Learning Objective 1
Chapter 3
Standard Costing
& Variance Analysis
MsA. Le Hoang Oanh
16-2
Standard Cost Theory
Using Standard-Costing Systems for Control
What can standard costing concepts do for today’s
businesses?
l Competition is quick and plentiful
If you don’t find your wasteful areas quickly, your
competitors and your customers will!
Responsibility accounting
Objective feedback to the responsible folks
l
based on carefully
predetermined amounts.
Standard
costs are
used for planning labor
and material requirements.
the expected level
of performance.
benchmarks for
measuring performance.
16-4
1
Using Standard-Costing Systems for Control
This variance is unfavorable
because the actual cost
exceeds the standard cost.
ACTUAL COST
incurred and
recorded in the
production of the
product or service
Standard
Product cost
STANDARD COST
a budget for the
production of one
unit of product or
service
Using Standard-Costing Systems for Control
COST VARIANCE
the difference
between the
actual cost and
the standard cost
A standard cost variance
is the amount by which
an actual cost differs from
the standard cost.
16-5
Management by Exception
16-6
Management by Exception
Managers focus on quantities and costs
that deviate significantly from standards
(a practice known as management by exception).
Take the time to investigate only significant cost variances.
What is significant?
Amount
Standard
Direct
labor
Depends on
the size of the
organization
Direct
materials
Type of Product Cost
Depends on
the production
process
Depends on
the type of the
organization
16-7
16-8
2
Costs and Benefits of
Standard-Costing Systems
Variance Analysis Cycle
Identify
questions
Receive
explanations
Take
corrective
actions
Costs
IMPROVED
DECISION
MAKING, BUT:
Conduct next
period’s
operations
Analyze
variances
Begin
Prepare standard
cost performance
report
Benefits
Implementing and maintaining cost standards can
be time-consuming, labor-intensive, and expensive.
16-9
Cost Variance Analysis
16-10
A General Model for Variance Analysis
FB at actual
activities
Actual costs
Standard cost variances
Price variance
Quantity variance
The difference between
the actual price and the
standard price
The difference between
the actual quantity and
the standard quantity
16-11
Actual quantity
×
Actual price
Actual quantity
×
Standard price
Price / Rate
variance
=
FB at standard
activity allowed for
actual output
Standard
costs
Standard quantity
×
Standard price
Quantity / Efficiency
variance
16-12
3
A General Model for
Variance Analysis
Actual quantity
×
Actual price
A General Model for
Variance Analysis
Actual quantity
×
Standard price
Price / Rate
variance
Standard quantity
×
Standard price
Quantity / Efficiency
variance
Standard price is the amount that should
have been paid for the resources acquired.
Actual quantity
×
Actual price
Actual quantity
×
Standard price
Price / Rate
variance
Standard quantity
×
Standard price
Quantity / Efficiency
variance
Standard quantity is the standard activities
allowed for the actual output.
16-13
A General Model for
Variance Analysis
Actual quantity
×
Actual price
Standard Costs
Actual quantity
×
Standard price
Price / Rate
variance
Materials price variance
AQ(AP - SP)
Labor rate variance
Variable
overhead
AQ = Actual
Quantity
APspending
= Actualvariance
Price
16-14
Standard quantity
×
Standard price
Quantity / Efficiency
variance
Materials quantity variance
SP(AQ - SQ)
Labor efficiency variance
Variable
overhead
SP = Standard
Price
variance
SQ efficiency
= Standard
Quantity
16-15
Let’s use the
concepts of the
general model to
calculate standard
cost variances,
starting with
direct materials.
16-16
4
Material Variances
Forget me not……
Learning Objective 3
What if materials
purchases don’t match
production usage? How
does this change the
variance calculations?
The price variance is
computed on the entire
quantity purchased.
The quantity variance is
computed only on the
quantity used.
16-17
Quick Check
Materials Variances
§ Purchased quantity or Used quantity?
§ Which quantity is the price variance based on? What’s it
Hanson Inc.’s has the following direct material
standard to manufacture one Tree Line tent:
6 square meters per tent at
$3.00 per square meter (sq m)
trying to measure?
Purchased
§ Which quantity is the Quantity variance based on?
What’s it trying to measure?
Last month Hanson purchased 8,500 square
meters at $2.8 per square meter and used
18,800/3 square meters to make 1,000 tents.
Used
16-20
5
Materials Variances
Actual quantity
purchased
×
Actual price
Actual quantity
purchased
×
Standard price
Materials Variances
SQ = …......... tents × ….. sq m per tent
SQ = …............... sq m
We should compute
the price variance
using the actual
quantity purchased.
Actual quantity
used
×
We should compute Standard price
the quantity variance
using the actual
quantity used.
Standard quantity
×
Standard price
16-21
Materials Variances
16-22
Reporting Materials Variances
I need the variances as soon
as possible so that I can
better identify problems
and control costs.
We may also calculate materials
variances using formulas:
You accountants just don’t
understand the problems we
production managers have.
MPV =
MPV =
Okay. I’ll compute
the price variance when
materials are purchased,
and the usage variance as
soon as material is used.
MPV =
MQV =
MQV =
MQV =
16-23
16-24
6
Standard Costs
Responsibility for Materials Variances
I am not responsible
for this unfavorable
materials usage
variance.
You bought poor quality
materials, so my people
had to use more of it.
Your poorly trained workers and
poorly maintained equipment
caused the problems.
Also, your poor scheduling
requires rush orders of materials
at higher prices, causing
unfavorable price variances.
Now let’s calculate
standard cost
variances for
direct labor.
16-25
Labor Variances
16-26
Labor Variances
Actual costs
Hanson has the following direct labor
standard to manufacture one Tree Line tent:
1.5 standard hours per tent at
$12 per direct labor hour
Actual hours
×
Actual rate
FB at standard
activity allowed for
actual output
FB at actual
activities
Actual hours
×
Standard rate
Standard
costs
Standard hours
×
Standard rate
Last month 1,550 direct labor hours were
worked at $12.2 per hour to make 1,000 tents.
16-27
Rate variance
$...... Unfavorable
Efficiency variance
$........ Favorable
16-28
7
Labor Variances
Labor Variances
SH = …….. tents × ….. hours per tent
SH = ……………. hours
Actual hours
×
Actual rate
Actual hours
×
Standard rate
We may also calculate labor
variances using formulas:
Standard hours
×
Standard rate
LRV = AH(AR - SR)
LRV = ………… hrs($........ - $.....)
LRV = $......... Unfavorable
Rate variance
$...... Unfavorable
Efficiency variance
$........ Favorable
LEV = SR(AH - SH)
LEV = $...... (………hrs – ………hrs)
LEV = $.......... Unavorable
16-29
Labor Rate Variance –
A Closer Look
Labor Efficiency Variance –
A Closer Look
Poorly
trained
workers
Using highly paid skilled workers to
perform unskilled tasks results in an
unfavorable price variance.
High skill,
high rate
16-30
Unfavorable
Efficiency
Variance
Low skill,
low rate
Production managers who make work assignments
are generally responsible for price variances.
16-31
Poor
quality
materials
Poor
supervision
of workers
Poorly
maintained
equipment
16-32
8