Post on 13-Dec-2015
ACC3200
STANDARD COSTING
Learning Objectives
Describe the standard-setting process and explain how standard costs relate to budgets and variances.
Prepare a flexible budget and show how total costs change with sales volume.
Calculate and interpret the direct materials price and quantity variances.
Calculate and interpret the direct labor rate and efficiency variances.
Calculate and interpret the variable overhead rate and efficiency variances.
Calculate and interpret the fixed overhead spending variance.
Standard Cost Systems
Benchmarks formeasuring performance.
The expected levelof performance.
Based on carefullypredetermined amounts.
Used for planning labor, materialand overhead requirements.Standard
Costs are
In a standard cost system, all manufacturing costsare recorded at standard rather than actual amounts.
Ideal versus Attainable Standards
Should we useideal standards that require employees towork at 100 percent
peak efficiency?
I recommend using attainable standards that can be
achieved with reasonableand efficient effort.
Types of Standards
Definition ExamplesQuantity The amount of input Ounces of aluminum in a can of Coca Cola Standard that should go into a Tons of steel in a Ford F-150 truck
single unit of product Yards of denim in a pair of Levi's 550 jeans Price The price that should Price per ounce of aluminum
Standard be paid for a specific Price per ton of steel quantity of input Price per yard of denim
The Standard Cost Card
Standard StandardDirect Costs Quantity Unit Cost Ice Cream 10 oz. 0.05$ per oz. 0.50$ Mix-in Ingredients 2 oz. 0.10$ per oz. 0.20 Direct Labor 0.10 hrs. 8.00$ per hr. 0.80 Manufacturing Overhead Costs Variable Manufacturing Overhead 0.10 hrs. 1.00$ per hr. 0.10 (Based on Direct Labor Hours) Fixed Manufacturing Overhead $6,000 ÷ 15,000 units = $0.40 per unit 0.40 Standard Manufacturing Cost per Unit 2.00$
StandardPrice (Rate)
10-6
Master Budgets Versus Flexible Budgets
The master budget is based on managers’ best estimate ofactivity (15,000 units) multiplied by the standard unit cost.
The flexible budget shows how total costs are expected to change ifactivity is lower (12,000 units) or higher (18,000 units) than expected.
10-7
Planning Process
Based on estimated(budgeted)
sales volume.
Master Budget
Control Process
Flexible Budget
Actual Results
Compare actual results to the flexiblebudget to evaluate performance, after
controlling for actual sales volume.
A flexible budget for the actualactual activityis compared with actual results.
Flexible Budget as a Benchmark
10-8
Cold Stone Creamery’s master budget of $7,500 for ice cream was based on a sales forecast of 15,000 units ($.50 per unit × 15,000
units). During the period, the amount spent for ice cream was $8,000, or $500 higher than the master budget. Did Cold Stone do
a good job controlling ice cream costs?
There are two possible reasons why spending exceeded the master budget:1. Cold Stone may have spent more than $.50 on ice cream for each unit produced.2.Cold Stone may have produced more than 15,000 units,requiring more ice cream than planned.
Cold Stone actually produced 18,000 units for the period. Let’sprepare a flexible budget at 18,000 and evaluate performance.
Flexible Budget as a Benchmark
10-9
Volume Variance versus Spending Variance
Based on18,000 units
ActualCost
$8,000
Based on18,000 units
FlexibleBudget$9,000
SpendingVariance $1,000 F
Based on15,000 units
MasterBudget$7,500
VolumeVariance1,500 U
10-10
Type of Product Cost
Am
ou
nt
DirectLabor
Standard
Favorable versus Unfavorable Variances
This variance is unfavorable because the actual cost
exceeds the standard cost.
DirectMaterial
These variances are favorable because the actual cost
is less than the standard cost.
ManufacturingOverhead
10-11
Favorable versus Unfavorable Variances
10-12
Use of Flexible Budgets to Calculate Cost Variances
A standard is the expected cost for one
unit.
A budget is the expected cost for all units
produced.
What is the difference between standards
and budgets?
10-13
SQ basedon actual
units
SQ basedon budgeted
unitsAP = Actual price of inputAQ = Actual quantity of inputSP = Standard price of inputSQ = Standard quantity of input allowed to achieve the actual units of output
SP × AQActualcost
AP × AQ
Spendingvariance
Calculation of Direct Cost Variances
Quantity varianceSP × (SQ – AQ)
Masterbudget
SQ × SP
Flexiblebudget
SP × SQ
10-14
Price varianceAQ × (SP – AP)
Direct Materials Variances
Standard StandardQuantity Unit Cost
Ice Cream 10 oz. 0.05$ per oz. 0.50$
StandardPrice
Cold Stone’s Standard Cost Information for Ice Cream
Cold Stone’s actual results for the period were:• 18,000 units produced and sold.• 200,000 ounces of ice cream purchased at a total cost of $8,000.
