Standard Costing: A
Functional-Based
Control Approach
9
9-1
Developing Unit Input Standards
1
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 X Standard Quantity (SP X SP)
9-2
Developing Unit Input Standards
1
• 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.
9-3
Variance Analysis and Accounting: Direct
Materials and Direct Labor
3
• A flexible budget can be 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 cost = (AP X AQ) – (SP X SQ)
9-4
Variance Analysis and Accounting: Direct
Materials and Direct Labor
3
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
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
9-5
Variance Analysis and Accounting: Direct
Materials and Direct Labor
3
Direct Materials Price Variance: 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 X AQ) – (SP X 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
9-6
Variance Analysis and Accounting: Direct
Materials and Direct Labor
3
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 X AQ) – (SP X 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
9-7
Variance Analysis and Accounting: Direct
Materials and Direct Labor
3
Timing of the Price Variance Computation
The direct materials price variance can be computed at
one of two points:
1) When the direct materials are issued for use in
production
2) When they are purchased
9-8
Variance Analysis and Accounting: Direct
Materials and Direct Labor
3
Accounting for the Direct Materials Price and Usage
Variances
Materials (SP X AQ)
Direct Materials Price Variance (AP –SP)AQ
Accounts Payable (AP X AQ)
Work in Process (SQ X SP)
Direct Materials Usage Variance (AQ-AQ)SP
Materials (AQ X SP)
9-9
Variance Analysis and Accounting: Direct
Materials and Direct Labor
3
Direct Labor Rate Variance computes the difference
between what was paid to direct laborers and what
should have been paid
LRV = (AR X AH) – (SR X AH)
Direct Labor Efficiency variance measures the
difference between the direct labor hours that were
actually used and the direct labor hours that should
have been used
LEV = (AH X SR) – (SH X SR)
9-10
Variance Analysis and Accounting: Direct
Materials and Direct Labor
3
Accounting for the Direct Labor Rate and
Efficiency Variance
(assuming a favorable direct labor rate variance
and an unfavorable labor efficiency variance)
Work in Process (SH X SR)
Direct Labor Efficiency Variance (AH –SH)SR
Direct Labor Rate Variance (AH – SR) AH
Wages Payable (AH X AR)
9-11
Variance Analysis and
Accounting: Direct Materials and
Direct Labor
3
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
one allowable deviation. The upper control limit is
the standard plus the allowable deviation and the
lower control limit is the standard minus the allowable
deviation.
1-12
Variance Analysis: Overhead Costs
4
Variable overhead spending variance measures the
aggregate effect of differences in the actual variable
overhead rate and the standard variable overhead
rate
VOSV = (AVOR X AH) – (SVOR X 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
Variable overhead efficiency variance measures the
change in variable overhead consumption that occur
because of the efficient/inefficient use of direct labor
VOEV = (SVOR X AH) – (SVOR X SH)
9-13
Variance Analysis: Overhead Costs
4
Fixed overhead spending variance is the difference between the
actual fixed overhead and the budgeted fixed overhead
FOSV = AFOH – BFOH
If less (more) is spent on fixed overhead items than was budgeted,
the spending variance is favorable (unfavorable).
Fixed overhead volume variance is the difference between
budgeted fixed overhead and applied fixed overhead
Volume variance = Budgeted fixed overhead – Applied fixed
overhead
As a general rule, 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
9-14
Variance Analysis: Overhead Costs
4
Accounting for Overhead Variances:
To Recognize the incurrence of actual overhead:
Variable Overhead Control
Fixed Overhead Control
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
9-15
Variance Analysis: Overhead Costs
4
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
9-16
Mix and Yield Variances: Materials and
5
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
9-17
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
5
Yield variance = (Standard yield – Actual yield) SPy
Where:
Standard yield – yield ratio X total actual inputs
Yield ratio = total output/total input
SPy = Standard cost of the yield
(Similar equations for labor)
9-18