Managerial accounting 5th jiambalvo ch11

Learning objective 1: Explain how standard costs are developed Slide 11-3 Standard Costs and Budgets Standard Costs and Budgets  Standard cost should be incurred to produce a product

Prepared by

Debby Bloom-Hill CMA, CFM

CHAPTER 11

Standard Costs

and Variance Analysis

Standard Costs

and Variance Analysis

Learning objective 1: Explain how standard

costs are developed Slide 11-3

Standard Costs and

Budgets

Standard Costs and

Budgets

 Standard cost

should be incurred to produce a product or service under

anticipated conditions

 Standard costs can be used by

manufacturing and service companies

 A tool manufacturer may set a standard cost for producing a hammer

 A bank may set a standard cost for processing a check

Standard Costs and

Budgets

Standard Costs and

Budgets

 The term standard cost often refers

to the cost of a single unit

 The term budgeted cost often

refers to the cost, at standard, of

the total number of budgeted units

 The cost information contained in

budgets must be consistent with standard costs

Learning objective 1: Explain how standard

costs are developed

 If materials budget indicates purchases of

5,000 pounds, standard cost is $25,000

(5,000 pounds * $5 standard cost per pound)

 If labor budget is prepared for 1,000 units

produced, 3,000 labor hours are needed at a standard cost of $30,000 (3,000 hours * $10)

Starbucks

Learning objective 1: Explain how standard

costs are developed Slide 11-7

Development of Standard

Costs

Development of Standard

Costs

 Standard costs for material, labor

and overhead are developed in a

variety of ways

 Standard quantity and price for

material may be specified:

 In engineering plans that provide a list of material

 In recipes or formulas

 By time and motion studies

 In price lists provided by suppliers

Development of Standard

Costs

Development of Standard

Costs

 Standard quantity and rate for direct

labor may be specified:

 Through analysis of past data

to be paid

 In contracts that set labor rates

 Standard costs for overhead involves

procedures similar to those used to

develop predetermined overhead

rates

Learning objective 1: Explain how standard

costs are developed Slide 11-9

Ideal versus Attainable

 Ideal standards assumes that no

obstacles to the production process will be encountered

standards believe they motivate employees to strive for the best possible control over production costs

Ideal versus Attainable

Standards

Ideal versus Attainable

Standards

 Attainable standards are standard

costs that take into account the

possibility that a variety of

circumstances may lead to costs

that are greater than ideal

defects are a fact of life, it makes sense to plan for their associated costs

attainable standards

Learning objective 1: Explain how standard

costs are developed Slide 11-11

What is the primary benefit of a standard

costing system?

a It records costs at what should have

been incurred

b It allows a comparison of differences

between actual and standard costs

c It is easy to implement

d It is inexpensive and easy to use

Answer: b

It allows a comparison of differences between

actual and standard costs

Test Your Knowledge 1

Standard Costing

Learning objective 1: Explain how standard

costs are developed Slide 11-13

A General Approach to

Variance Analysis

A General Approach to

Variance Analysis

 Companies that use standard

costing can analyze the difference

between a standard and an actual

cost

 Called a standard cost variance

being performed efficiently

 The analysis is called variance

analysis

 It generally involves breaking down the differences between standard and actual cost into two

components

A General Approach to

Variance Analysis

A General Approach to

Variance Analysis

 Direct material variances

 Material price variance

 Material quantity variance

 Direct labor variances

 Labor rate variance

 Labor efficiency variance

 Manufacturing overhead variances

 Controllable overhead variance

Learning objective 2: Calculate and interpret

variances for direct material Slide 11-15

Material Variances

 Material price variance

 Difference between the actual price

per unit of material (AP) and the standard price per unit of material (SP) times the actual quantity of material purchased (AQ)

 Material quantity variance

 Difference between the actual quantity

of material used (AQ) and the standard quantity of material allowed for the

number of units produced (SQ) times the standard price of material (SP)

Slide 11-17

You Get What You Measure!

Learning objective 2: Calculate and

interpret variances for direct material

Data for chips used in the production of computers

Standard: 3 chips per computer @ $6.50 per

Calculate the material price variance

Test Your Knowledge 2

$1,350 - $1,300 = $50 Unfavorable price variance

AQ p X AP

Actual Quantity of Material Purchased at Standard Price

AQ p X SP

Slide 11-19

Test Your Knowledge 3

Data for chips used in the production of computers

Standard: 3 chips per computer @ $6.50 per

chip Quantity purchased: 200 chips for $1,350 total

Quantity used: 123 chips for production of 40

units Calculate the material quantity variance:

Learning objective 2: Calculate and

interpret variances for direct material

$800 - $780 = $20 Unfavorable quantity variance

Actual Quantity of Material

Used at Standard Price

Direct Labor Variances

 Labor Rate Variance

 Difference between actual wage rate (AR) and standard wage rate (SR)

times the actual number of labor hours worked (AH)

