COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan
Chapter 9
Standard Costing: A FunctionalBased Control Approach
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.
1
Study Objectives
1. Describe how unit input standards are developed, and
explain why standard costing systems are adopted.
2. Explain the purpose of a standard cost sheet.
3. Compute and journalize the direct materials and direct
labor variances, and explain how they are used for
control.
4. Compute overhead variances three different ways, and
explain overhead accounting.
5. Calculate mix and yield variances for direct materials
and direct labor.
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Developing Unit Input Standards
• Unit standard cost is the product of
standard price and standard quantity
Standard Standard

Price
Quantity
SP  SQ 
• Quantity standards specify how much of the
input should be used per unit of output
• Price standards specify how much should be
paid for the quantity of the input to be used
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Developing Unit Input 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.
• Kaizen standards reflect a planned
improvement and are a type of currently
attainable standard.
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Developing Unit Input Standards
• Usage of standard costing systems
– Cost management
– Planning and control
– Decision making and product costing
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Developing Unit Input Standards
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Standard Cost Sheets
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Variance Analysis and Accounting:
Direct Materials and Direct Labor
Total budget variance = (AP  AQ) – (SP  SQ)
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Variance Analysis and Accounting:
Direct Materials and Direct Labor
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Variance Analysis and Accounting:
Direct Materials and Direct Labor
Accounting for the Direct Materials Price and
Usage Variances
Materials (SP  AQ)
Direct Materials Price Variance (AP - SP)AQ
Accounts Payable (AP  AQ)
15,600
3,900
Work in Process (SQ  SP)
Direct Materials Usage Variance (AQ - SQ)SP
Materials (AQ  SP)
15,600
3,900
19,500
19,500
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Variance Analysis and Accounting:
Direct Materials and Direct Labor
• Direct materials price variances can be
computed at the point
– when the direct materials are issued into
production OR
.– when the materials are purchased
• This method would require AQ to be defined as the
actual quantity purchased, rather than actual
quantity used)
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Variance Analysis and Accounting:
Direct Materials and Direct Labor
Direct materials usage variances should be computed as
direct materials are issued into production.
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Variance Analysis and Accounting:
Direct Materials and Direct Labor
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Variance Analysis and Accounting:
Direct Materials and Direct Labor
Accounting for the Direct Labor Rate
and Efficiency Variances
Work in Process (SH  SR)
Direct Labor Rate Variance (AR - SR)AH
Direct Labor Efficiency Variance (AH - SH)SR
Wages Payable (AH  AR)
2,400
65
200
2,665
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Variance Analysis and Accounting:
Direct Materials and Direct Labor
• Investigating direct materials and labor
variances
– Because random variations around the standard are
expected, management should establish an
acceptable range of performance.
– The acceptable range is the standard, plus or minus
an allowable deviation.
• The upper control limit is the standard plus the allowable
deviation
• The lower control limit is the standard minus the allowable
deviation.
