Chapter 9
Standard Costing and Variances
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Standard Cost Systems
Based on carefully
predetermined amounts.
Standard
Costs are
Used for planning labor, material,
and overhead requirements.
The expected level
of performance.
Benchmarks for
measuring performance.
In a standard cost system, all manufacturing costs
are recorded at standard rather than actual amounts.
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Ideal versus Attainable Standards
Should we use
ideal standards that
require employees to
work at 100 percent
peak efficiency?
I recommend using
attainable standards
that can be
achieved with
reasonable
and efficient effort.
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Types of Standards
Quantity
Standard
Price
Standard
Definition
The amount of input
that should go into a
single unit of product
The price that should
be paid for a specific
quantity of input
Examples
Ounces of aluminum in a can of Coca Cola
Tons of steel in a Ford F-150 truck
Yards of denim in a pair of Levi's 550 jeans
Price per ounce of aluminum
Price per ton of steel
Price per yard of denim
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Master Budgets Versus Flexible
Budgets
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Variance Analysis
Amount
These variances are favorable
because the actual cost
is less than the standard cost.
This variance is unfavorable
because the actual cost
exceeds the standard cost.
Standard
Direct
Labor
Direct
Material
Manufacturing
Overhead
Type of Product Cost
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Variance Analysis
Causes of Favorable Variances
• Paying a lower price than
expected for direct materials.
• Using less direct materials than
expected.
• Paying a lower rate than expected
for direct labor.
• Producing a unit in less time than
expected.
• Paying less than expected for
manufacturing overhead costs.
• Using less of a variable overhead
resource than expected.
• Producing more using a fixed
overhead resource than expected.
Causes of Unfavorable Variances
• Paying a higher price than
expected for direct materials.
• Using more direct materials than
expected.
• Paying a higher rate than
expected for direct labor.
• Producing a unit in more time
than expected.
• Paying more than expected for
manufacturing overhead costs.
• Using more of a variable
overhead resource than expected.
• Producing less using a fixed
overhead resource than expected.
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Variable Cost Variances
Spending
Variance
Actual Costs
Actual Quantity (AQ)
×
Actual Price (AP)
Actual Quantity (AQ)
×
Standard Price (SP)
Price
Variance
Flexible Budget
Standard Quantity (SQ)
×
Standard Price (SP)
Quantity
Variance
Total
Spending
Variance
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Direct Materials Variances
Materials Price Variance
Materials Quantity Variance
Purchasing Manager
Production Manager
The standard price is used to compute the quantity variance
so that the production manager is not held responsible for
the purchasing manager’s performance.
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Direct Labor Variances
Spending
Variance
Actual Costs
Actual Hours (AH)
×
Actual Rate (AR)
Actual Hours (AH)
×
Standard Rate (SR)
Rate
Variance
Flexible Budget
Standard Hours(SH)
×
Standard Rate (SR)
Efficiency
Variance
Total
Spending
Variance
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Responsibility for Labor Variances
Production managers are
usually held accountable
for labor variances
because they can
influence the:
Mix of skill levels
assigned to work tasks.
Level of employee
motivation.
Quality of production
supervision.
Production Manager
Quality of training
provided to employees.
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Variable Manufacturing Overhead
Variances
Spending
Variance
Actual Costs
Actual Hours (AH)
×
Actual Rate (AR)
Actual Hours (AH)
×
Standard Rate (SR)
Rate
Variance
Flexible Budget
Standard Hours(SH)
×
Standard Rate (SR)
Efficiency
Variance
Total
Spending
Variance
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Variable Manufacturing Overhead
Variances
Rate Variance
Efficiency Variance
Results from paying more
or less than expected for
overhead items and from
excessive usage of
overhead items.
A function of the
selected allocation
measure (direct labor
hours). It does not reflect
overhead control.
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Summary of Spending Variances
• Variances are always calculated by comparing actual results to budgeted,
or standard, results.
• Companies try to hold specific managers responsible for specific
variances, while removing the effects of factors that are beyond
managers’ control.
• The formulas for variances allow only one factor, such as price, quantity
or volume to change, while holding everything else constant at either
actual or standard values (depending on the type of variance).
• The driving factor for a variance always appears in parentheses in the
formula, as well as in the name of the variance. For example, the
formula for the direct materials price variance is AQ X (SP - AP).
• Try not to memorize rules or rely on the formulas to determine whether a
variance is favorable or unfavorable; just think about it. For example, paying
more for material, or using more materials to produce the same number of
units is unfavorable.
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Framework for Fixed Overhead Spending
and Volume Variances
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Supplement 9B – Recording
Standard Costs and Variances in a
Standard Cost System
Common Rules
• The initial debit to an inventory account (Raw Materials, Work in
Process, or Finished Goods) and the eventual debit to Cost of Goods
Sold should be based on the standard cost, not the actual cost.
• Cash, payables, or other accounts, such as accumulated
depreciation or prepaid assets, should be credited for the actual cost
incurred.
• The difference between the standard cost (a debit) and the actual
cost (a credit) should be recorded as the cost variance.
• Unfavorable variances should appear as debit entries; favorable
variances should appear as credit entries.
• At the end of the accounting period, all the variances should be
closed to the Cost of Goods Sold account to adjust the standard
cost up or down to the actual cost.
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End of Chapter 9
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