Cornerstones of cost management 3rd edition hansen mowen chapter 9

VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Calculating the Direct Materials Price Variance and Direct Materials Usage Variance • Price rate variance: difference

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STANDARD COSTING: A FUNCTIONAL-BASED CONTROL

APPROACH

CHAPTER 9

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CHAPTER 9 OBJECTIVES

1 Describe how unit input standards are

developed, and explain why standard

costing systems are adopted

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

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CHAPTER 9 OBJECTIVES

4 Compute overhead variances three

different ways, and explain overhead

accounting

5 Calculate mix and yield variances for

direct materials and direct labor

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DEVELOPING UNIT INPUT STANDARDS

• Price Standards specify how much should

be paid for the quantity of the input to be

used

• Quantity standards specify how much of

the input should be used per unit of output

• Unit standard cost is the product of these

two standards

Standard price × Standard Quantity (SP × SP)

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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

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Kaizen Standards

• Continuous improvement standards

• Reflect planned improvement and are a type of

currently attainable standard

• Have a cost reduction focus and because of their

emphasis on continuous improvement, are

constantly changing

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Kaizen Standards

• Standards and Activity-Based Costing

• An activity’s cost is determined by the amount of

resources consumed by each activity

• Standard consumption patterns are identified based

on historical experience

• Activity-based systems also use standards for

control, where control is specifically defined as cost

reduction

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Usage of Standard Costing Systems

• Cost Management

• Planning and Control

• Decision Making and Product Costing

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EXHIBIT 9.1—COST ASSIGNMENT

APPROACHES

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EXHIBIT 9.2—STANDARD COST SHEET FOR

DELUXE STRAWBERRY FROZEN YOGURT

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STANDARD COST SHEETS

• Standard costs are developed for direct

materials, direct labor, and overhead used

in producing a product or service

• Total of these standard costs yields the

standard cost per unit

• Standard cost sheet provides the detail

underlying the standard unit cost

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VARIANCE ANALYSIS AND ACCOUNTING:

DIRECT MATERIALS AND DIRECT LABOR

• Flexible budget : used to identify the

direct material or direct labor input costs

that should have been incurred for the

actual level of activity

• Total budget variance: the difference

between the actual cost of the input and its standard cost

Total budget variance = (AP × AQ) – (SP ×

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Calculating the Direct Materials Price

Variance and Direct Materials Usage Variance

• Price (rate) variance: difference between the

actual and standard unit prices of an input

multiplied by the actual quantity of inputs

• Usage (efficiency) variance: difference

between the actual and standard quantity of inputs multiplied by the standard unit price of the input

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• Unfavorable (U) variance: occurs whenever

actual prices or usage of inputs are greater than

standard prices or usage

• Favorable (F) variance: occurs whenever actual

prices or usage of inputs are less than standard

prices or usage

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• Direct materials price variance (MPV):

difference between what was actually paid for

direct materials and what would have been paid for the actual quantity bought if it had been bought at

the standard price

MPV = (AP × AQ) – (SP × AQ)

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MPV = (AP – SP)AQ

• if the actual price is greater than standard, the

MPV is unfavorable

• if the actual price is less than the standard

price, the MPV is favorable

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• Direct materials usage variance: the difference

between the amount of materials actually used and what should have been used for the actual quantity

of units produced multiplied by the standard price

MUV = (SP × AQ) – (SP × SQ)

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MUV = (AQ – SP)SQ

• if the actual quantity is greater than standard,

the MUV is unfavorable

• if the actual quantity is less than the standard

quantity, the MUV is favorable

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Timing of the Price Variance

Computation

• The direct materials price variance can be

computed at one of two points

• When the direct materials are issued for use in

production

• When they are purchased

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Timing of the Direct Materials Usage

Variance Computation

• Direct materials usage variance should be

computed as direct materials are issued for

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EXHIBIT 9.3 - STANDARD BILL OF

MATERIALS

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Accounting for the Direct Materials

Price and Usage Variances

• In a standard costing system, all inventories are

carried at standard

• Direct materials price variance is computed at the

point of purchase

• Unfavorable variances are always debits, and

favorable variances are always credits

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• Purchase of direct materials, assuming an

unfavorable MPV and that AQ is defined as direct

materials purchased

Direct Materials Price Variance (AP –SP)AQ

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• Issuance and usage of direct materials, assuming

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Calculating Direct Labor Variances

• The rate (price) and efficiency (usage) variances

for direct labor can be calculated using either the

graphical, three-pronged approach or a formula

approach

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Direct Labor Rate and Efficiency

