Standard Costing: A FunctionalBased Control Approach Prepared by Douglas Cloud Pepperdine University 9-1 Objectives 1. Describe how unitstudying input standards are After this developed, and explain why standard cost chapter, you should systems are adopted. be able to: 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. Continued 9-2 Objectives 5. Calculate mix and yield variances for direct materials and direct labor. 9-3 Unit Standard Cost To determine the unit standard cost for a particular input, two decisions must be made: 1. How much of the input should be used per unit of output (quantity decision)? 2. How much should be paid for the quantity of the input to be used (pricing decision)? 9-4 Sources for Setting Standards Historical experience Engineering studies Input from operating personnel 9-5 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. Kaizen standards reflect a planned improvement and are a type of currently attainable standard. 9-6 Purpose of Standards To Improve Planning and Control To Facilitate Product Costing 9-7 Cost Assignment Approaches Manufacturing Costs Direct Materials Direct Labor Overhead Actual costing system Actual Actual Actual Normal costing system Actual Actual Budgeted Standard Standard Standard costing system Standard 9-8 9-9 Standard Cost Sheet Deluxe Strawberry Frozen Yogurt Description Direct materials: Yogurt Strawberries Milk Whipped cream Gelatin Container Total direct materials Standard Price $0.020 0.010 0.015 0.025 0.010 0.030 Standard Standard Usage Cost Subtotal x x x x x x 25 oz. 10 oz. 8 oz. 4 oz. 1 oz. 1 = $0.50 = 0.10 = 0.12 = 0.10 = 0.01 = 0.03 $0.86 Continued 9-10 Description Standard Price Standard Usage Standard Cost Direct labor: Machine operators $8.00 x 0.01 hr. = $0.08 Total direct labor Overhead: Variable overhead 6.00 x 0.01 hr. = $0.06 Fixed overhead 20.00 x 0.01 hr. = 0.20 Total overhead Total standard unit cost Subtotal $0.08 0.26 $1.20 9-11 Standard Usage Allowed Standard Quantity (SQ) of Materials Allowed for 20,000 quarts: SQ = Unit quantity standard x Actual output = 25 x 20,000 = 500,000 ounces Standard Hours (SH) of Labor Allowed for 20,000 quarts: SH = Unit quantity standard x Actual output = 0.01 x 20,000 = 200 direct labor hours 9-12 Price and Usage Variances Actual production: 30,000 quarts Actual yogurt usage: 780,000 ounces Actual price per ounce of yogurt: $0.025 Actual direct labor hours: 325 hours Actual wage rate: $8.20 per hour 9-13 Price and Usage Variances AP x AQ (Actual Quantity at Actual Price) (1) SP x AQ (Actual Quantity at Standard Price) (2) Price Variance (1) –(2) SP x SQ (Standard Quantity at Standard Price) (3) Usage Variance (2) – (3) Total Variance (1) – (3) 9-14 Material Price Variance MPV = (AP – SP)AQ Actual Actual price Standard pricequantity per unit per unitof direct material used 9-15 Material Price Variance MPV = (AP – SP)AQ = ($0.025 – $0.020)780,000 = $0.005 x 780,000 = $3,900 U 9-16 Direct Materials Usage Variance MUV = (AQ – SQ)SP Standard Actual quantity Standard price quantity of of materials per unit materials used allowed for the actual output 9-17 Direct Materials Usage Variance MUV = (AQ – SQ)SP = (780,000 – 750,000)$0.02 = 30,000 x $0.02 = $600 U 9-18 The actual price is $0.025 per ounce while the standard price is $0.020 and 780,000 ounces are purchased. Helado Company would make the following entry: Materials 15 600 00 The receiving report and the invoice are Direct Materials Price Variance 900 00 used to record the receipt of 3the Accounts Payable merchandise and to control the payment. 19 500 00 Material Price Variance 9-19 The entry to record Helado’s usage of 780,000 ounces of yogurt during the first week of May would be: Work in Process 15 000 00 The receiving report and the invoice are Direct Materials Usage Variance 600 00 used to record the receipt of the Materials merchandise and to control the payment. 