STANDARD COSTING: A
FUNCTIONAL-BASED CONTROL
APPROACH
CHAPTER 9
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CHAPTER 9 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
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CHAPTER 9 OBJECTIVES
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
• Price Standards specify how much should be
paid for the quantity of the input to be used
• Quantity standards specify how much of the
input should be used per unit of output
• Unit standard cost is the product of these two
standards
Standard price × Standard Quantity (SP × SP)
LO-1
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DEVELOPING UNIT INPUT STANDARDS
Establishing 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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DEVELOPING UNIT INPUT STANDARDS
Kaizen Standards
• Continuous improvement standards
• Reflect planned improvement and are a type of
currently attainable standard
• Have a cost reduction focus and because of their
emphasis on continuous improvement, are
constantly changing
LO-1
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DEVELOPING UNIT INPUT STANDARDS
Kaizen Standards
• Standards and Activity-Based Costing
• An activity’s cost is determined by the amount of
resources consumed by each activity
• Standard consumption patterns are identified based
on historical experience
• Activity-based systems also use standards for control,
where control is specifically defined as cost reduction
• Activities are classified as either value-added or nonvalue-added
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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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EXHIBIT 9.1—COST ASSIGNMENT
APPROACHES
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EXHIBIT 9.2—STANDARD COST SHEET FOR
DELUXE STRAWBERRY FROZEN YOGURT
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STANDARD COST SHEETS
• Standard costs are developed for direct
materials, direct labor, and overhead used in
producing a product or service
• Total of these standard costs yields the standard
cost per unit
• Standard cost sheet provides the detail
underlying the standard unit cost
LO-2
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VARIANCE ANALYSIS AND ACCOUNTING:
DIRECT MATERIALS AND DIRECT LABOR
• Flexible budget : used to identify the direct
material or direct labor input costs that
should have been incurred for the actual
level of activity
• Total budget variance: the difference
between the actual cost of the input and its
standard cost
Total budget variance = (AP × AQ) – (SP × SQ)
LO-3
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VARIANCE ANALYSIS AND ACCOUNTING:
DIRECT MATERIALS AND DIRECT LABOR
Calculating the Direct Materials Price Variance and
Direct Materials Usage Variance
• Price (rate) variance: difference between the actual
and standard unit prices of an input multiplied by
the actual quantity of inputs
• Usage (efficiency) variance: difference between the
actual and standard quantity of inputs multiplied by
the standard unit price of the input
LO-3
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VARIANCE ANALYSIS AND ACCOUNTING:
DIRECT MATERIALS AND DIRECT LABOR
Calculating the Direct Materials Price Variance and
Direct Materials Usage Variance
• Unfavorable (U) variance: occurs whenever actual
prices or usage of inputs are greater than standard
prices or usage
• Favorable (F) variance: occurs whenever actual
prices or usage of inputs are less than standard
prices or usage
LO-3
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VARIANCE ANALYSIS AND ACCOUNTING:
DIRECT MATERIALS AND DIRECT LABOR
Calculating the Direct Materials Price Variance and
Direct Materials Usage Variance
• Direct materials price variance (MPV): difference
between what was actually paid for direct materials
and what would have been paid for the actual
quantity bought if it had been bought at the
standard price
MPV = (AP × AQ) – (SP × AQ)
LO-3
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VARIANCE ANALYSIS AND ACCOUNTING:
DIRECT MATERIALS AND DIRECT LABOR
Calculating the Direct Materials Price Variance and
Direct Materials Usage Variance
MPV = (AP – SP)AQ
• if the actual price is greater than standard, the
MPV is unfavorable
• if the actual price is less than the standard price,
the MPV is favorable
LO-3
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VARIANCE ANALYSIS AND ACCOUNTING:
DIRECT MATERIALS AND DIRECT LABOR
Calculating the Direct Materials Price Variance and
Direct Materials Usage Variance
• Direct materials usage variance: the difference
between the amount of materials actually used and
what should have been used for the actual quantity
of units produced multiplied by the standard price
MUV = (SP × AQ) – (SP × SQ)
LO-3
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VARIANCE ANALYSIS AND ACCOUNTING:
DIRECT MATERIALS AND DIRECT LABOR
Calculating the Direct Materials Price Variance and