• Actual Price (AP) = $8,000 ÷ 200,000 ounces = $.04 per ounce• Actual Quantity (AQ) = 200,000 ounces• Standard Price (SP) = $.05 per ounce• Standard Quantity (SQ) = 10 ounces per unit × 18,000 actual units = 180,000 ounces
10-15
Direct Materials Variances
AP × AQ$.04 × 200,000
$8,000
SP × AQ$.05 × 200,000
$10,000
SP × SQ
SQ =18,000 actual units × 10 ounces
Spending Variance
Quantity VarianceSP × (SQ – AQ)
Price VarianceAQ × (SP – AP)
10-16
AP × AQ SP × AQ
Materials Price Variance Materials Quantity Variance
Production ManagerPurchasing Manager
The standard price is used to compute the quantity varianceso that the production manager is not held responsible for
the purchasing manager’s performance.
Direct Materials Variances
10-17
Direct Labor Variances
SH Basedon actual
units produced
AR = Actual hourly labor rateAH = Actual labor hoursSR = Standard hourly labor rateSH = Standard labor hours allowed to achieve the actual units of output
Actualcost
AR × AH
Rate varianceAH × (SR – AR)
SR × AHFlexiblebudget
SR × SH
Direct laborvariances
Efficiency varianceSR × (SH – AH)
10-18
Direct Labor Variances
Standard StandardHours Unit Cost
Direct Labor 0.10 hrs. $8.00 per hr. 0.80$
StandardRate
Cold Stone’s Standard Cost Information for Direct Labor
• Actual Rate (AR) = $16,500 ÷ 2,000 hours = $8.25 per hour• Actual Hours (AH) = 2,000 hours• Standard Rate (SR) = $8.00 per hour• Standard Hours (SH) = 0.10 hours per unit × 18,000 actual units = 1,800 hours
Cold Stone’s actual results for the period were:• 18,000 units produced and sold.• Direct labor costs were $16,500 for 2,000 hours worked.
10-19
Direct Labor Variances
AR × AH
Spending variance
SR × AH SR × SH
Efficiency varianceSR × (SH – AH)
Rate varianceAH × (SR – AR)
SH = 18,000 actual units × 0.10 hours
10-20
Responsibility for Labor Variances
Production Manager
Production managers areusually held accountable
for labor variancesbecause they can
influence the:
Mix of skill levelsassigned to work tasks.
Level of employee motivation.
Quality of production supervision.
Quality of training provided to employees.
10-21
Manufacturing Overhead Cost Variances
Contain variable overheadthat increases asactivity increases.
Contain fixed overheadthat remains constantas activity changes.
Are a function of the activity levelchosen to determine the rate.
Overhead Rates
10-22
Variable Manufacturing Overhead Variances
AR = Actual variable overhead rateSR = Standard variable overhead rate AH = Actual direct labor hoursSH = Standard direct labor hours allowed to achieve the actual units of output
Actual VOHAR × AH
SR × AHFlexible budget
SR × SH
Variable overhead spending variances
VOH efficiency varianceSR × (SH –AH)
VOH rate varianceAH × (SR – AR)
10-23
Variable Manufacturing Overhead Variances
Standard StandardHours Unit Cost
Variable manufacturing Overhead 0.10 hrs. $1.00 per hr. 0.10$
StandardVOH Rate
Cold Stone’s Standard Cost Informationfor Variable Manufacturing Overhead
Cold Stone’s actual results for the period were:• 18,000 units produced and sold.• Actual VOH costs were $1,800 for 2,000 direct labor hours.
• Actual Direct Labor Hours (AH) = 2,000 hours• Standard Direct Labor Hours (SH) = 0.10 hours per unit × 18,000 units = 1,800 hours• Actual Variable Overhead Rate (AR) = $1,800 ÷ 2,000 hours = $.90 per hour• Standard Variable Overhead Rate (SR) = 0.10 hours per unit × $1.00 per hour = $0.10 per unit
10-24
Variable Manufacturing Overhead Variances
Actual VOHAR × AH
AR × SRFlexible budget
SR × SH
Variable overhead spending variance
SH = 18,000 actual units × 0.10 hours
VOH efficiency varianceSR × (SH –AH)
VOH rate varianceAH × (SR – AR)
10-25
Rate VarianceRate Variance Efficiency VarianceEfficiency Variance
Results from paying moreor less than expected foroverhead items and from
excessive usage ofoverhead items.
A function of the selected allocation
measure (direct labor hours). It does not reflect
overhead control.