15 600 00 Material Usage Variance 9-20 Rate and Efficiency Variances AH x AR (Actual Hours at Actual Rate) (1) AH x SR (Actual Hours at Standard Rate) (2) SH x SR (Standard Hours at Standard Rate) (3) Efficiency Variance (2) – (3) Rate Variance (1) –(2) Total Variance (1) – (3) 9-21 Labor Rate Variances LRV = (AR – SR)AH Actual direct Standard Actual hourly labor hours hourly wage wage rate rate used 9-22 Labor Rate Variances LRV = (AR – SR)AH = ($8.20 – $8.00)325 = $0.20 x 325 = $65 U 9-23 Labor Efficiency Variances LEV = (AH – SH)SR Actual direct Standard Standard hourly direct wage labor hours usedlabor hours that rate should have been used 9-24 Labor Efficiency Variances LEV = (AH – SH)SR = (325 – 300)$8.00 = 25 x $8.00 = $200 U 9-25 During the period Helado Company uses 325 actual direct labor hours, while the standard hours for the units produced is 300 hours. The actual rate incurred is $8.20 per hour while the standard rate is $8.00 per hour. Work in Process 2 400 00 The receiving report and the invoice are Direct Labor Rate Variance used to record the receipt of the65 00 Directmerchandise Labor Efficiency Variance 200 00 and to control the payment. Wages Payable 2 665 00 Labor Variances 9-26 Disposition of Direct Materials and Direct Labor Variances Cost of Goods Sold 4 765 00 The receiving report and the invoice are Direct Materials Price Variance used to record the receipt of the Direct Materials Usage Variance merchandise and to control the payment. Direct Labor Rate Variance Direct Labor Efficiency Variance 3 900 00 600 00 65 00 200 00 If immaterial in amount 9-27 Disposition of Direct Materials and Direct Labor Variances Work in Process Finished Goods Cost of Goods Sold Total Prime Costs $ 0 Percentage of Total 0% 3,480 20 13,920 80 $17,400 100 % If material in amount 9-28 Disposition of Direct Materials and Direct Labor Variances Finished Goods 953 00 The receiving report and the invoice are Cost of Goods Sold 3 812 00 used to record the receipt of the Direct Materials Price Variance merchandise and to control the payment. Direct Materials Usage Variance Direct Labor Rate Variance Direct Labor Efficiency Variance 3 900 00 600 00 65 00 200 00 If material in amount 9-29 Variable Overhead Variances Variable overhead rate (standard) Actual variable overhead costs Actual hours worked Quarts of deluxe frozen strawberry yogurt produced Hours allowed for production Applied variable overhead $6.00/DLH $7,540 1,300 120,000 1,200 $7,200 9-30 Variable Overhead Variances Actual Variable Overhead (1) Variable Overhead Rate x Actual Hours (2) Spending Variance (1) –(2) Variable Overhead Rate x Standard Hours (3) Efficiency Variance (2) – (3) Total Variance (1) – (3) 9-31 Variable Overhead Spending Variances VOSV = (AVOR x AH) – (SVOR x AH) = (AVOR – SVOR)AH = ($5.80 – $6.00)1,300 = $260 F 9-32 Variable Overhead Efficiency Variances VOSV = (AH – SH)SVOR = (1,300 – 1,200)$6.00 = $600 U 9-33 Helado Company, Inc. Flexible Budget Performance Report For the Month Ended May 31, 2004 Cost Formula Actual Costs Budget Spending Variance Natural gas $3.80 $4,400 $4,940 $540 F Electricity 2.00 2,840 2,600 240 U Water 0.20 300 260 40 U $6.00 $7,540 $7,800 $240 F Total cost 9-34 Helado Company, Inc. Performance Report For the Month Ended May 31, 2004 Budget for Budget Actual for Actual Spending Standard Efficiency Cost Formula Costs Hours Variance Hours Variance Natural gas $3.80 $4,400 Electricity 2.00 2,840 2,600 Water 0.20 300 260 $6.00 $7,540 Total $4,940 $540 F $4,560 $380 U 240 U 2,400 200 U 40 U 240 20 U $7,800 $260 F $7,200 $600 U 9-35 Fixed Overhead Variances Budgeted or Planned Items (May) Budgeted fixed