Chapter 9
Standard Costing and Variances
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Standard Cost Systems
Based on carefully
predetermined amounts.
Standard
Costs are
Used for planning labor, material,
and overhead requirements.
The expected level
of performance.
Benchmarks for
measuring performance.
In a standard cost system, all manufacturing costs
are recorded at standard rather than actual amounts.
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Learning Objective 9-1
Describe the standard-setting
process and explain how standard
costs relate to budgets and variances.
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Ideal versus Attainable Standards
Should we use
ideal standards that
require employees to
work at 100 percent
peak efficiency?
I recommend using
attainable standards
that can be
achieved with
reasonable
and efficient effort.
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Types of Standards
Quantity
Standard
Price
Standard
Definition
The amount of input
that should go into a
single unit of product
The price that should
be paid for a specific
quantity of input
Examples
Ounces of aluminum in a can of Coca Cola
Tons of steel in a Ford F-150 truck
Yards of denim in a pair of Levi's 550 jeans
Price per ounce of aluminum
Price per ton of steel
Price per yard of denim
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The Standard Cost Card
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Learning Objective 9-2
Prepare a flexible budget and show
how total costs change with sales
volume.
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Master Budgets Versus Flexible
Budgets
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Variance Analysis
Amount
These variances are favorable
because the actual cost
is less than the standard cost.
This variance is unfavorable
because the actual cost
exceeds the standard cost.
Standard
Direct
Labor
Direct
Material
Manufacturing
Overhead
Type of Product Cost
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Variance Analysis
Causes of Favorable Variances
• Paying a lower price than
expected for direct materials.
• Using less direct materials than
expected.
• Paying a lower rate than expected
for direct labor.
• Producing a unit in less time than
expected.
• Paying less than expected for
manufacturing overhead costs.
• Using less of a variable overhead
resource than expected.
• Producing more using a fixed
overhead resource than expected.
Causes of Unfavorable Variances
• Paying a higher price than
expected for direct materials.
• Using more direct materials than
expected.
• Paying a higher rate than
expected for direct labor.
• Producing a unit in more time
than expected.
• Paying more than expected for
manufacturing overhead costs.
• Using more of a variable
overhead resource than expected.
• Producing less using a fixed
overhead resource than expected.
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Comparing Actual Results to the Master
Budget
Cold Stone Creamery’s master budget of $7,500 for ice cream was based
on a sales forecast of 15,000 units ($0.50 per unit × 15,000 units). During
the period, the amount spent for ice cream was $8,000, or $500 higher than
the master budget. Did Cold Stone do a good job controlling ice cream
costs?
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Comparing Actual Results to the Master
Budget
There are two possible reasons why spending exceeded the master budget:
1. Cold Stone may have spent more than $0.50 on ice cream for
each unit produced.
2. Cold Stone produced more than 15,000 units, requiring more ice cream
than planned.
Let’s prepare a flexible budget at 18,000 units and evaluate performance.
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Volume Variance versus Spending
Variance
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Variable Cost Variances
Spending
Variance
Actual Costs
Actual Quantity (AQ)
×
Actual Price (AP)
Actual Quantity (AQ)
×
Standard Price (SP)
Price
Variance
Flexible Budget
Standard Quantity (SQ)
×
Standard Price (SP)
Quantity
Variance
Total
Spending
Variance
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Learning Objective 9-3
Calculate and interpret the direct
materials price and quantity
variances.
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Direct Materials Variances
Cold Stone’s Standard Cost Information for Ice Cream
Ice Cream
Standard
Quantity
10 oz.
Standard
Price
$ 0.05 per oz.
Standard
Unit Cost
$ 0.50
Cold Stone’s actual results for the period were:
• 18,000 units produced and sold.
• 200,000 ounces of ice cream purchased at a total cost of $8,000.