Direct Materials Usage Variance
MUV = (AQ – SP)SQ
• if the actual quantity is greater than standard, the
MUV is unfavorable
• if the actual quantity is less than the standard
quantity, the MUV is favorable
LO-3
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VARIANCE ANALYSIS AND ACCOUNTING:
DIRECT MATERIALS AND DIRECT LABOR
Timing of the Price Variance Computation
• The direct materials price variance can be
computed at one of two points
• When the direct materials are issued for use in
production
• When they are purchased
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VARIANCE ANALYSIS AND ACCOUNTING:
DIRECT MATERIALS AND DIRECT LABOR
Timing of the Direct Materials Usage Variance
Computation
• Direct materials usage variance should be
computed as direct materials are issued for
production
• To facilitate this process, many companies use three
forms
• Standard bill of materials
• Color-coded excessive usage forms
• Color-coded returned-materials forms
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EXHIBIT 9.3 - STANDARD BILL OF
MATERIALS
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VARIANCE ANALYSIS AND ACCOUNTING:
DIRECT MATERIALS AND DIRECT LABOR
Accounting for the Direct Materials Price and
Usage Variances
• In a standard costing system, all inventories are
carried at standard
• Direct materials price variance is computed at the
point of purchase
• Unfavorable variances are always debits, and
favorable variances are always credits
LO-3
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VARIANCE ANALYSIS AND ACCOUNTING:
DIRECT MATERIALS AND DIRECT LABOR
Accounting for the Direct Materials Price and
Usage Variances
• Purchase of direct materials, assuming an
unfavorable MPV and that AQ is defined as direct
materials purchased
Materials
(SP × AQ)
Direct Materials Price Variance (AP –SP)AQ
Accounts Payable
(AP × AQ)
LO-3
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VARIANCE ANALYSIS AND ACCOUNTING:
DIRECT MATERIALS AND DIRECT LABOR
Accounting for the Direct Materials Price and
Usage Variances
• Issuance and usage of direct materials, assuming an
unfavorable MUV
Work in Process
Direct Materials Usage Variance
Materials
(SQ × SP)
(AQ-AQ)SP
(AQ × SP)
LO-3
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VARIANCE ANALYSIS AND ACCOUNTING:
DIRECT MATERIALS AND DIRECT LABOR
Calculating Direct Labor Variances
• The rate (price) and efficiency (usage) variances for
direct labor can be calculated using either the
graphical, three-pronged approach or a formula
approach
LO-3
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VARIANCE ANALYSIS AND ACCOUNTING:
DIRECT MATERIALS AND DIRECT LABOR
Direct Labor Rate and Efficiency Variances:
Formula Approach
• Direct labor rate variance (LRV) computes the
difference between what was paid to direct
laborers and what should have been paid
LRV = (AR × AH) – (SR × AH) OR (AR – SR)AH
where
AR = Actual hourly wage rate
SR = Standard hourly wage rate
AH = Actual direct labor hours used
LO-3
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VARIANCE ANALYSIS AND ACCOUNTING:
DIRECT MATERIALS AND DIRECT LABOR
Direct Labor Rate and Efficiency Variances:
Formula Approach
• Direct labor efficiency variance (LEV) measures the
difference between the direct labor hours that were
actually used and the direct labor hours that should have
been used
LEV = (AH × SR) – (SH × SR) or (AH – SH)SR
where
AH = Actual direct labor hours used
SH = Standard direct labor hours that should have been used
SR = Standard hourly wage rate
LO-3
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VARIANCE ANALYSIS AND ACCOUNTING:
DIRECT MATERIALS AND DIRECT LABOR
Accounting for the Direct Labor Rate and
Efficiency Variance
• Assume a favorable direct labor rate variance and
an unfavorable labor efficiency variance
Work in Process
Direct Labor Efficiency Variance
Direct Labor Rate Variance
Wages Payable
(SH × SR)
(AH –SH)SR
(AH – SR) AH
(AH × AR)
LO-3
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VARIANCE ANALYSIS AND ACCOUNTING:
DIRECT MATERIALS AND DIRECT LABOR
Investigating Direct Materials and Labor
Variances
• As random variations around the standard are
expected, management should establish an
acceptable range of performance
• The acceptable range is the standard, plus or minus
one allowable deviation
• The top and bottom measures of the allowable
range are called the control limits
• The upper control limit is the standard plus the
allowable deviation and 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
• All variances are closed out at the end of the year
• Immaterial variances are closed to Cost of Goods Sold
• Materials variances are prorated among Work in
Process, Finished Goods, and Cost of Goods Sold
LO-3
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VARIANCE ANALYSIS: OVERHEAD COSTS
Four-Variance Method for Calculating
Overhead Variances
• Calculates two variances for variable overhead and
two variances for fixed overhead