Variances: Formula Approach

• Direct labor rate variance (LRV) computes the

difference between what was paid to direct laborers

and what should have been paid

LRV = (AR × AH) – (SR × AH) OR (AR – SR)AH

where

AR = Actual hourly wage rate

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Direct Labor Rate and Efficiency

Variances: Formula Approach

• Direct labor efficiency variance (LEV) measures the

difference between the direct labor hours that were

actually used and the direct labor hours that should have been used

LEV = (AH × SR) – (SH × SR) or (AH – SH)SR

where

AH = Actual direct labor hours used

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Accounting for the Direct Labor Rate

and Efficiency Variance

• Assume a favorable direct labor rate variance and

an unfavorable labor efficiency variance

Work in Process (SH × SR)

Direct Labor Efficiency Variance (AH –SH)SR

Direct Labor Rate Variance (AH – SR) AH

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Investigating Direct Materials and

Labor Variances

• As random variations around the standard are

expected, management should establish an

acceptable range of performance

• The acceptable range is the standard, plus or

minus one allowable deviation

• The top and bottom measures of the allowable

range are called the control limits

• The upper control limit is the standard plus the

allowable deviation and the lower control limit is the

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Disposition of Direct Materials and

Direct Labor Variances

• All variances are closed out at the end of the year

• Immaterial variances are closed to Cost of Goods

Sold

• Materials variances are prorated among Work in

Process, Finished Goods, and Cost of Goods Sold

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VARIANCE ANALYSIS: OVERHEAD COSTS

Four-Variance Method for Calculating

Overhead Variances

• Calculates two variances for variable overhead and

two variances for fixed overhead

• Total variable overhead variance is divided into two

components: the variable overhead spending

variance and the variable overhead efficiency

variance

• The total fixed overhead variance is divided into two

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Variable Overhead Spending Variance

• Measures the aggregate effect of differences in the

actual variable overhead rate (AVOR) and the

standard variable overhead rate (SVOR)

VOSV = (AVOR × AH) – (SVOR × AH)

• Variable overhead is assumed to vary as the

production volume changes – variable overhead

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Variable Overhead Efficiency Variance

• Measures the change in variable overhead

consumption that occur because of the

efficient/inefficient use of direct labor

VOEV = (SVOR × AH) – (SVOR × SH)

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EXHIBIT 9.4—VARIABLE OVERHEAD

SPENDING VARIANCE BY ITEM

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EXHIBIT 9.5—VARIABLE OVERHEAD SPENDING AND EFFICIENCY VARIANCES BY

ITEM

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Fixed Overhead Spending Variance

• Difference between the actual fixed overhead and

the budgeted fixed overhead

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Fixed Overhead Volume Variance

• Difference between budgeted fixed

overhead and applied fixed overhead

Volume variance = Budgeted fixed overhead – Applied fixed overhead

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Fixed Overhead Volume Variance

• If actual production is less than budgeted

production, the volume variance will be unfavorable

• If actual production is more than budgeted

production, the volume variance will be favorable

• The difference is due solely to the differences in

production or planned utilization of capacity

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EXHIBIT 9.6—FIXED OVERHEAD SPENDING

VARIANCE BY ITEM

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Accounting for Overhead Variances

• To assign overhead to production

Work in Process

Variable Overhead Control

Fixed Overhead Control

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• To recognize the incurrence of actual overhead

Various Accounts

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• To recognize the variances

Variable Overhead Efficiency Variance

Fixed Overhead Spending Variance

Variable Overhead Spending Variance

Fixed Overhead Volume Variance

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• To close the variances to Cost of Goods Sold

Fixed Overhead Volume Variance

Cost of Goods Sold

Variable Overhead Spending Variance

Variable Overhead Efficiency Variance

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EXHIBIT 9.7—TWO-VARIANCE ANALYSIS:

HELADO COMPANY

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EXHIBIT 9.8—THREE-VARIANCE ANALYSIS:

HELADO COMPANY

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MIX AND YIELD VARIANCES: MATERIALS

AND LABOR

• Mix variance: created whenever the

actual mix of inputs differs from the

standard mix

• Yield variance: occurs whenever the

actual yield (output) differs from the

standard yield

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AND LABOR

Direct Materials Mix Variance

• Difference in the standard cost of the actual mix of

inputs use and the standard cost of the mix of

inputs that should have been used

• If relatively more of a more expensive input is

used, the mix variance will be unfavorable

• If relatively more of a less expensive input is used,

the mix variance will be favorable

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AND LABOR

Direct Materials Yield Variance

• Designed to show the extent to which the amount

of input resulted in the expected amount of output

Yield variance = (Standard yield – Actual yield) Spy

where

Standard yield = yield ratio × total actual inputs

Yield ratio = total output/total input

SPy = Standard cost of the yield

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END OF CHAPTER 9

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