•
•
•
•
Actual Price (AP) = $8,000 ÷ 200,000 ounces = $0.04 per ounce
Actual Quantity (AQ) = 200,000 ounces
Standard Price (SP) = $0.05 per ounce
Standard Quantity (SQ) = 10 ounces per unit × 18,000 actual units =
180,000 ounces
9- 17
Direct Materials Variances
Spending
Variance
(AQ) × (AP)
200,000 × $0.04
$8,000
(AQ) × (SP)
200,000 × $0.05
$10,000
Price Variance
$2,000F
(SQ) × (SP)
180,000 × $0.05
$9,000
Quantity Variance
$1,000U
Spending Variance
$1,000F
9- 18
Direct Materials Variances
Materials Price Variance
Materials Quantity Variance
Purchasing Manager
Production Manager
The standard price is used to compute the quantity variance
so that the production manager is not held responsible for
the purchasing manager’s performance.
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Learning Objective 9-4
Calculate and interpret the direct
labor rate and efficiency variances.
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Direct Labor Variances
Spending
Variance
Actual Costs
Actual Hours (AH)
×
Actual Rate (AR)
Actual Hours (AH)
×
Standard Rate (SR)
Rate
Variance
Flexible Budget
Standard Hours(SH)
×
Standard Rate (SR)
Efficiency
Variance
Total
Spending
Variance
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Direct Labor Variances
Cold Stone’s Standard Cost Information for Direct Labor
Direct Labor
Standard
Hours
0.10 hrs.
Standard
Rate
$10.00 per hr.
Standard
Unit Cost
$ 1.00
Cold Stone’s actual results for the period were:
• 18,000 units produced and sold.
• Direct labor costs were $20,500 for 2,000 hours worked.
•
•
•
•
Actual Rate (AR) = $20,500 ÷ 2,000 hours = $10.25 per hour
Actual Hours (AH) = 2,000 hours
Standard Rate (SR) = $10.00 per hour
Standard Hours (SH) = 0.10 hours per unit × 18,000 actual units = 1,800 hours
9- 22
Direct Labor Variances
Spending
Variance
(AH) × (AR)
2,000 × $10.25
$20,500
(AH) × (SR)
2,000 × $10.00
$20,000
Rate Variance
$500U
(SH) × (SR)
1,800 × $10.00
$18,000
Efficiency Variance
$2,000U
Spending Variance
$2,500U
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Responsibility for Labor Variances
Production managers are
usually held accountable
for labor variances
because they can
influence the:
Mix of skill levels
assigned to work tasks.
Level of employee
motivation.
Quality of production
supervision.
Production Manager
Quality of training
provided to employees.
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Learning Objective 9-5
Calculate and interpret the variable
overhead rate and efficiency
variances.
9- 25
Variable Manufacturing Overhead
Variances
Spending
Variance
Actual Costs
Actual Hours (AH)
×
Actual Rate (AR)
Actual Hours (AH)
×
Standard Rate (SR)
Rate
Variance
Flexible Budget
Standard Hours(SH)
×
Standard Rate (SR)
Efficiency
Variance
Total
Spending
Variance
9- 26
Variable Manufacturing Overhead
Variances
Cold Stone’s Standard Cost Information
for Variable Manufacturing Overhead
Variable Manufacturing Overhead
Standard
Hours
0.10 hrs.
Standard
VOH Rate
$1.00 per hr.
Standard
Unit Cost
$ 0.10
Cold Stone’s actual results for the period were:
• 18,000 units produced and sold.
• Actual VOH costs were $1,800 for 2,000 direct labor hours.
• Actual Direct Labor Hours (AH) = 2,000 hours
• Standard Direct Labor Hours (SH) = 0.10 hours per unit × 18,000 units =
1,800 hours
• Actual Variable Overhead Rate (AR) = $1,800 ÷ 2,000 hours = $0.90 per hour
• Standard Variable Overhead Rate (SR) = 0.10 hours per unit × $1.00 per
hour = $0.10 per unit
9- 27
Variable Manufacturing Overhead
Variances
Spending
Variance
(AH) × (AR)
2,000 × $0.90
$1,800
(AH) × (SR)
2,000 × $1.00
$2,000
Rate Variance
$200F
(SH) × (SR)
1,800 × $1.00
$1,800
Efficiency Variance
$200U
Spending Variance
$0
9- 28
Variable Manufacturing Overhead
Variances
Rate Variance
Efficiency Variance
Results from paying more
or less than expected for
overhead items and from
excessive usage of
overhead items.
