14
Standard
Costing: A
Managerial
Control Tool
PowerPresentation® prepared by
David J. McConomy, Queen’s University
Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
14-1
Learning Objectives

Explain how unit standards are set and
why standard cost systems are
adopted.

Explain the purpose of a standard cost
sheet.

Describe the basic concepts
underlying variance analysis and
explain when variances should be
investigated.
Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
14-2
Learning Objectives
(continued)

Compute the materials and labour
variances and explain how they are used
for control.

Compute the variable and fixed overhead
variances and explain their meaning.

Use variance analysis as an analytical tool
for profitability analysis. (Appendix A)
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14-3
Learning Objectives
(continued)

Prepare journal entries for materials and
labour variances and describe the
accounting for overhead variances.
(Appendix B)
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14-4
Unit Standard Cost
To determine the unit standard cost for a
particular input, two decisions must be made:
1. How much of the input should be used per
unit of output ? (Quantity decision)
2. How much should be paid for the quantity
of the input to be used ? (Pricing decision)
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14-5
Types of Standards
Ideal Standards demand
maximum efficiency and
can be achieved only if
everything operates
perfectly.
Currently attainable
standards can be achieved
under efficient operating
conditions.
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14-6
Sources for Quantitative Standards
1. Historical experience
2. Engineering studies
3. Input from operating
personnel
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14-7
Factors for Price Standards - Materials
1. Market forces
2. Quality
3. Discounts
4. Freight
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14-8
Factors for Price Standards - Labour
1. Market forces
2. Trade unions
3. Payroll taxes
4. Qualifications
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14-9
Purposes of Standards

To improve planning and control

To facilitate product costing
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14-10
Cost Assignment Approaches
Manufacturing Costs
Direct
Materials
Direct
labour
Overhead
Actual costing system
Actual
Actual
Actual
Normal costing system
Actual
Actual
Budgeted
Standard
Standard
Standard
Standard costing system
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14-11
A Standard Cost Sheet
Description
Standard
Price
Standard
Usage
Standard
Cost/Unit
Direct materials
Direct labour
Variable overhead
Fixed Overhead1
$1.50/kg.
$6.00/hr.
$10.00/hr.
$8.00/hr.
10 kgs.
2 hours
2 hours
2 hours
$15.00
12.00
20.00
16.00
$63.00
Other Operating Data for Period:
Units produced 20,000 units
210,000 kilograms purchased @ $1.55 per kilogram; 205,000 kgs.
used
Direct labour costs 39,000 hours @ $6.10 per hour
Variable overhead $410,000
1Fixed overhead $300,000; Rate = ($310,000/38,750 hrs)
Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
14-12
Variable Cost Variance Analysis:
General Description
Actual Quantity of
Input at Actual Price
AQ x AP
Actual Quantity of
Input at Standard Price
AQ x SP
Price
Variance
AQ x (AP - SP)
Standard Quantity of
Input at Standard Price
SQ x SP
Usage
Variance
SP x (AQ - SQ)
Budget
Variance
(AQ x AP) - (SQ x SP)
Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
14-13
Variance Investigation
Variances are investigated if two
conditions are met:
1. The variance is material
2. The benefits of investigating and
taking corrective action are
greater than its costs
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14-14
Control Limits:
Standard + Allowable Deviation
Investigating occurs for values
outside the allowable range.
Example: Assume the allowable deviation may be the
lesser of $8,000 or 10% of the standard. Suppose the
standard is $50,000 and the actual deviation from
standard is $6,000. Will the variance be investigated.
Answer: Yes. Ten percent of standard is $5,000. Since
$6,000 is larger than the allowable deviation, an
investigation will take place.
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14-15
Material Variances
Formula Approach:
MPV = (AP - SP)AQ
= ($1.55-$1.50)210,000
= $10,500 U
MUV = (AQ - SQ)SP
= (205,000 - 200,000)$1.50
= $7,500U
SQ = 20,000 units x 10 lbs per unit
Diagram Approach:
AQ x AP
210,000 x $1.55
AQ x SP
AQ x SP
SQ x SP
210,000 x $1.50 205,000 x $1.50
MPV = $10,500U
Responsibility:
Purchasing
200,000 x $1.50
MUV = $7,500U
Responsibility:
Manufacturing
Flexible Budget Variance = $18,000U
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14-16
Labour Variances
Formula Approach:
LRV = (AR - SR)AH
= ($6.10 - $6.00)39,000
= $3,900 U
LEV= (AH - SH)SR
= (39,000 - 40,000)$6.00
= $6,000 F
SQ = 20,000 units x 2 hrs. per unit
Diagram Approach:
AH x AR
39,000 x $6.10
AH x SR
39,000 x $6.00
LRV = $3,900 U
Responsibility:
Human Resources
SH x SR
40,000 x $6.00
LEV = $6,000 F
Responsibility:
Manufacturing
Flexible Budget Variance = $2,100 F
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14-17
Variable Overhead Variances
Formula Approach:
OSV = (AVOR - SVOR)AH
= $410,000 - ($10 X 39,000 hrs)
= $20,000 U
OEV = (AH - SH)SVOR
= (39,000 - 40,000)$10.00
= $10,000 F
SQ = 20,000 units x 2 hrs. per unit
Diagram Approach:
AH x AVOR
AH x SVOR
$410,000
SH x SVOR
39,000 x $10.00
OSV = $20,000 U
Responsibility:
Manufacturing
40,000 x $10.00
OEV = $10,000 F
Responsibility:
Manufacturing
Flexible Budget Variance = $10,000 U
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14-18
Fixed Overhead Variances
Actual Overhead
Budgeted Overhead
Applied Overhead
$310,000
SOR x SH ($8 x40,000)
$300,000
OSV = $10,000F
DV = 10,000F
Responsibility:
Manufacturing
Responsibility:
Difficult to Assess
Alternative Approach for Computing FOH Denominator Variance
Planned level
Applied level (SOR)
Over
FOH Denominator Variance
Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
38,750
40,000
1,250
x $8
$10,000
======
hrs.
hrs.
hrs.
F
14-19
APPENDIX A
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14-20
Further Analysis of the
Profit Volume Variance