Variable Manufacturing Overhead Variances
10-26
Fixed Manufacturing Overhead Spending Variance
Fixed OverheadSpending Variance
BudgetedFixed
Overhead
ActualFixed
Overhead= ‒
Cold Stone budgeted $6,000 for fixed manufacturing overhead butactually incurred $6,300 in fixed manufacturing overhead costs.
Fixed OverheadSpending Variance
$300 U$6,000 $6,300= ‒
10-27
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. Spending or using more of a variable resource is unfavorable. Using more of a fixed resource is favorable, because it drives down the fixed cost per unit.
10-28
10-29
Ice Cream$8,000
Ice Cream$9,000
DM Price$2,000 F
DM Quantity$1,000 U
Mix-Ins$4,200
Mix-Ins$3,600
DM Price$700 U
DM Quantity$100 F
Direct Labor$16,500
Direct Labor$14,400
DL Rate$500 U
DL Efficiency$1,600 U
Variable OH$1,800
Variable OH$1,800
VOH Rate$200 F
VOH Efficiency$200 U
Fixed OH$6,300
Fixed OH$6,000
FOH Budget$300 U
Actual Cost$36,800
Budgeted Cost$34,800
Total Spending Variance$2,000 U
Spending VariancesActualCosts
FlexibleBudget
Summary of Spending Variances
Supplement 10A – Fixed Manufacturing Overhead Volume and Capacity Variances
Budgeted Fixed Overhead Rate
BudgetedFixed
Overhead
Budgeted Volume= ÷
Budgeted Fixed Overhead Rate$0.40 per unit
$6,00015,000 units= ÷
Cold Stone budgeted $6,000 for fixed manufacturing overhead for a budgeted volume of 15,000 units. Cold Stone’s budgeted
fixed manufacturing overhead rate is:
Fixed Overhead Rate Based on Budgeted Volume
10-30
Fixed Overhead Volume Variance
Applied FOH FOH Rate
×Actual
Volume
Budgeted FOH FOH Rate
×Budgeted Volume
= ‒
Fixed Overhead Volume Variance
FOH Rate×
(Actual Volume ‒ Budgeted Volume)=
Fixed Overhead Volume Variance$1,200 Favorable
$0.40×
(18,000 units ‒ 15,000 units)=
Fixed Manufacturing Overhead Volume Variance
10-31
Fixed Manufacturing Overhead Spending and Volume Variances
AU = Actual UnitsBU = Master Budget UnitsFOH = Fixed manufacturing overheadFOH Rate = Budgeted FOH cost ÷ Budgeted units
Over- or UnderappliedFixed Overhead
FOH Volume VarianceFOH Rate × (AU – BU)
FOH Spending VarianceBudgeted – Actual FOH
ActualFOH
Budgeted FOHFOH Rate × BU
Applied FOHFOH Rate × AU
10-32
Fixed Manufacturing Overhead Variances
Standard FixedQuantity Overhead Rate
Fixed Manufacturing Overhead $6,000 ÷ 15,000 units = $0.40 per unit 0.40$
StandardPrice (Rate)
Cold Stone’s Standard Cost Informationfor Fixed Manufacturing Overhead
Cold Stone’s actual results for the period were:• 18,000 units produced and sold.• Actual FOH costs were $6,300.
Cold Stone’s budget for fixed overhead was:• 15,000 units to be produced and sold.• Budgeted FOH costs were $6,000.
10-33
Actual FOHBudgeted FOH FOH Rate × BU
Applied FOHFOHR × AU
Over- or UnderappliedFixed Overhead
FOH Volume Variance FOH Rate × (AU – BU)
FOH Spending VarianceBudgeted – Actual FOH
Fixed Manufacturing Overhead Spending and Volume Variances
10-34
Fixed Overhead Rate Based on Practical Capacity
FixedOverhead Rate
BudgetedFixed
Overhead
PracticalCapacity= ÷
FixedOverhead Rate$0.30 per unit
$6,00020,000 units= ÷
Cold Stone budgeted $6,000 for fixed manufacturing overhead andhas a practical capacity of 20,000 units. Cold Stone’s
fixed manufacturing overhead rate is:
Practical capacity is the number of units that could be produced under normal operating conditions.
10-35
ExpectedCapacity Variance
FOH Rate×
Budgeted Volume – Practical Capacity=
Fixed Overhead Capacity Variances
ExpectedCapacity Variance
$0.30×
15,000 units – 20,000 units= = $1,500
Unfavorable
The expected capacity variance is computed before the period begins.
10-36
UnexpectedCapacity Variance
FOH Rate×
Actual Volume – Budgeted Volume=
Fixed Overhead Capacity Variances
UnexpectedCapacity Variance
$0.30×
18,000 units – 15,000 units= = $900
favorable
The unexpected capacity variance iscomputed after the period is over.
