CHAPTER 10
Standard Costing and
Analysis of Direct Costs
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Managing Costs
Standard
cost
Actual
cost
Comparison between
standard and actual
performance
level
Cost
variance
10-2
Management by Exception
Amount
Managers focus on quantities and costs
that exceed standards, a practice known as
management by exception..
Standard
Direct
Labor
Direct
Material
Type of Product Cost
10-3
Setting Standards
Cost
Standards
Analysis of
Historical Data
Task
Analysis
10-4
Participation in Setting Standards
Accountants, engineers, personnel administrators, and production
managers combine efforts to set standards based on experience and
expectations.
10-5
Perfection versus Practical Standards: A
Behavioral Issue
Should we use
practical standards
or perfection
standards?
Practical standards
should be set at levels
that are currently
attainable with
reasonable and
efficient effort.
10-6
Perfection versus Practical Standards: A
Behavioral Issue
I agree. Perfection
standards are
unattainable and
therefore discouraging
to most employees.
10-7
Cost Variance Analysis
Standard Cost Variances
Price Variance
Quantity Variance
The difference between
the actual price and the
standard price.
The difference between
the actual quantity and
the standard quantity.
10-8
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Materials
price- SP)
variance
AQ(AP
Labor rate variance
AQ =Variable
Actual overhead
Quantity
AP = spending
Actual Price
variance
Standard Quantity
×
Standard Price
Quantity Variance
Materials
quantity
variance
SP(AQ
- SQ)
Labor efficiency variance
SP
= Standard
Price
Variable
overhead
SQ
= Standard
Quantity
efficiency
variance
10-9
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Standard price is the amount that should
have been paid for the resources acquired.
10-10
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Standard quantity is the quantity that should
have been used.
10-11
Standard Costs
Let’s use the concepts
of the general model to
calculate standard cost
variances, starting with
direct material.
10-12
Material Variances
Zippy
Hanson Inc. has the following direct material standard to
manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week 1,700 pounds of material were purchased and used to
make 1,000 Zippies. The material cost a total of $6,630.
10-13
Material Variances Summary
Actual Quantity
×
Actual Price
1,700 lbs.
×
$3.90 per lb.
Actual Quantity
×
Standard Price
1,700 lbs.
×
$4.00 per lb.
$6,630
Price variance
$170 favorable
$ 6,800
Standard Quantity
×
Standard Price
1,500 lbs.
×
$4.00 per lb.
$6,000
Quantity variance
$800 unfavorable
10-14
Material Variances
Hanson purchased and
used 1,700 pounds.
How are the variances
computed if the amount
purchased differs from
the amount used?
Zippy
The price variance is
computed on the entire
quantity purchased.
The quantity variance is
computed only on the
quantity used.
10-15
Material Variances
Zippy
Hanson Inc. has the following material standard to manufacture one
Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week 2,800 pounds of material were purchased at a total cost of
$10,920, and 1,700 pounds were used to make 1,000 Zippies.
10-16
Material Variances
Actual Quantity
Purchased
×
Actual Price
2,800 lbs.
×
$3.90 per lb.
Zippy
Actual Quantity
Purchased
×
MPV = AQ(AP - SP)
Standard Price
MPV = 2,800 lbs.
× ($3.90 - 4.00)
2,800 lbs.
MPV = $280
×
Favorable
$4.00 per lb.
$10,920
Price variance
$280 favorable
$11,200
Price variance increases
because quantity
purchased increases.
10-17
Material Variances
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs
- 1,500 lbs)
MQV = $800 unfavor.
Zippy
Actual Quantity
Used
Standard Quantity
×
×
Standard Price
Standard Price
1,700 lbs.
×
$4.00 per lb.
$6,800
Quantity variance is
unchanged because
actual and standard
quantities are unchanged.
1,500 lbs.
×
$4.00 per lb.
$6,000
Quantity variance
$800 unfavorable
10-18
Isolation of Material Variances
I need the variances as soon
as possible so that I can
better identify problems
and control costs.
You accountants just don’t
understand the problems
we production managers have.
Okay. I’ll start computing
the price variance when
material is purchased and
the quantity variance as
soon as material is used.
10-19
Standard Costs
Now let’s calculate
standard cost
variances for
direct labor.
10-20
Labor Variances
Zippy
Hanson Inc. has the following direct labor
standard to manufacture one Zippy:
1.5 standard hours per Zippy at $10.00 per direct
labor hour
Last week 1,550 direct labor hours were
worked at a total labor cost of $15,810 to
make 1,000 Zippies.
10-21
Labor Variances Summary
Actual Hours
×
Actual Rate
1,550 hours
×
$10.20 per hour
$15,810
Actual Hours
×
Standard Rate
1,550 hours
×
$10.00 per hour
$15,500
Rate variance
$310 unfavorable
Standard Hours
×
Standard Rate
1,500 hours
×
$10.00 per hour
$15,000
Efficiency variance
$500 unfavorable
10-22
Significance of Cost Variances
1. Size of variance
1.
2.
Dollar amount
Percentage of standard
2. Recurring variances
3. Trends
4. Controllability
What clues help me
to determine the
variances that I should
investigate?
5. Favorable variances
6. Costs and benefits of
investigation
10-23
Controllability of Variances
Direct-Material
Price Variance
Direct-Material
Quantity Variance
Direct-Labor
Rate Variance
Direct-Labor
Efficiency Variance
10-24
Behavioral Impact of Standard
Costing
If I buy cheaper materials, my directmaterials expenses will be lower than
what is budgeted. Then I’ll get my bonus.
But we may lose customers because of
lower quality.
10-25
Interaction among Variances
I am not responsible for
the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
time to process it.
You used too much
time because of poorly
trained workers and
poor supervision.
10-26
Standard Costs and Product Costing
Standard material and labor costs
are entered into Work-in-Process
inventory instead of actual costs.
Standard cost variances
are closed directly to
Cost of Goods Sold.
10-27
Use of Standard Costs
for Product Costing
Raw-material Inventory
Accounts Payable
Actual quantity at
standard cost
Actual quantity at
actual cost
Direct-Material Price Variance
Unfavorable
variance
Favorable
variance
10-28
Use of Standard Costs
for Product Costing
Raw-material Inventory
Work-in-Process Inventory
Actual quantity at
standard cost
Standard quantity
at standard price
Direct-Material Quantity Variance
Unfavorable
variance
Favorable
variance
10-29
Use of Standard Costs
for Product Costing
Work-in-Process Inventory
Wages Payable
Standard quantity
at standard price
Actual quantity at
actual cost
Direct-Labor Rate Variance
Unfavorable
variance
Favorable
variance
Direct-Labor Efficiency Variance
Unfavorable
variance
Favorable
variance
10-30
Use of Standard Costs
for Product Costing
Cost of Goods Sold
Unfavorable
variance
Favorable
variance
10-31
End of Chapter 10
Let’s set the
standard a
little higher.
10-32
