Cost Management
ACCOUNTING AND CONTROL
HANSEN & MOWEN
9-1
9
Standard Costing: A Functional-Based
Control Approach
9-2
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  Standard Quantity (SP  SP)
9-3
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.
9-4
Developing Unit Input Standards
1
Usage of Standard Costing Systems
Cost Management
Planning and Control
Decision Making and Product Costing
9-5
Developing Unit Input Standards
1
Cost Assignment Approaches
9-6
Standard Cost Sheets
2
Standard Cost Sheet for Deluxe Strawberry
Frozen Yogurt
9-7
Variance Analysis and Accounting:
Direct Materials and Direct Labor
3
Total budget variance = (AP  AQ) – (SP  SQ)
Performance Report: Total Budget Variances
9-8
Variance Analysis and Accounting:
Direct Materials and Direct Labor
3
Price and Usage Variances: Direct Materials
MPV = (AP – SP)AQ
MUV = (AQ– SQ)SP
9-9
Variance Analysis and Accounting:
Direct Materials and Direct Labor
3
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
9-10
Variance Analysis and Accounting:
Direct Materials and Direct Labor
3
Direct materials price variances can be computed at
the point
1)when the direct materials are issued into production
OR
2)when the materials are purchased. (This method
would require AQ to be defined as the actual quantity
purchased, rather than actual quantity used.
9-11
Variance Analysis and Accounting:
Direct Materials and Direct Labor
3
Direct materials usage variances should be computed as
direct materials are issued into production.
9-12
Variance Analysis and Accounting:
Direct Materials and Direct Labor
3
Rate and Efficiency Variances: Direct Labor
LRV = (AR – SR)AH
LRV = (AR – SR)AH
9-13
Variance Analysis and Accounting:
Direct Materials and Direct Labor
3
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
9-14
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 an
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.
9-15
Variance Analysis and Accounting:
Direct Materials and Direct Labor
3
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
9-16
Variance Analysis and Accounting:
Direct Materials and Direct Labor
3
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
9-17
Variance Analysis: Overhead Costs
4
Variable Overhead Analysis
VOHSP= (AVOR – SVOR)AH
VOHEV = (AH – SH)SVOR
9-18
Variance Analysis: Overhead Costs
4
Variable Overhead Spending Variance by Item
9-19
Variance Analysis: Overhead Costs
4
Variable Overhead Spending and
Efficiency Variance by Item
aPer
direct labor hour.
bSpending
variance = Actual costs - Budget for actual hours.
cEfficiency
variance = Budget for actual hours - Budget for standard hours.
9-20
Variance Analysis: Overhead Costs
4
Fixed Overhead Analysis
FOHSP= AFOH – BFOH
FOHVV = SFOHR  [SH(D) – SH]
9-21
Variance Analysis: Overhead Costs
4
9-22
Variance Analysis: Overhead Costs
4
Graph of Fixed Overhead Variances
9-23
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
7,540
20,500
28,040
3,500
600
500
340
260
4,000
9-24
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
4,000
260
4,260
1,100
600
500
9-25
Variance Analysis: Overhead Costs
4
Two-Variance Analysis: Helado Company
9-26
Variance Analysis: Overhead Costs
4
Three-Variance Analysis: Helado Company
9-27
Mix and Yield Variances:
Materials and Labor
5
Standard Mix Information: Direct Materials
Direct Material
Peanuts
Almonds
Total
Mix Mix Proportion
128 lbs.
32 lbs.
160 lbs.
0.80
0.20
SP
Standard Cost
$0.50
1.00
$64
32
$96
Yield
120 lbs.
Yield ratio: 0.75 (1.20/160)
Standard cost of yield (SP): $0.80 per pound ($96/120 pounds of yield)
9-28
Mix and Yield Variances:
Materials and Labor
5
Malcom Nut Company produces a batch of 1,600
pounds and produces the following actual results:
Direct
Material
Actual Mix
Percentages
Peanuts
Almonds
Total
1,120 lbs.
480
1,600 lbs.
70 %
30
100 %
Yield
1,300 lbs.
81.3 %
9-29
Mix and Yield Variances:
Materials and Labor
5
Mix Variance = Σ(AQi – SMi)SPi
Direct
Material
AQ
SM AQ – SM SP
Peanuts
1,120 1,280
Almonds
480 320
Mix variance
-160
160
$0.50
1.00
(AQ – SM)SP
$-80
60
$-80 U
9-30
Mix and Yield Variances:
Materials and Labor
5
Direct Materials Yield Variance
Yield variance = (Standard yield – Actual yield) SPy
Standard yield = Yield ratio x Total actual inputs
Yield variance = (1,200 – 1,300)$0.80
= $80 F
9-31
Mix and Yield Variances:
Materials and Labor
5
Standard Mix Information
Labor Type
Shelling
Mixing
Total
Mix
3 hrs.
2 hrs.
5 hrs.
Mix Proportion
SP
0.60
$ 8.00
0.40
15.00
Standard Cost
$24
30
$54
Yield
120 lbs.
Yield ratio: 24 = (120/5), or 2,400%
Standard cost of yield (SPy ): $0.45 per pound ($54/120 pounds of yield)
9-32
Mix and Yield Variances:
Materials and Labor
Direct Labor Type
Shelling
Mixing
Total
Yield
Actual
5
Mix Percentages*
20 hrs.
30 hrs.
50 hrs.
40%
60%
100%
1,300 lbs.
2,600%
*Uses 50 hours as the base.
9-33
Mix and Yield Variances:
Materials and Labor
5
Direct Labor Mix Variance
Direct Labor Type AH
Shelling
20
Mixing
30
Direct Labor mix variance
SM
30
20
AH – SM
-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 x 50) – 1,300]$0.45
= (1,200 – 1,300)$0.45
= $45 F
9-34
End of
Chapter 9
9-35