
Automatedmanufacturing
manufacturing
Automated
processestend
tendto
tobe
bemore
more
processes
consistentin
inmeeting
meeting
consistent
productionspecifications
specifications
production
minimizingvariances
variances
minimizing
Notdefined
definedbroadly
broadlyenough
enough
Not
tocapture
captureimportant
importantaspect
aspect
to
ofownership
ownership
of
©McGraw-Hill Ryerson Limited, 2001
16-61
Kaizen Costing
KAIZENCOSTING
COSTINGis
isthe
theprocess
processof
ofcost
costreduction
reduction
KAIZEN
duringthe
themanufacturing
manufacturingphase
phaseof
ofaaproduct
product
during
Improvementis
isthe
thegoal
goaland
andresponsibility
responsibilityof
ofeach
eachworker
worker
Improvement
Cost per product unit
Current year
cost base
Kaizen goal:
cost reduction
rate
Actual cost
performance
of the
current year
Irwin/McGraw-Hill Ryerson
12/31/x0
Actual cost
reduction
achieved
Cost base
for next
Time
year
12/31/x1
©McGraw-Hill Ryerson Limited, 2001
16-62
END OF CHAPTER
16
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson Limited, 2001