• Total variable overhead variance is divided into two
components: the variable overhead spending
variance and the variable overhead efficiency
variance
• The total fixed overhead variance is divided into two
components: the fixed overhead spending variance
and the fixed overhead volume variance
LO-4
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VARIANCE ANALYSIS: OVERHEAD COSTS
Variable Overhead Spending Variance
• Measures the aggregate effect of differences in the
actual variable overhead rate (AVOR) and the
standard variable overhead rate (SVOR)
VOSV = (AVOR × AH) – (SVOR × AH)
• Variable overhead is assumed to vary as the
production volume changes – variable overhead
changes in proportion to changes in the direct labor
hours used
LO-4
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VARIANCE ANALYSIS: OVERHEAD COSTS
Variable Overhead Efficiency Variance
• Measures the change in variable overhead
consumption that occur because of the
efficient/inefficient use of direct labor
VOEV = (SVOR × AH) – (SVOR × SH)
LO-4
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EXHIBIT 9.4—VARIABLE OVERHEAD
SPENDING VARIANCE BY ITEM
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EXHIBIT 9.5—VARIABLE OVERHEAD
SPENDING AND EFFICIENCY VARIANCES BY
ITEM
LO-4
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VARIANCE ANALYSIS: OVERHEAD COSTS
Fixed Overhead Spending Variance
• Difference between the actual fixed overhead and
the budgeted fixed overhead
FOSV=AFOH − BFOH
AFOH = Actual fixed overhead
BFOH = Budgeted fixed overhead
• If less (more) is spent on fixed overhead items than
was budgeted, the spending variance is favorable
(unfavorable)
LO-4
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VARIANCE ANALYSIS: OVERHEAD COSTS
Fixed Overhead Volume Variance
• Difference between budgeted fixed
overhead and applied fixed overhead
Volume variance = Budgeted fixed overhead – Applied fixed overhead
LO-4
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VARIANCE ANALYSIS: OVERHEAD COSTS
Fixed Overhead Volume Variance
• If actual production is less than budgeted
production, the volume variance will be unfavorable
• If actual production is more than budgeted
production, the volume variance will be favorable
• The difference is due solely to the differences in
production or planned utilization of capacity
LO-4
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EXHIBIT 9.6—FIXED OVERHEAD SPENDING
VARIANCE BY ITEM
LO-4
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VARIANCE ANALYSIS: OVERHEAD COSTS
Accounting for Overhead Variances
• To assign overhead to production
Work in Process
Variable Overhead Control
Fixed Overhead Control
LO-4
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VARIANCE ANALYSIS: OVERHEAD COSTS
Accounting for Overhead Variances
• To recognize the incurrence of actual overhead
Variable Overhead Control
Fixed Overhead Control
Various Accounts
LO-4
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VARIANCE ANALYSIS: OVERHEAD COSTS
Accounting for Overhead Variances
• 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
LO-4
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VARIANCE ANALYSIS: OVERHEAD COSTS
Accounting for Overhead Variances
• To close the variances to Cost of Goods Sold
Fixed Overhead Volume Variance
Cost of Goods Sold
Cost of Goods Sold
Variable Overhead Spending Variance
Variable Overhead Efficiency Variance
Fixed Overhead Spending Variance
LO-4
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EXHIBIT 9.7—TWO-VARIANCE ANALYSIS:
HELADO COMPANY
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EXHIBIT 9.8—THREE-VARIANCE ANALYSIS:
HELADO COMPANY
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MIX AND YIELD VARIANCES: MATERIALS
AND LABOR
• Mix variance: created whenever the actual
mix of inputs differs from the standard mix
• Yield variance: occurs whenever the actual
yield (output) differs from the standard yield
LO-5
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MIX AND YIELD VARIANCES: MATERIALS
AND LABOR
Direct Materials Mix Variance
• Difference in the standard cost of the actual mix of
inputs use and the standard cost of the mix of inputs
that should have been used
• If relatively more of a more expensive input is used,
the mix variance will be unfavorable
• If relatively more of a less expensive input is used, the
mix variance will be favorable.
Mix Variance =
 ( AQi  SMi)SPi
LO-5
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MIX AND YIELD VARIANCES: MATERIALS
AND LABOR
Direct Materials Yield Variance
• Designed to show the extent to which the amount of
input resulted in the expected amount of output
Yield variance = (Standard yield – Actual yield) Spy
where
Standard yield = yield ratio × total actual inputs
Yield ratio = total output/total input
SPy = Standard cost of the yield
LO-5
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END OF CHAPTER 9
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