 Labor Efficiency Variance

of hours worked (AH) and the standard labor hours allowed for the number of units produced (SH)

times the standard labor wage rate (SR)

Slide 11-21

Direct Labor Variances

 Standard for 1 unit: 4 hours @ $15 per hour

 Actual labor: 1,700 hours @ $15.50 per hour

to produce 450 units

Learning objective 3: Calculate and

interpret variances for direct labor

Test Your Knowledge 4

Data for labor used in the production of sneakers

Standard: 25 hours per sneaker at $12.00 per

hour

Actual quantity produced: 24,500 sneakers

Quantity used: 6,000 hours, total cost $69,000

Calculate the labor rate variance:

$69,000 - $72,000 = ($3,000) Favorable rate variance

$69,000

6,000 X $12.00

$72,000

Slide 11-23

Test Your Knowledge 5

Data for labor used in the production of sneakers

Standard: 25 hours per sneaker at $12.00 per

hour

Actual quantity produced: 24,500 sneakers

Quantity used: 6,000 hours, total cost $69,000

Calculate the labor efficiency variance :

Learning objective 3: Calculate and

interpret variances for direct labor

$72,000 - $73,500 = ($1,500) Favorable efficiency variance

Overhead Variances

 Controllable overhead variance

of overhead and amount of overhead that would be included in a flexible budget for the actual level of

production

overhead included in the flexible budget and the amount of overhead applied to production using the

standard overhead rate

Slide 11-25

Overhead Variances

 Standard for 1 unit: $50 overhead applied

 Actual overhead: $23,000 to produce 450

units

 Flexible budget overhead: $15,000 fixed +

$20 per unit produced

Learning objective 3: Calculate and

interpret variances for direct labor

Interpreting Overhead Volume

 A volume variance signals that the

quantity of production was greater

or less than anticipated

 The usefulness of the volume

variance is limited

 It signals only that more or fewer

units have been produced than planned when the standard

overhead rate was set

Learning objective 5: Calculate the financial impact of operating at

more or less than planned capacity Slide 11-27

Standard Cost Variance

Formulas

Standard Cost Variance

Formulas

Standard Cost Variance

Formulas

Standard Cost Variance

Formulas

Slide 11-29

A favorable labor efficiency variance means:

a Labor rates were higher than called for by

standards

b Inexperienced labor was used, causing the

rate to be lower than standard

c More labor was used than called for by

standards

d Less labor was used than called for by

standards

Answer: d

Less labor was used than called for by standards

Test Your Knowledge 6

Learning objective 5: Calculate the financial impact of

operating at more or less than planned capacity

What does an unfavorable overhead volume

variance mean?

a Overhead costs are out of control

b Overhead costs are in control

c Production was greater than anticipated

d Production was less than anticipated

Answer: d

Production was less than anticipated

Test Your Knowledge 7

 Standard cost variances do not

provide definitive evidence that

costs are out of control and

managers are not performing

effectively

 They should be viewed as an

indicator of potential problem areas

 The only way to determine whether costs are being effectively

controlled is to investigate the

facts behind the variances Learning objective 5: Calculate the financial impact of

operating at more or less than planned capacity

Standard Cost Variances

Learning objective 6: Discuss how the management-by-exception approach is

applied to the investigation of standard cost variances Slide 11-33

Management by Exception

 Investigation of standard cost

variances is a costly activity

approach is to investigate only those variances that are considered exceptional

 Must determine criteria to measure what is considered exceptional

 Absolute dollar value of the

variance

 The variance as a percent of actual

or standard cost

“Favorable” Variances May Be

 A favorable variance may be

indicative of poor management decisions

 A poor decision regarding the

quality of raw materials might

result in an unfavorable variance in material quantity

 A firm may have an unfavorable

variance because it engaged in

process improvements

 They can lead to greater efficiency

which results in actual labor hours being less than standard labor hours

 Firms should stimulate greater

demand to take advantage of the

greater production capabilities

Learning objective 7: Explain why a favorable variance may be unfavorable,

how process improvements may lead to unfavorable variances, and why evaluation in terms of variances may lead to overproduction

Evaluation in Terms of Variances Can Lead to Excess

Production

Evaluation in Terms of Variances Can Lead to Excess

Production

 When bottlenecks exist, the

department in front of the

bottleneck should not produce more than the bottlenecked department

can handle

 If it does it will create excess

work-in-process inventory and result in a negative impact on shareholder

value

Learning objective 7: Explain why a favorable variance may be unfavorable,

 The central idea of responsibility

accounting is that managers should

be held responsible for only the

costs they can control

 Additionally, managers and workers should only be held responsible for variances they can control

Learning objective 7: Explain why a favorable variance may be unfavorable,

how process improvements may lead to unfavorable variances, and why evaluation in terms of variances may lead to overproduction

Learning objective 7: Explain why a favorable variance may be unfavorable,

Slide 11-39

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