A function of the
selected allocation
measure (direct labor
hours). It does not reflect
overhead control.
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Summary of Spending Variances
• Variances are always calculated by comparing actual results to budgeted,
or standard, results.
• Companies try to hold specific managers responsible for specific
variances, while removing the effects of factors that are beyond
managers’ control.
• The formulas for variances allow only one factor, such as price, quantity
or volume to change, while holding everything else constant at either
actual or standard values (depending on the type of variance).
• The driving factor for a variance always appears in parentheses in the
formula, as well as in the name of the variance. For example, the
formula for the direct materials price variance is AQ X (SP - AP).
• Try not to memorize rules or rely on the formulas to determine whether a
variance is favorable or unfavorable; just think about it. For example, paying
more for material, or using more materials to produce the same number of
units is unfavorable.
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Learning Objective 9S-1
Calculate and interpret the fixed
overhead spending and volume
variances.
9- 31
Framework for Fixed Overhead Spending
and Volume Variances
9- 32
Fixed Overhead Rate Based on
Budgeted Volume
Budgeted Fixed
Overhead Rate
=
Budgeted
Fixed
Overhead
÷
Budgeted
Volume
Cold Stone budgeted $6,000 for fixed manufacturing overhead for a
budgeted volume of 15,000 units. Cold Stone’s budgeted
fixed manufacturing overhead rate is:
9- 33
Fixed Manufacturing Overhead
Variances
Cold Stone’s Standard Cost Information
for Fixed Manufacturing Overhead
Quantity
Price (Rate)
Fixed Manufacturing Overhead
$6,000 ÷ 15,000 units = $0.40 per unit
Overhead Rate
$ 0.40
Cold Stone’s budget for fixed overhead was:
• 15,000 units to be produced and sold.
• Budgeted FOH costs were $6,000.
Cold Stone’s actual results for the period were:
• 18,000 units produced and sold.
• Actual FOH costs were $6,300.
9- 34
Computing Fixed Overhead Spending and
Volume Variances
9- 35
Fixed Manufacturing Overhead
Spending Variance
9- 36
Fixed Overhead Rate Based on Practical
Capacity
Practical capacity is the number of units that could be
produced under normal operating conditions.
Fixed
Overhead Rate
=
Budgeted
Fixed
Overhead
÷
Practical
Capacity
Cold Stone budgeted $6,000 for fixed manufacturing overhead and
has a practical capacity of 20,000 units. Cold Stone’s
fixed manufacturing overhead rate is:
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Fixed Manufacturing Overhead
Spending and Capacity Variances
Cold Stone’s Cost Information
for Fixed Manufacturing Overhead
Standard
Quantity
Standard
Price (Rate)
Fixed Manufacturing Overhead
$6,000 ÷ 20,000 units = $0.30 per unit
Fixed
Overhead Rate
$ 0.30
Practical capacity is 20,000 units.
Cold Stone’s budget for fixed overhead was:
• 15,000 units to be produced and sold.
• Budgeted FOH costs were $6,000.
Cold Stone’s actual results for the period were:
• 18,000 units produced and sold.
• Actual FOH costs were $6,300.
9- 38
Fixed Overhead Capacity Variances
The expected capacity variance is computed
before the period begins.
The unexpected capacity variance is
computed after the period is over.
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Learning Objective 9S-2
Prepare journal entries to record
standard costs and variances.
