1
PowerPoint Presentation by
Gail B. Wright�Professor Emeritus of Accounting�Bryant University
© Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license.�
MANAGEMENT ACCOUNTING
8th EDITION
BY
HANSEN & MOWEN
9 STANDARD COSTING
LEARNING OBJECTIVES
2
LEARNING GOALS
After studying this chapter, you should be able to:
LEARNING OBJECTIVES
3
Continued
LEARNING OBJECTIVES
4
Click the button to skip Questions to Think About
QUESTIONS TO THINK ABOUT:�Blue Corn Foods
5
What motivated Rosita to implement a more formal cost control system?
QUESTIONS TO THINK ABOUT:�Blue Corn Foods
6
Why does a standard cost system provide more detailed control information?
QUESTIONS TO THINK ABOUT:�Blue Corn Foods
7
What type of control is being exercised with the use of standards?
QUESTIONS TO THINK ABOUT:�Blue Corn Foods
8
How can standards be used to control costs?
9
1
Tell how unit standards are set; why standard costing systems are adopted.
LEARNING OBJECTIVE
QUANTITY STANDARDS: Definition
10
Tell the amount of input that should be used per unit of output.
LO 1
PRICE STANDARDS: Definition
11
Tell the amount that should be paid for the quantity of input used.
LO 1
12
Where do quantity & price standards come from?
Quantity standards come from experience, studies, & personnel. Price standards come from operations, purchasing, personnel, & accounting.
LO 1
13
What is the difference between ideal and attainable standards?
Ideal standards only work under perfect conditions. Attainable standards can be achieved under efficient operating conditions.
LO 1
STANDARD COST SYSTEMS
Why adopt a standard cost system?
14
LO 1
COST ASSIGNMENT
15
LO 1
EXHIBIT 9-1
Standard costs are readily available for product costing in a standard cost system.
16
2
State the purpose of a standard cost sheet.
LEARNING OBJECTIVE
STANDARD COST PER UNIT: Definition
17
Is the sum of standards costs for direct materials (DM), direct labor (DL), & overhead.
LO 2
BLUECHITO COST SHEET
18
LO 2
EXHIBIT 9-2
Standard cost sheet provides details for standard cost measures.
19
3
Describe basic concepts underlying variance analysis & explain how they are used for control.
LEARNING OBJECTIVE
TOTAL BUDGET VARIANCE: Definition
20
Is the difference between actual cost & planned cost of production.
LO 3
FAVORABLE & UNFAVORABLE
The difference between actual & planned can be favorable (actual price or usage < standard) or unfavorable (actual price or usage > standard). Does not mean good or bad!
21
LO 3
22
What should we do when we find variances?
If variances are significant, that is if they are beyond our control limits, they should be investigated if it is cost beneficial to do so.
LO 3
FORMULA: Total Variance
23
Total variance is Actual cost – Applied cost or Total cost – Standard cost.
LO 3
Total Variance
= (AP X AQ) – (SP X SQ)
= Actual price x Actual quantity
– Standard Price x Standard Quantity
24
How can we make total variances more useful?
Total variances provide more information if they are divided into Price variances & Efficiency variances.
LO 3
25
4
Compute materials & labor variances; explain how they are used for control.
LEARNING OBJECTIVE
FAVORABLE & UNFAVORABLE
Repeat: The difference between actual & planned can be favorable (actual price or usage < standard) or unfavorable (actual price or usage > standard). Does not mean good or bad!
26
LO 4
BLUE-CORN FOODS, INC.: Background
27
LO 4
Information for actual production, cost of corn, & inspectors.
360 hours @ $7.35 = $2,646
Actual cost of inspectors
780,000 ounces @ $0.0069
Actual cost of corn
48,500 bags corn chips
Actual production
TOTAL MATERIALS & LABOR VARIANCES
28
LO 4
EXHIBIT 9-5
Compares actual costs with budgeted costs at level of production.
MATERIALS VARIANCES
29
LO 4
EXHIBIT 9-6
Decompose total materials variance into price & usage variances.
FORMULA: Materials Price Variance (MPV)
30
Materials price variance tells whether a company paid more than expected for raw materials.
LO 4
MPV
= (AQ X AP) – (AQ X SP)
= (AP – SP)AQ
= ($0.0069 - $0.0060) 780,000
= $ 702 U
31
Who is responsible for a materials price variance?
The Purchasing Agent.
LO 4
MPV AS PERFORMANCE EVALUATION
Limitations on using price variance in performance evaluation: buying lower quality or too much inventory. Results of investigation show shortage of usual grade of corn; purchasing agent has no control over supply.
32
LO 4
FORMULA: Materials Usage Variance (MUV)
33
Materials usage variance tells whether a company used more raw materials than expected.