The profit volume variance can be
decomposed further, for example into
industry volume and market share variances

In the next slide, assume that the master
budget was based on a certain percentage of
market share, and that the industry
experienced an increase in its volume of 10%
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14-21
Profit Variances
Sales
from Chapter 13
Master Budget Flexible Budget
(1,000 units)
(800 units)
$ 100,000
$ 80,000
Actual
(800 units)
$ 82,000
Variable Costs
40,000
32,000
39,000
Contribution Margin
60,000
48,000
43,000
Fixed Costs
30,000
30,000
34,000
Operating Income
30,000
18,000
9,000
Comparing the flexible to the static (master) budget isolates the
effects of volume on profits, and comparing actual to flexible budget
isolates the appropriate cost variances as well as the sales price
variance, as follows:
Profit volume variance = 18,000 – 30,000
Sales price variance = 82,000 – 80,000
Variable cost variances = 32,000 – 39,000
Fixed cost variances = 30,000 – 34,000
=$
=
=
=
- 12,000 (U)
2,000 (F)
- 7,000 (U)
- 4,000 (U)
Total variances
=$
- 21,000 (U)
===========
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14-22
Industry Volume and Market Share Variances
Master Budget
(1,000 units)
Sales
$ 100,000
Master
Budget
adjusted for
Actual
Industry
Volume
$ 110,000
Flexible Budget
(800 units)
Actual
(800 units)
$ 80,000
$ 82,000
Variable Costs
40,000
44,000
32,000
39,000
Contribution
Margin
Fixed Costs
60,000
66,000
48,000
43,000
30,000
30,000
30,000
34,000
Operating Income
30,000
36,000
18,000
9,000
Comparing the flexible to the static (master) budget isolates the effects of volume on
profits This in turn can be broken down into an industry volume variance and a market
share variance
Industry volume variance = 36,000 – 30,000 = $
Market share variance = 18,000 – 36,000
=
Profit volume variance = 18,000 – 30,000
=$
6,000 (F)
- 18,000 (U)
_______
- 12,000 (U)
=========
IVV = 10% of CM of $60,000
MSV= 30,000 loss of revenues to maintain the same market share x CMR of 0.60
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14-23
Sales Mix Variance

Assume that the previous statement was for a
multi-product company, and that its budgeted
CMR at its budgeted mix was 0.60.

Assume further that the actual sales mix would
have resulted in a budgeted CMR of 0.58 instead