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Supplement 9B – Recording
Standard Costs and Variances in a
Standard Cost System
Common Rules
• The initial debit to an inventory account (Raw Materials, Work in
Process, or Finished Goods) and the eventual debit to Cost of Goods
Sold should be based on the standard cost, not the actual cost.
• Cash, payables, or other accounts, such as accumulated
depreciation or prepaid assets, should be credited for the actual cost
incurred.
• The difference between the standard cost (a debit) and the actual
cost (a credit) should be recorded as the cost variance.
• Unfavorable variances should appear as debit entries; favorable
variances should appear as credit entries.
• At the end of the accounting period, all the variances should be
closed to the Cost of Goods Sold account to adjust the standard
cost up or down to the actual cost.
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Recording Standard Costs for Cold
Stone Creamery
Standard
Direct Material
Cost
Raw
Materials
Inventory
Standard Direct Labor
and Manufacturing
Overhead Costs
No Work in Process or
Finished Goods Inventory
Cost of
Goods
Sold
9- 42
Direct Materials Costs
Cold Stone’s Standard Cost Information for Direct Materials
Ice Cream
Standard
Quantity
10 oz.
Standard
Price
$ 0.05 per oz.
Standard
Unit Cost
$ 0.50
Cold Stone’s actual results for the period were:
• 200,000 ounces of ingredients were purchased on account for a total of $8,000,
at an average actual price of $0.04 per ounce.
• All 200,000 ounces of ingredients were used to make and sell 18,000 units.
The journal entry to record the direct materials purchase is:
9- 43
Direct Materials Costs
Cold Stone’s Standard Cost Information for Direct Materials
Ice Cream
Standard
Quantity
10 oz.
Standard
Price
$ 0.05 per oz.
Standard
Unit Cost
$ 0.50
Cold Stone’s actual results for the period were:
• 200,000 ounces of ingredients were purchased on account for a total of $8,000,
at an average actual price of $0.04 per ounce.
• All 200,000 ounces of ingredients were used to make and sell 18,000 units.
The journal entry to record the direct materials use is:
9- 44
Direct Labor and Manufacturing
Overhead Costs
Cold Stone’s Standard Cost Information for Direct Labor
Direct Labor
Standard
Hours
0.10 hrs.
Standard
Rate
$10.00 per hr.
Standard
Unit Cost
$ 1.00
Cold Stone’s actual results for the period were:
• 18,000 units produced and sold.
• Direct labor costs were $20,500 for 2,000 hours worked.
The journal entry to record direct labor is:
9- 45
Direct Labor and Manufacturing
Overhead Costs
Standard Cost Information for Variable Manufacturing Overhead
Variable Manufacturing Overhead
Standard
Hours
0.10 hrs.
Standard
VOH Rate
$1.00 per hr.
Standard
Unit Cost
$ 0.10
Cold Stone’s actual results for the period were:
• 18,000 units produced and sold.
• Actual VOH costs were $1,800 for 2,000 direct labor hours.
The journal entry to record variable manufacturing overhead is:
9- 46
Direct Labor and Manufacturing
Overhead Costs
Cold Stone’s Standard Cost Information for Fixed Manufacturing Overhead
Standard
Quantity
Fixed Manufacturing Overhead
$6,000 ÷ 15,000 units = $0.40 per unit
Cold Stone’s budget for fixed overhead:
• 15,000 units to be produced and sold.
• Budgeted FOH costs were $6,000.
Standard
Price (Rate)
Standard
Unit Cost
$ 0.40
Cold Stone’ actual results for the period:
• 18,000 units produced and sold.
• Actual FOH costs were $6,300.
The journal entry to record fixed manufacturing overhead costs is:
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Cost of Goods Sold and Cost Variance
Summary
The cost of goods sold balance is $36,000 before closing
the variances accounts. By closing the variance
accounts, we will increase cost of goods sold to $36,600.
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Cost of Goods Sold and Cost Variance
Summary
The entry to close the variance accounts to the Cost of Goods Sold is:
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End of Chapter 9
9- 50