10-37
Standard FixedQuantity Overhead Rate
Fixed Manufacturing Overhead $6,000 ÷ 20,000 units = $0.30 per unit 0.30$
StandardPrice (Rate)
Cold Stone’s Cost Informationfor Fixed Manufacturing Overhead
Cold Stone’s actual results for the period were:• 18,000 units produced and sold.• Actual FOH costs were $6,300.
Practical capacity is 20,000 units.Cold Stone’s budget for fixed overhead was:• 15,000 units to be produced and sold.• Budgeted FOH costs were $6,000.
Fixed Manufacturing Overhead Spending and Capacity Variances
10-38
Actual FOHBudgeted Cost
of Capacity FOH Rate × PC
Cost of Capacity Used
FOHR × AU
Over- or UnderappliedFixed Overhead
FOH Capacity Variance FOH Rate × (AU – PC)
FOH Spending Variance Budgeted – Actual FOH
Fixed Manufacturing Overhead Spending and Capacity Variances
10-39
• 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.
Common Rules
Supplement 10B – Recording Standard Costs and Variances in a Standard Cost System
10-40
RawMaterialsInventory
Cost of Goods Sold
No Work in Process or Finished Goods Inventory
Standard Direct Material
Cost
Standard Direct Laborand ManufacturingOverhead Costs
Recording Standard Costs for Cold Stone Creamery
10-41
Direct Materials Costs
Cold Stone’s actual results for the period were:• 200,000 ounces of ice cream were purchased on account for a total of $8,000, at an average actual price of $.04 per ounce.• All 200,000 ounces of ice cream were used to make and sell 18,000 units.
The journal entry to record the direct materials purchase is:
Standard StandardQuantity Unit Cost
Ice Cream 10 oz. 0.05$ per oz. 0.50$
StandardPrice
Cold Stone’s Standard Cost Information for Direct Materials
10-42
Direct Materials Costs
Standard StandardQuantity Unit Cost
Ice Cream 10 oz. 0.05$ per oz. 0.50$
StandardPrice
The journal entry to record the direct materials use is:
Cold Stone’s actual results for the period were:• 200,000 ounces of ice cream were purchased on account for a total of $8,000, at an average actual price of $.04 per ounce.• All 200,000 ounces of ice cream were used to make and sell 18,000 units.
Cold Stone’s Standard Cost Information for Direct Materials
10-43
Direct Labor and Manufacturing Overhead Costs
Standard StandardHours Unit Cost
Direct Labor 0.10 hrs. $8.00 per hr. 0.80$
StandardRate
Cold Stone’s Standard Cost Information for Direct Labor
Cold Stone’s actual results for the period were:• 18,000 units produced and sold.• Direct labor costs were $16,500 for 2,000 hours worked.
The journal entry to record direct labor is:
10-44
Direct Labor and Manufacturing Overhead Costs
The journal entry to record variable manufacturing overhead is:
Standard StandardHours Unit Cost
Variable manufacturing Overhead 0.10 hrs. $1.00 per hr. 0.10$
StandardVOH Rate
Cold Stone’s Standard Cost Informationfor Variable Manufacturing Overhead
Cold Stone’s actual results for the period were:• 18,000 units produced and sold.• Actual VOH costs were $1,800 for 2,000 direct labor hours.
10-45
Standard StandardQuantity Unit Cost
Fixed Manufacturing Overhead $6,000 ÷ 15,000 units = $0.40 per unit 0.40
StandardPrice (Rate)
Cold Stone’ actual results for the period:• 18,000 units produced and sold.• Actual FOH costs were $6,300.
Cold Stone’s budget for fixed overhead:• 15,000 units to be produced and sold.• Budgeted FOH costs were $6,000.
Cold Stone’s Standard Cost Informationfor Fixed Manufacturing Overhead
The journal entry to record fixed manufacturing overhead costs is:
Direct Labor and Manufacturing Overhead Costs
10-46
Cost of Goods Sold and Cost Variance Summary
Actual Cost
$36,800Standard Cost
$36,000Total Cost Variance
$800 U
Recall the following from the summary of cost variances:
Cost Variance SummaryCost of Goods SoldApplied
StandardCost
= 36,000 Balance = 800
Balance = 0ActualCost = 36,800
10-47
Cost of Goods Sold and Cost Variance Summary
Debit Credit
Ice Cream Price Variance 2,000
Mix-in Quantity Variance 100
Variable Overhead Rate Variance 200
Fixed Overhead Volume Variance 1,200
Cost of Goods Sold 800
Ice Cream Quantity Variance 1,000
Mix-in Price Variance 700
Direct Labor Rate Variance 500
Direct Labor Efficiency Variance 1,600
Variable Overhead Efficiency Variance 200 Fixed Overhead Spending Variance 300
AccountsThe entry to close the variance accounts to the Cost of Goods Sold is:
10-48
End of Topic 4