CHAPTER 10:
S TA N D A R D C O S T I N G A N D
A N A LY S I S O F D I R E C T C O S T S
P R O F. J A C K I E S I R I V I R I YA K U L
AGENDA
• Conceptual Overview
• Setting Standards
• Variance Analysis
– Direct-Material Variances
– Direct-Labor Variances
• Managing Variance
– Significance of Variances
– Statistical Control Chart
– Controllability of Variances
CONCEPTUAL OVERVIEW
• Elements of cost control system:
(1) Standard cost
(2) Actual cost
(3) Cost variance (the difference between actual and standard costs)
• Management by exception: Managers investigate only “significant” cost
variances.
EXERCISE
Variances are computed by taking the difference between which of
the following?
A. Product cost and period cost.
B. Actual cost and differential cost.
C. Price factors and rate factors.
D. Actual cost and standard cost.
E. Product cost and standard cost.
ANS: D
EXERCISE
The term “management by exception” is best defined as:
A. choosing exceptional managers.
B. controlling actions of subordinates through acceptance of
management techniques.
C. investigating unfavorable variances.
D. devoting management time to investigate significant variances.
E. controlling costs so that non-zero variances are treated as
“exceptional”.
ANS: D
SETTING STANDARDS
• Accountants, engineers, personnel administrators, and production
managers combine efforts to set standards based on experience and
expectations
– Standard price: prices that should be paid for resources
– Standard quantity: quantity that should be used.
• Two methods to develop standards:
– Analysis of historical data: what it did cost.
– Task analysis: what it should cost.
• Focus on practical standards, which are achievable
– Not perfection standards, which are impossible to reach.
VARIANCE ANALYSIS
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.
VARIANCE ANALYSIS
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Materials
price- SP)
variance
AQ(AP
Labor rate variance
AQ =Variable
Actual overhead
Quantity
AP = spending
Actual Price
variance
Standard Quantity
×
Standard Price
Quantity Variance
Materials
quantity
variance
SP(AQ
- SQ)
Labor efficiency variance
SP
= Standard
Price
Variable
overhead
SQ
= Standard
Quantity
efficiency
variance
DIRECT-MATERIAL VARIANCES
• Example: Hansen Inc. has the following direct material standard to
manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound. Last
week 1,700 pounds of material were purchased and used to make 1,000
Zippies. The material costs of a total of $6,630. Determine DM price
variance and quantity variance.
• Sol.:
AQ × AP
AQ × SP
1,700 × $3.90
1,700 × $4.00
= $6,630
= $6,800
Price variance
$170 favorable
SQ × SP
(1.5 × 1,000) × $4.00
= $6,000
Quantity variance
$800 unfavorable
DIRECT-MATERIAL VARIANCES
• Example: Hanson Inc. has the following material standard to manufacture
one Zippy: 1.5 pounds per Zippy at $4.00 per pound. Last week 2,800
pounds of material were purchased at a total of $10,920, and 1,700
pounds were used to make 1,000 Zippies. Determine DM purchase price
variance and quantity variance.
• Sol.: AQPurchase× AP
AQPurchase× SP
2,800 × $3.90
2,800 × $4.00
= $10,920
= $11,200
Purchase Price variance
$280 favorable
DIRECT-MATERIAL VARIANCES
• Example: Hanson Inc. has the following material standard to manufacture
one Zippy: 1.5 pounds per Zippy at $4.00 per pound. Last week 2,800
pounds of material were purchased at a total of $10,920, and 1,700
pounds were used to make 1,000 Zippies. Determine DM purchase price
variance and quantity variance.
• Sol.:
AQUsed× SP
1,700 × $4.00
= $6,800
SQ × SP
(1.5 × 1,000) × $4.00
= $6,000
Quantity variance
$800 unfavorable
EXERCISE
A direct-material quantity variance can be caused by all of the
following except:
A. improper employee training
B. changes in sales volume
C. acquisition of materials that are below standard quality
D. adjustment problems with machines
E. disgruntled workers
ANS: B
EXERCISE
Degregorio Corporation makes a product that uses a material with the
following direct material standards:
Standard quantity
3.8 kilos per unit
Standard price
$7.00 per kilo
The company produced 5,600 units in November using 21,750 kilos of the
material. During the month, the company purchased 24,800 kilos of the
direct material at a total cost of $168,640.
The materials quantity variance for November is:
A. $3,290 F
B. $3,196 F
C. $3,290 U
D. $3,196 U
ANS: C
DIRECT-LABOR VARIANCES
• Example: Hansen Inc. has the following direct labor standard to
manufacture one Zippy: 1.5 standard hours per Zippy at $10.00 per
direct labor hour. Last week 1,550 direct labor hours were worked at a
total of $15,810 to make 1,000 Zippies. Determine DL rate variance and
efficiency variance.
• Sol.:
AH × AR
AH × SR
1,550 × $10.20
1,550 × $10.00
= $15,810
= $15,500
Rate variance
$310 unfavorable
SH × SR
(1.5 × 1,000) × $10.00
= $15,000
Efficiency variance
$500 unfavorable
EXERCISE
During a recent lengthy strike at Morell Manufacturing Company,
management replaced striking assembly line workers with office workers.
The assembly line workers had been paid $18 per hour while the office
workers are only paid $10 per hour. What is the most likely effect on the
labor variances in the first month of this strike?
Labor Rate Variance
Labor Efficiency Variance
A.
Unfavorable
No effect
B.
No effect
Unfavorable
C.
Unfavorable
Favorable
D.
Favorable
Unfavorable
ANS: D
EXERCISE
Rickett Corporation had a favorable direct-labor efficiency variance of
$6,000 for the period just ended. The actual wage rate was $0.50 more
than the standard rate of $12.00. If the company’s standard hours allowed
for actual production totaled 9,500, how many hours did the firm actually
work?
A. 9,000
B. 9.020
C. 9,980
D. 10,000
E. None of the answers is correct.
ANS: A
SIGNIFICANCE OF VARIANCES
• Size of variance
– Dollar amount
– Percentage of standard
• Recurring variances
• Trends
• Controllability
• Favorable variances
• Costs and benefits of investigation
CONTROLLABILITY OF VARIANCES
• Who has the most influence over the different variances?
– Direct material price – Purchasing Department
– Direct material quantity – Production Department
– Direct labor rate – Production Department, Human Resources
– Direct labor efficiency – Production Department
• Interaction among variances
– Example: Purchase poor quality material
•
•
•
•
Favorable DM price variance
Unfavorable DM quantity variance
Unfavorable DL rate variance
Unfavorable DL efficiency variance
• Overall, standard costing may have either positive or negative effects