How much is the Sales Mix Variance?
Answer: - 0.02 x 80,000 = $ -1,600 U
The following spreadsheet includes a
comprehensive analysis of all profit variances
Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
14-24
Profit Variances - A Comprehensive Analysis
Master Budget
Sales
$ 100,000
Master
Budget
adjusted for
Actual
Industry
Volume
$ 110,000
Flexible Budget
Flexible
Budget
adjusted for
Actual
Sales Mix
Actual
$ 80,000
$ 80,000
$ 82,000
Variable Costs
40,000
44,000
32,000
33,600
39,000
Contribution
Margin
Fixed Costs
60,000
66,000
48,000
46,400
43,000
30,000
30,000
30,000
30,000
34,000
Operating Income
30,000
36,000
18,000
16,400
9,000
Summary of Variances
Industry volume variance = 36,000 – 30,000
Market share variance = 18,000 – 36,000
Profit volume variance = 18,000 – 30,000
Sales mix variance = 16,400 – 18,000
=$
=
=
=
Sales price variance = 82,000 – 80,000
Variable cost variances = 33,600 – 39,000
Fixed cost variances = 30,000 – 34,000
=
=
=
Total variances
Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
6,000 (F)
- 18,000 (U)
$
- 12,000 (U)
- 1,600 (U)
2,000 (F)
- 5,400 (U)
- 4,000 (U)
__________
- 21,000 (U)
=========
14-25
Profitability Analysis:
Problem 14-44
1. Total CM per Master Budget
A
9,000 x $8 = $72,000
B
6,500 x 11 = 71,500
$143,500
Total standard CM for Actual Quantities
A
10,000 x $8 = $80,000
B
6,000 x 11 = 66,000
$146,000
Profit Volume Variance (gross)
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2,500 F
=======
14-26
Profitability Analysis:
Problem 14-45 (continued)
2. Weighted average CM per unit based on Master Budget
$143,500/15,500 = 9.2581
Total standard CM for Actual Quantity
Total standard CM for 16,000 units
assuming budgeted sales mix
16,000 x $9.2581
Sales mix variance
Profit volume variance (net)
(16,000 - 15,500) x $9.2581 =
Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
146,000
148,129
$ 2,129 U
4,629 F
14-27
Profitability Analysis:
Problem 14-45 (continued)
3. Decline in industry sales
(77,500 - 64,000) x 77,500 = 17.42%
Industry volume variance
.1742 x 15,1500 x 9.2581 =
$24,997 U
Budgeted market share: 15,500/77,500 = 20%
Market share variance
(16,000-[0.20 x 64,000]) x 9.2581 =
$29,626 F
4. Sales Price Variance
A
10,000($21 - 20) = 10,000 F
B
6,000($32 - 30) = 12,000 F
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$22,000 F
14-28
Profitability Analysis:
Problem 14-45 (continued)
5. Variable cost flexible budget variances
Variable manufacturing costs
A
10,000($12 - 11) = 10,000 U
B
6,000($20 - 18) = 12,000 U = $22,000 U
Variable marketing and administrative
A
10,000($1.10 - 1) = 1,000 U
B
6,000($1.10 - 1) = 600 U = $ 1,600 U
$23,600 U
6. Fixed cost flexible budget variance
Manufacturing 36,000 - 34,500 = 1,500 U
Mktg and admin 44,000 - 40,000 = 4,000 U $5,500 U
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14-29
Profitability Analysis:
Problem 14-45 (continued)
7. Budgeted net income
Industry volume variance
Market share variance
Profit volume variance (net)
Sales mix variance
Profit Volume Variance (gross)
Sales price variance
Variable cost flex. bud. var.
Fixed cost flex. bud. var.
Total profit variances
Actual net income
Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
$69,000
$24,997 U
29,626 F
4,629 F
2,129 U
2,500 F
$22,000 F
$23,600 U
5,500 U
$ 4,600U
$ 64,400
14-30
APPENDIX B
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14-31
Accounting for Variances
Journal Entry for Purchase of Direct Materials
Materials (AQ x SP)
MPV (AP - SP)AQ
Accounts Payable (AQ x AP)
315,000
10,500
325,500
Rule: Unfavourable variances are recorded by a debit
and favourable variances are recorded by a credit.
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14-32
Accounting for Variances
(continued)
Recording the Issuance of Materials to Production
Work in Process (SQ x SP)
MUV [(AQ - SQ)SP]
Materials (AQ x SP)
300,000
7,500
307,500
AQ = Actual quantity used in production
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14-33
Accounting for Variances
(continued)
Recording the Direct Labour Costs
Work in Process (SH x SR)
LEV [(AH - SH) SR]
Accrued Payroll (AH x AR)
LRV [(AR - SR) AH]
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240,000
3,900
237,900
6,000
14-34
Accounting for Variances
(continued)
Recording Variable Overhead
Work in Process (SQ x SP)
400,000
Manufacturing Applied (SQ x SP)
400,000
Manufacturing Overhead (Actual)
Various Accounts
410,000
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410,000
14-35
Accounting for Variances
(continued)
Recording Fixed Overhead
Work in Process (SQ x SP)
320,000
Manufacturing Overhead Applied
320,000
Manufacturing Overhead (Actual)
Various Accounts
300,000
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300,000
14-36
Accounting for Variances
(continued)
Recording O/H Variances and Closing the O/H Accounts
Manufacturing O/H Applied (Variable)
Manufacturing O/H Applied (Fixed)
OSV (Variable)
Manufacturing Overhead (Variable)
Manufacturing Overhead (Fixed)
OEV (Variable)
OSV (Fixed)
DV (Fixed)
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400,000
320,000
20,000
410,000
300,000
10,000
10,000
10,000
14-37
Accounting for Variances
(continued)
Disposition of Overhead Variances
OEV (Variable)
OSV (Fixed)
DV (Fixed)
OSV (Variable)
Cost of Goods Sold
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10,000
10,000
10,000
20,000
10,000
14-38