9 -1
CHAPTER
Standard
Costing: A
Managerial
Control Tool
9 -2
Objectives
1. Tell how unitAfter
standards
are this
set and why
studying
standard costing
systems
are
adapted.
chapter, you should
2. State the purposebeofable
a standard
cost sheet.
to:
3. Describe the basic concepts underlying
variance analysis, and explain when variances
should be investigated.
4. Compute the material and labor variances,
and explain how they are used for control.
Continued
9 -3
Objectives
5. Calculate the variable and fixed overhead
variances, and give their definitions.
6. Appendix: Prepare journal entries for
materials and labor variances, and show how
to account for overhead variances.
9 -4
Cost control often means
the difference between
success and failure.
9 -5
Why Standard Cost Systems
Are Adopted
Standard costing systems enhance planning
and control and improve performance
measurement.
Standard costing systems facilitate product
costing.
9 -6
Manufacturing Costs
Direct
Materials
Direct
Labor
Overhead
Actual costing system
Actual
Actual
Actual
Normal costing system
Actual
Actual
Budgeted
Standard costing system
Standard
Standard
Standard
9 -7
Standard Cost Sheet
for Corn Chips
Description
Direct materials:
Yellow corn
Cooking oil
Salt
Lime
Bags
Total direct materials
Standard Standard Standard
Price
Usage
Cost Subtotal
$0.006
0.031
0.005
0.400
0.044
18 oz.
2 oz.
1 oz.
0.01 oz.
1 bag.
$0.108
0.062
0.005
0.004
0.044
$0.223
9 -8
Standard Cost Sheet
for Corn Chips
Standard Standard Standard
Price
Usage
Cost Subtotal
Description
Direct materials
Direct labor:
Inspectors
$7.000
Machine operators
10.000
Total direct labor
Overhead:
Variable overhead
3.850
Fixed overhead
32.050
Total overhead
Total standard unit cost
$0.223
0.0070 hr.
0.0008 hr.
$0.049
0.008
0.057
0.078 hr.
0.0078 hr.
$0.030
0.250
0.280
$0.560
9 -9
During the first week of March, 100,000
packages of corn chips are produced.
The standard quantity of yellow corn
meal per package is 18 ounces.
9 -10
Standard Quantity of Materials Allowed
SQ = Unit quantity standard x Actual output
= 18 x 100,000
= 1,800,000 ounces
Standard Hours Allowed
SH = Unit labor standard x Actual output
= 0.0008 x 100,000
= 80 direct labor hours
9 -11
Total variance = Price variance + Usage variance
= (AP – SP)AQ + (AQ – SQ)SP
= [(AP x AQ) – (SP x AQ)]
+ [(SP x AQ) – (SP x SQ)]
= (AP x AQ) – (SP x AQ)]
+ (SP x AQ) – (SP x SQ)
= (AP x AQ) – (SP x SQ)
Variance Analysis: General Description
1. AP x AQ
(Actual Quantity
of Input at Actual
Price)
2. SP x AQ
(Actual Quantity
of Input at
Standard Price)
Price Variance
(1-2)
3. SP x SQ
(Standard
Quantity of Input
at Standard Price)
Usage Variance
(2-3)
Budget
Variance (1-3)
9 -12
9 -13
Unfavorable variances
occur whenever actual
prices or usage of inputs
are greater than standard
prices or usage.
Favorable variances
occur whenever the
opposite occurs.
9 -14
Cost
x
x
x
x
$110,000
$100,000
x
x
$ 90,000
Time
9 -15
Variance Analysis: Materials and Labor
Actual production
48,500 bags of corn chips
Actual cost of corn 780,000 ounces of $0.0069 = $5,382
Actual cost of
inspection labor
Corn
Inspection labor
360 hours at $7.35 = $2,646
Actual Costs Budgeted Costs Total Variance
$5,382.00
$5,238.00
$144.00 U
2,646.00
2,376.50
269.50 U
Variance Analysis: Columnar Approach
AQ x AP 780,000
x 0.0069 $5,382
AQ x SP
780,000 x $.0.0060
$4,680
$702 U
Price Variance
SQ x SP
873,000 x $0.0060
$5,238
$558 F
Usage Variance
$144 U
Total Variance
9 -16
9 -17
Material Price Variance
MPV = (AP – SP)AQ
The actual
The actual
The standard
quantity of
price per price
unit per unit
material used
9 -18
Material Price Variance
MPV = (AP – SP)AQ
= ($0.0069 – $0.0060)780,000
= $0.0009 x 780,000
= $702 U
Percent of SP x SQ = $702/$4,680 = 15%
9 -19
Direct Materials Usage Variance
MUV = (AQ – SQ)SP
The standard
The actual
The standard
quantity ofquantity of
price per unit
materials
materials used
allowed for the
actual output
9 -20
Direct Materials Usage Variance
MUV = (AQ – SQ)SP
= (780,000 – 873,000)($0.006)
= 93,000 x $0.006
= $558 F
Percent of SQ x SP = $558/$5,238 = 10.7%
9 -21
Labor Rate Variances
LRV = (AR – SR)AH
The actual
The actual
The standard
hourly wage
direct labor
hourly wage
rate
rate hours used
9 -22
Labor Rate Variances
LRV = (AR – SR)AH
= ($7.35 – $7.00)360
= $0.35 x 360
= $126 U
Percent of SR x SH = $126/$2,520 = 5%
Labor Variances: Columnar Approach
AH x AR
360 x $735
$2,646
AH x SR
360 x $7.00
$2,520
$126 U
Rate Variance
SH x SR
339.5 x $7.00
$2,376.50
$143.50 U
Efficiency Variance
$269.50 U
Total Variance
9 -23
9 -24
Labor Efficiency Variances
LEV = (AH – SH) SR
The actual
The standard
The standard
direct labor
hourly wage
direct labor
hours usedhours that rate
should have
been used
9 -25
Labor Efficiency Variances
LEV = (AH – SH)SR
= (360 – 339.5)$7
= 20.5 x $7
= $143.50 U
Percent of SH x SR = $143.50/$2,376.50 = 6%
9 -26
Variable Overhead Variances
Variable overhead rate (standard)
Actual variable overhead costs
Actual hours worked
Bags of chips produced
Hours allowed for production
Applied variable overhead
$3.85/DLH
$1,600
400
48,500
373.3
$1,456
Variable Overhead Variances: Columnar Approach
Actual VO
$1,600
VO Rate x
Actual Hours
$1,540
$60 U
Spending
Variance
VO Rate x
Standard Hours
$1,456
$84 U
Efficiency Variance
$144 U
Total Variance
9 -27
9 -28
Variable Overhead
Spending Variances
VOSV = (AVOR x AH) – (SVOR x AH)
= (AVOR – SVOR)AH
= ($4.00 – $3.85)400
= $60 U
9 -29
Crunch Chips, Inc.
