Chapter 16
Standard costing
variance analysis
kaizen costing
Standards
≠ Predetermined amount for what should
happen
≠ Quantity standard
≠ Quantity of the resource that should be
consumed
≠ Cost standard
≠ Cost per unit that should be paid for the resource
≠ Provides a context for evaluating actual
amounts
Standards
≠ Advantages
≠ Provides a context for evaluating actual
amounts
≠ Standard costs do not fluctuate
≠ Simplified accounting
≠ Less expensive than actual costing
Setting standards
≠ Quantity standards
≠ How much should be consumed?
≠ Product/process analysis
≠ Allowance for normal, unavoidable
inefficiencies
≠Historical data
≠ Is it still relevant?
Setting standards
≠ Cost standards
≠ What should a unit of the resource cost?
≠ Normal quality
≠ Normal quantity
≠ Regular supplier
≠ Same shipping method
≠ Etc.
Setting standards
≠ Other issues
≠ What is normal?
≠ Practical or perfection?
≠ Who determines the standard?
≠ Who is most familiar with the usage?
≠ Who is most familiar with the cost?
Variance analysis
≠ Comparison of standard to actual
results
≠ Quantity
≠ Material quantity variance
≠ Labor efficiency variance
≠ Cost
≠ Material cost variance
≠ Labor rate variance
Variance analysis
≠ Quantity variance formula
≠ Standard price * (actual – standard quantity)
≠ Notice what is in the parentheses
≠ Cost variance formula
≠ Actual quantity * (actual – standard cost)
≠ Notice what is in the parentheses
≠ I pay for the actual amount I purchase
Variance analysis
≠ Favorable or unfavorable?
≠ Favorable if actual is less than standard
≠ Implies efficiency or cost savings
≠ Unfavorable if actual is greater than
standard
≠ Implies waste or excessive cost
≠ Does not mean “good” or “bad”
≠ Any variance is a deviation from what was
supposed to happen
Variance analysis
≠ Responsibility
≠ Why did the variance occur?
≠ Usage issue
≠ Efficiency or inefficiency
≠ Quality issue
≠ Different material or labor mix
≠ Quantity issue
≠ Discount or surcharge
Variance analysis
Standard quantity per finished unit
Standard cost per unit
Actual output (finished units)
Actual quantity used
Actual cost per unit
12
$ 3.80
500
5,942
$ 3.75
Variance analysis
Quantity
variance
= $
3.80 * (
= $ 220.40
Price
variance
=
5,942 *(
= $ 297.10
5,942 - (
500 *
Favorable
$ 3.75 Favorable
3.80 )
12 ))
Variance analysis
Standard hours per finished unit
Standard rate per hour
Actual output (finished units)
Actual hours used
Total actual labor cost
2
$ 12.40
500
1,085
$ 13,237
Variance analysis
Quantity
variance
=
=
Price
variance
=
=
Variance analysis
≠ Multiple substitutable inputs
≠ Multiple labor skills, multiple materials
≠ Quantity (efficiency) variances can be
broken down further
≠ Mix variance
≠ Yield variance
Variance analysis
≠ Mix variance
≠ Mix of inputs is different than standard
Difference
between actual
and standard
proportions of the
specific input
*
Total
quantity of
the
resource
class
*
Standard
price of the
specific input
Variance analysis
≠ Yield variance
≠ Actual total quantity of inputs is different
than standard
Difference
between actual
and standard
quantity of the
resource class
*
Standard
input
proportion of
the specific
resource
*
Standard
price of the
specific input
Variance analysis
Standard
Material price per unit
X
$
12.00
Y
18.00
Z
32.00
Standard
Proportion of
quanity
total
300
20.0%
450
30.0%
750
50.0%
1,500
100.0%
Actual price
per unit
$
11.50
19.20
32.70
Actual
Proportion of
quantity
total
280
17.5%
520
32.5%
800
50.0%
1,600
100.0%
Material
X
Y
Z
Variance analysis
Material quantity variance
X
Actual quantity
Standard quantity
Difference
Standard price per unit
Material quantity variance
280
300
(20)
$
12.00
$
(240.00)
Favorable
Material
Y
Z
Total
520
800
450
750
70
50
$
18.00 $
32.00
$
1,260.00 $
1,600.00 $
2,620.00
Unfavorable Unfavorable Unfavorable
Variance analysis
Material mix variance
Material
Y
X
Actual input
proportion
Standard input
proportion
Difference
Actual total
quantity of inputs
Product
Standard price of
input
Material mix
variance
$
Z
Total
17.5%
32.5%
50.0%
20.0%
-2.5%
30.0%
2.5%
50.0%
0.0%
1,600
(40.0)
1,600
40.0
1,600
-
12.00
18.00
32.00
$
(480.00) $
720.00 $
Favorable
Unfavorable No variance
$
240.00
Unfavorable
Variance analysis
Material yield variance
1,600
Material
Y
1,600
1,500
100
1,500
100
1,500
100
20.0%
20.0
30.0%
30.0
50.0%
50.0
X
Actual total inputs
Standard total
inputs
Difference
Standard input
proportion
Product
Standard price of
input
Material yield
variance
$
12.00
$
18.00
Z
Total
1,600
$
32.00
$
240.00 $
540.00 $
1,600.00 $
2,380.00
Unfavorable Unfavorable Unfavorable Unfavorable
Variance analysis
≠ Now what?
≠ Investigation of variances
≠ Variance size
≠ Cost/benefit of analysis
≠ Offsetting variances
≠ Controllability
≠ Interactions and tradeoffs
≠ Recurring variances
Variance analysis
≠ Criticisms
≠ Variances can be too aggregated
≠ Work best in stable, mass production
environment
≠ Focus on cost minimization, not qualitative
issues
≠ Greater automation reduces variances
≠ Standards are often relevant for only a
short time
Standard cost accounting
≠ Use of standard costs reduces period-to-period
fluctuations
≠ Standard costs are debited to inventory and
CofGS accounts
≠ Variance is the difference between the debit to
inventory and the credit
≠ Variances are closed to CofGS at end of period
≠ Favorable variances decrease CoGS
≠ Unfavorable variances increase CofGS
Kaizen costing
≠ Form of continuous improvement
≠ Process
≠ Cost reduction goal is established
≠ Actual costs are compared to goal
≠ Actual cost achieved by year end becomes
the base for next year’s reduction target