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Variance Analysis and Accounting:
Direct Materials and Direct Labor
Disposition of Direct Materials and
Direct Labor Variances Immaterial
Cost of Goods Sold
Direct Materials Price Variance
Direct Materials Usage Variance
Direct Labor Rate Variance
Direct Labor Efficiency Variance
4,765
3,900
600
65
200
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Variance Analysis and Accounting:
Direct Materials and Direct Labor
Disposition of Direct Materials and
Direct Labor Variances Material
Prime Costs
Work in Process
Finished Goods
Cost of Goods Sold
Total
Percentage of Total
$0
3,480
13,920
0%
20
80
$17,400
100%
Finished Goods
Cost of Goods Sold
Direct Materials Price Variance
Direct Materials Usage Variance
Direct Labor Rate Variance
Direct Labor Efficiency Variance
953
3,812
3,900
600
65
200
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Variance Analysis: Overhead Costs
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Variance Analysis: Overhead Costs
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Variance Analysis: Overhead Costs
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Variance Analysis: Overhead Costs
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Variance Analysis: Overhead Costs
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Variance Analysis: Overhead Costs
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Variance Analysis: Overhead Costs
Accounting for Overhead Variances
To recognize the incurrence of actual overhead:
Variable Overhead Control
7,540
Fixed Overhead Control
20,500
Miscellaneous Accounts
To recognize the variances:
Fixed Overhead Control
Variable Overhead Efficiency Variance
Fixed Overhead Spending Variance
Variable Overhead Control
Variable Overhead Spending Variance
Fixed Overhead Volume Variance
28,040
3,500
600
500
340
260
4,000
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Variance Analysis: Overhead Costs
Accounting for Overhead Variances
(continued)
To close the variances to Cost of Goods Sold:
Fixed Overhead Volume Variance
Variable Overhead Spending Variance
Cost of Goods Sold
Cost of Goods Sold
Variable Overhead Efficiency Variance
Fixed Overhead Spending Variance
4,000
260
4,260
1,100
600
500
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Variance Analysis: Overhead Costs
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Variance Analysis: Overhead Costs
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Mix and Yield Variances:
Materials and Labor
Standard Mix Information: Direct Materials
Direct
Material
Peanuts
Almonds
Mix
Mix
Proportion
128 lbs
0.80
32 lbs
0.20
160
Standard
SP
Cost
$0.50
$64.00
$1.00
32.00
$96.00
Yield: 120 lbs.
Yield ratio: 0.75 (120 / 160)
Standard cost of yield (SPy): $0.80 per pound ($96 / 120 pounds of yield)
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Mix and Yield Variances:
Materials and Labor
Malcom Nut Company produces a batch of 1,600
pounds and produces the following actual results:
Direct
Materials
Peanuts
Almonds
Actual
Mix
1,120 lbs
480 lbs
1,600 lbs
Percentages
70%
30%
100%
Yield
1,300 lbs
81.3%
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Mix and Yield Variances:
Materials and Labor
Mix Variance = Σ(AQi – SMi)SPi
Direct
Materials
AQ
Peanuts
1,120
Almonds
480
Mix variance
SM
1,280
320
AQ-SM
(160)
160
SP
(AQ-SM)SP
$0.50 $
(80)
$1.00 $
160
$
80 U
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Mix and Yield Variances:
Materials and Labor
Direct Materials Yield Variance
Yield variance = (Standard yield – Actual yield) Spy
Standard yield = Yield ratio × Total actual inputs
Yield variance = (1,200 – 1,300)$0.80
= $80 F
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Mix and Yield Variances:
Materials and Labor
Standard Mix Information: Direct Labor
Labor
Mix
Standard
Type
Mix
Proportion
SP
Cost
Shelling
3 hrs
0.60
$8.00
$24.00
Mixing
2 hrs
0.40 $15.00
30.00
5
$54.00
Yield: 120 lbs.
Yield ratio: 24 or 2400% (120 / 5)
Standard cost of yield (SPy): $0.45 per pound ($54 / 120 pounds of yield)
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Mix and Yield Variances:
Materials and Labor
Direct
Labor
Type
Shelling
Mixing
Yield
Actual
Mix
20 hrs
30 hrs
50 hrs
Mix
Percentages*
40%
60%
100%
1,300 lbs
2600.0%
*uses 50 hours as the base
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Mix and Yield Variances:
Materials and Labor
Direct
Labor
Type
AH
Shelling
20
Mixing
30
Mix variance
SM
30
20
AH-SH
(10)
10
SP
(AH-SM)/SP
$8.00 $
(80)
$15.00 $
150
$
70 U
Direct Labor Yield Variance
Yield variance = (Standard yield – Actual yield)Spy
= [(24 × 50) – 1,300]$0.45
= (1,200 – 1,300)$0.45
= $45 F
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COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan
End Chapter 9
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.
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