overhead $20,000 Expected activity 1,000 direct labor hours Standard fixed overhead rate $20 Hours allowed toActual produce 100,000 quarts of frozen Results yogurt (0.01 x 100,000) Actual production 120,000 quarts Actual fixed overhead cost $20,500 Standard hours allowed for actual production (0.01 x 120,000) 1,200 9-36 Total Fixed Overhead Variances Applied fixed = Standard fixed overhead rate overhead x Standard hours = $20 x 1,200 = $24,000 Total fixed = $20,500 – $24,000 overhead variance = $3,500 Overapplied 9-37 Fixed Overhead Variances Actual Fixed Overhead (1) Budgeted Fixed Overhead (2) Fixed Overhead Rate x Standard Hours (3) Volume Variance (2) – (3) Spending Variance (1) – (2) Total Variance (1) – (3) 9-38 Fixed Overhead Spending Variance FOSV = AFOH – BFOH = $20,500 – $20,000 = $500 U 9-39 Helado Company, Inc. Performance Report For the Month Ended May 31, 2004 Fixed Overhead Items Depreciation Salaries Taxes Insurance Total Actual Cost Budgeted Cost Variance $ 5,000 13,400 1,100 1,000 $20,500 $ 5,000 $---13,000 400 U 1,050 50 U 950 50 U $20,000 $500 U 9-40 Fixed Overhead Volume Variance FOVV = Budgeted fixed overhead – Applied fixed overhead = [Standard fixed overhead rate x SH(D)] – (Standard fixed overhead x SH) = $20(1,000 – 1,200) = $4,000 F 9-41 To assign overhead to production, the following entry is made: Work in Process 31 200 00 The receiving report and the invoice are Variable Overhead Control used to record the receipt of the Fixed Overhead Control merchandise and to control the payment. 7 200 00 24 000 00 To recognize the incurrence of actual overhead, the following entry is needed: Variance Overhead Control 7 540 00 The receiving report and the invoice are Fixed Overhead Control 20 500 00 used to record the receipt of the Miscellaneous Accounts merchandise and to control the payment. 28 040 00 9-42 MIX AND YIELD VARIANCES: MATERIAL AND LABOR Standard Mix Information: Direct Materials Direct Material Mix Mix Proportion Peanuts Almonds 128 lbs. 32 lbs. Total 160 lbs. 0.80 0.20 SP $0.50 1.00 Standard Cost $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) 9-43 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 % 9-44 Standard Mix SM = Standard mix proportion x Total actual input quantity SM(peanuts) = 0.80 x 1,600 pounds = 1,280 pounds SM(almonds) = 0.20 x 1,600 pounds = 320 pounds 9-45 Standard Mix Mix Variance = 3(AQ – SM)SP Direct Material AQ SM AQ – SM Peanuts 1,120 1,280 Almonds 480 320 Mix variance -160 160 SP $0.50 1.00 (AQ – SM)SP $-80 60 $-80 U 9-46 Direct Materials Yield Variance Standard yield = Yield ratio x Total actual inputs Yield variance = (Standard yield – Actual yield)SPy Yield variance = (1,200 – 1,300)$0.80 = $80 F 9-47 Standard Mix Information Labor Type Mix Mix Proportion SP Standard Cost Shelling 3 hrs. 0.60 $ 8.00 $24 Mixing 2 hrs. 0.40 15.00 30 Total 5 hrs. Yield 120 lbs. $54 Yield ratio: 24 = (120/5), or 2,400% Standard cost of yield (SPy): $0.45 per pound pounds of yield) ($54/120 9-48 Standard Mix Information Malcom processes 1,600 pounds of nuts and produces the following actual results: Labor Type Actual Mix Mix Percentages* Shelling 20 hrs. 40% Mixing 30 hrs. 60% Total 50 hrs. 100% Yield 1,300 lbs. 2,600% *Uses 50 hours as the base. 9-49 Direct Labor Mix Variance Labor Type AH SM AH – SM SP (AH – SM)/SP Shelling 20 30 -10 $ 8.00 $-80 Mixing 30 20 10 15.00 150 Direct Labor mix variance $-70 U 9-50 Direct Labor Yield Variance Using the standard mix information and the actual results, the yield variance is computed as follows: Yield variance = (Standard yield – Actual yield)SPy = [(24 x 50) – 1,300]$0.45 = (1,200 – 1,300)$0.45 = $45 F The yield variance is favorable because the actual yield is greater than the standard yield. 9-51 End of Chapter 9-52 9-53