Flexible Budget Performance Report
For the Week Ended March 8, 2004
Cost
Formula
Actual
Costs
Spending
Budget Variance
$3.00
$1,190
$1,200
$10 F
Electricity
0.78
385
312
73 U
Water
0.07
25
28
3 F
$3.85
$1,600
$1,540
$60 U
Gas
Total cost
9 -30
Crunch Chips, Inc.
Performance Report
For the Week Ended March 8, 2004
Cost Actual
Formula Costs
Gas
Budget
for
Spending Standard Efficiency
Budget Variance Hours Variance
$3.00
$1,190
$1,200
Electricity
0.78
385
312
73 U
295
17 U
Water
0.07
25
28
3 F
26
2U
$3.85
$1,600
$1,540
$60 U $1,456
$84 U
Total cost
$10 F $1,135
$65 U
9 -31
Fixed Overhead Variances
Budgeted or Planned Items
Budgeted fixed overhead
$749,970
Practical activity
23,400 direct labor hours
Standard fixed overhead rate
$32.05
Hours allowed toActual
produce
3,000,000 bags of chips:
Results
0.078 x 3,000,000 = $23,400
Actual production
2,750,000 bags of chips
Actual fixed overhead cost
$749,000
Standard hours allowed for actual
production
21,450
9 -32
Total Fixed Overhead Variances
Applied fixed = Standard fixed overhead rate
overhead
x Standard hours
= $32.05 x 21,450
= $687,473 (rounded)
Total fixed = $749,000 – $687,473
overhead variance
= $61,527 underapplied
Fixed Overhead Variances: Columnar Approach
Budgeted FO
$749,970
Actual FO
$749,000
$970 F
Spending
Variance
Applied FO
$687,473
$62,497 U
Volume
Variance
$61,527 U
Total Variance
9 -33
9 -34
Crunch Chips, Inc.
Performance Report
For the Year Ended 2004
Fixed
Overhead Items
Actual
Costs
Budgeted
Cost
Variance
Depreciation
$530,000
$530,000 $ ----
Salaries
Taxes
Insurance
Total fixed overhead
159,370
50,500
9,130
$749,000
159,970
50,000
10,000
$749,970
600
500
870
$970
F
U
F
F
9 -35
Volume Variance
Volume variance = $32.05(23,400 – 21,450)
= ($32.05 x 23,400) – ($32.05 x 21,450)
= $749,970 – $687,473
= Budgeted fixed overhead – Applied
fixed overhead
= $62,497 U
9 -36
Appendix:
Accounting for
Variances
9 -37
The actual price is $0.0069 per ounce of
corn and standard price is $0.0060, and
780,000 ounces of corn are purchased.
Materials Inventory
4 680 00
The receiving report and the invoice are
Materials Price Variance
702 00
used to record the receipt of the
Accounts Payable
merchandise
and to control the payment.
Material Price Variance
5 382 00
9 -38
During the period 780,000 ounces of corn
is placed into production. The
standard quantity is 873,000 ounces,
and standard price is $0.006.
Work in Process
5 238 00
The receiving report and the invoice are
Materials Usage Variance
used to record the receipt of the
Materials
Inventory
merchandise
and to control the payment.
Material Usage Variance
558 00
4 680 00
During the period the firm has 360 actual
inspection hours, while the standard hours
for the units produced is 339.5 hours. The
actual rate is $7.35 per hour while the
standard rate is $7.00 per hour.
Work in Process
9 -39
2 376 00
The receiving report and the invoice are
Labor Efficiency Variance
143 50
used to record the receipt of the
Labormerchandise
Rate Variance and to control the payment.
126 00
Accrued Payroll
2 646 00
Labor Variances
9 -40
At the end of the year, the variances for
materials and labor are usually closed to
Cost of Goods Sold.
Cost of Goods Sold
971 50
The receiving report and the invoice are
Material Price Variance
used to record the receipt of the
Labor
Efficiency Variance
merchandise
and to control the payment.
Labor Rate Variance
Closing Variances
702 00
143 50
126 00
9 -41
At the end of the year, the variances for
materials and labor are usually closed to
Cost of Goods Sold.
Material Usage Variance
558 00
The receiving report and the invoice are
Cost of Goods Sold
used to record the receipt of the
merchandise and to control the payment.
Closing Variances
558 00
9 -42
Chapter Nine
The End
9 -43