Chapter 10. Are standards the same as budgets? A standard is the expected cost for one unit. A...
-
Upload
branden-newton -
Category
Documents
-
view
219 -
download
2
Transcript of Chapter 10. Are standards the same as budgets? A standard is the expected cost for one unit. A...
Chapter 10
Are standards the same as budgets?
A standard is the expected cost for one
unit.
A budget is the expected cost for all
units.
Standards vs. Budgets
Standard Costs
Provide benchmarks formeasuring performance.
Establish the expected levelof performance.
Based on carefullypredetermined amounts.
Used for planning material, labor,and overhead requirements.Standard
Costs are
Standard Costs
DirectLabor
Managers focus on quantities and coststhat exceed standards, a practice known as
management by exception.
Type of Product Cost
Am
ou
nt
DirectMaterial
ManufacturingOverhead
Standard
Setting Standard CostsPractical standards
should be set at levelsthat are currently
attainable withreasonable andefficient effort.
Setting Standard CostsI agree. Ideal standards,
that are based on perfection, are
unattainable and discourage most
employees.
Standard Cost Card – Variable Production Cost
A standard cost card for one unit of product might look like this:
A A x BStandard Standard StandardQuantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. 4.00$ per lb. 12.00$ Direct labor 2.5 hours 14.00 per hour 35.00 Variable mfg. overhead 2.5 hours 3.00 per hour 7.50 Total standard unit cost 54.50$
B
A General Model for Variance Analysis
Variance Analysis
Price Variance
Difference betweenDifference betweenactual price and actual price and standard pricestandard price
Quantity Variance
Difference betweenDifference betweenactual quantity andactual quantity andstandard quantitystandard quantity
A General Model for Variance Analysis
AQ(AP - SP) SP(AQ - SQ)
AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Standard Cost VariancesP
rod
uct
Co
st
Standard
This variance is unfavorablebecause the actual cost
exceeds the standard cost.
A standard cost variance is the amount by whichan actual cost differs from the standard cost.
Standard Cost Variances
I see that thereis an unfavorable
variance.
But why arevariances
important to me?
First, they point to causes ofproblems and directions
for improvement.
Second, they trigger investigations in departments
having responsibility for incurring the costs.
Setting Direct Material Standards
PriceStandards
Summarized in a Bill of Materials.
Final, deliveredcost of materials,net of discounts.
QuantityStandards
Price variance Quantity variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Material Variances Summary
Materials Price VarianceMaterials Quantity Variance
Production Manager Purchasing 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.
The standard price is used to compute the quantity varianceso that the production manager is not held responsible for
the purchasing manager’s performance.
Responsibility for Material Variances
Setting Direct Labor Standards
RateStandards
Often a singlerate is used that reflectsthe mix of wages earned.
TimeStandards
Use time and motion studies for
each labor operation.
Rate variance Efficiency variance
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
Labor Variances Summary
Responsibility for Labor Variances
Production Manager
Production managers and H. R. managers are usually held
accountablefor 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.
Setting Variable Manufacturing Overhead
Standards RateStandards
The rate is the variable portion of the
predetermined overhead rate.
QuantityStandards
The quantity is the activity in the allocation
base used for predetermined overhead.
Rate variance Efficiency variance
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
Variable Manufacturing Overhead Variances Summary
Responsibility for Overhead Variances
Production Manager
Production managers areusually held accountablefor overhead variances
because they caninfluence the:
Costs incurred on the shop floor.
Quality of production supervision.
Variable Overhead Variances – A Closer Look
Rate Variance Efficiency Variance
Results from paying moreor less than expected foroverhead items and from
excessive usage ofoverhead items.
Controlled bymanaging the
overhead cost driver.
Variance Analysis and Management by Exception
How do I knowwhich variances to
investigate?
Larger variances, in dollar amount or as a
percentage of the standard, are
investigated first.
Advantages of Standard CostsManagement by
exception
Improved cost control and performance
evaluation
Better Informationfor planning anddecision making
Possible reductionsin production costs
Advantages
PotentialProblems
Emphasis on negativemay impact morale.
Emphasizing standardsmay exclude other
important objectives.
Favorable variancesmay be misinterpreted.
Continuous improvementmay be moreimportant than
meeting standards.
Standard costreports may
not be timely.
End of Chapter 10