LO 4
MUV
= (AQ X SP) – (SQ X SP)
= (AQ – SQ)SP
= (780,000 – 873,000) $0.006
= $ 558 F
34
What is the percentage & source of the favorable MUV?
The 10.7% favorable MUV results from higher quality corn.
LO 4
35
Who is responsible for a materials usage variance?
The Production Manager.
LO 4
LABOR VARIANCES
36
LO 4
EXHIBIT 9-7
Decompose total labor variance into rate & efficiency variances.
FORMULA: Labor Rate Variance (LRV)
37
Labor rate variance tells whether a company paid more than expected for labor.
LO 4
LRV
= (AH X AR) – (AH X SR)
= (AR – SR)AH
= ($7.35 - $7.00) 360
= $ 126 U
38
What is the percentage & source of the unfavorable LRV?
The 5% favorable MUV results from market forces & unexpected overtime.
LO 4
FORMULA: Labor Efficiency Variance (LEV)
39
Labor efficiency variance tells whether a company used more labor than expected.
LO 4
LEV
= (AH X SR) – (SH X SR)
= (AH – SH)SR
= (360 – 339.5) $7
= $ 143.50 U
40
What is the percentage & source of the unfavorable LEV?
The 6% favorable LEV resulted from machinery breakdown.
LO 4
41
Who is responsible for a labor efficiency variance?
The Production & Maintenance Managers.
LO 4
42
5
Calculate variable & fixed overhead variances & give their definitions.
LEARNING OBJECTIVE
VARIABLE OVERHEAD: Background
43
LO 5
$1,456
Applied variable overhead
378.3
Hours allowed for production
48,500
Bags of chips produced
400
Actual hours worked (machining & inspection)
$1,600
Actual variable overhead costs
$3.85 per DLH
Variable overhead rate (standard)
FORMULA: Total Variable Overhead Variance
44
Total overhead variance is the difference between actual and applied variable overhead.
LO 5
Total Variable Overhead
= Actual – Applied Overhead
= $1,600 - $1,456
= $ 144 U
VARIABLE OVERHEAD VARIANCE
45
LO 5
EXHIBIT 9-8
Decomposes total variable overhead variance into spending & efficiency variances.
FORMULA: Variable Overhead Spending Variance
46
Variable overhead spending variance measures aggregate effect of actual variable overhead rate with standard rate.
LO 5
Spending Variance
= (AVOR X AH) – (SVOR X AH)
= (AVOR – SVOR)AH
= ($4.00 - $3.85) 400
= $ 60 U
VARIABLE OVERHEAD SPENDING VARIANCE
Variable overhead spending variance arises because prices change. It includes things such as indirect materials, indirect labor, electricity maintenance, etc. Increase or decrease in these items is beyond control of managers.
47
LO 5
FORMULA: Variable Overhead Efficiency Variance
48
Variable overhead efficiency variance measures change in variable overhead consumption because relies on direct labor.
LO 5
Efficiency Variance
= (AH – SH)SVOR
= (400 – 378.3) $3.85
= $ 84 U
FIXED OVERHEAD: Background
49
LO 5
Actual Results
21,450
Standard hours allowed for actual production
$749,000
Actual fixed overhead cost
2,750,000 bags of chips
Actual production
$32.05
Standard fixed overhead rate
23,400 DLH
Practical activity
$749,970
Budgeted fixed overhead
Budgeted or Planned Items
FORMULA: Applied Fixed Overhead
50
LO 5
Applied Fixed Overhead
= SFOR x Standard hours
= $32.05 x 21,450
= $ 687,473
FORMULA: Total Fixed Overhead Variance
51
Total fixed overhead variance is the difference between actual and applied fixed overhead.
LO 5
Total Fixed Overhead Variance
= Actual – Applied Overhead
= $749,000 - $687,473
= $ 61,527 Underapplied
FIXED OVERHEAD VARIANCES
52
LO 5
EXHIBIT 9-11
Decompose total fixed overhead variance into spending & volume variances.
FIXED OVERHEAD SPENDING VARIANCE
Fixed overhead spending variance is the difference between actual and budgeted fixed overhead. It includes things such as salaries, depreciation, taxes, and insurance. Increase or decrease in these items is beyond control of managers.
53
LO 5
FORMULA: Fixed Overhead Volume Variance
54
Fixed overhead volume variance measures the effect of actual output differing from output used to compute predetermined standard fixed overhead rate.
LO 5
Volume Variance
= Budgeted – Applied fixed overhead
= $479,970 - $687,473
= $62,497 U
55
6
Prepare journal entries for variances (Appendix).
LEARNING OBJECTIVE
JOURNAL ENTRIES
Blue Corn must write journal entries to enter information for variances into accounting records. Variances are closed into Cost of Goods Sold.
56
LO 6
57
THE END
CHAPTER 9