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CHAPTER 22Standard Costs and Balanced
Scorecard
After studying this chapter, you should be able to:
Distinguish between a standard and a budget.
Identify the advantages of standard costs.
Describe how standards are set.
Use standards to determine budget amountsand analyze variances.
Discuss the reporting of variances.
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The Need for Standards
Standards Are common in business
Sometimes imposed by government agencies
(regulations)
Standard costs Are predetermined unit costs
Used as measures of performance
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Distinguishing Between Standards and
Budgets
Standards and budgets are both Pre-determined costs
Part of management planning and control
A standard is a unit amountwhereas a
budget is a total amount Standard costs may be incorporated into a cost accounting
system
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The Need for Standards
Lets think about standards..
how much does it cost to make a.?
DM
DL
OH
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In Class Exercise on Standards
StandardDL
Cost
StandardP
StandardCost per unit
=
Lets think about standards..how much does it cost to make a.?
Use your product to create example costs
StandardDM
Cost
Standard P(Pre-determined
OH rate)
Standard Q(Activity)
StandardQ
StandardP
StandardQ
=
= X
X
X
StandardOH
Cost
SP
+
+
=
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Advantages of Standard Costs
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Setting Standard Costs
Setting standard costs Requires input from all personswho have responsibility for
costs and quantities
Standards costs need to be currentand should be undercontinuous review
There are two levels of standard costs Ideal standards represent optimum levelsof performance
under perfect operating conditions
Normal standards represent efficient levelsof performanceattainable under expected operating conditions (rigorous butattainable)
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Setting Standard Costson a per unit level
PRICE
P
x=
QUANTITY
Q
STANDARD
We can do this for DM, DL & OH.
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Direct Materials Price Standard
Direct materials price standard Cost per unitwhich should be incurred
Based on the purchasing departmentsbest estimate of the costof raw materials
Includes related costssuch as receiving, storing, and handling
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Direct Materials Quantity
Standard
Direct materials quantity standard Quantity of direct materials used per unitof finished goods
Based on physical measure such as pounds, barrels, etc.
Considers both the quantity and quality of materials required
Includes allowances for unavoidable wasteand normal storage
Materials
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Total Direct Materials
Cost/Unit
STANDARDDIRECT
MATERIALSPRICE
x =
STANDARDDIRECT
MATERIALSQUANTITY
STANDARDDIRECT
MATERIALS COSTPER UNIT
The standard direct materials cost perunitis calculated as follows:
PRICE
P
x =QUANTITY
Q
STANDARD
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Direct Labor Price Standard
Direct labor price standard Rate per hourincurred for direct labor
Based on current wage ratesadjusted for anticipatedchanges, such as cost of living adjustments
Includes employer payroll taxes, and fringe benefits
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Direct Labor Quantity Standard
Direct labor quantity standard
Time required to make one unitof the product
Critical in labor-intensive companies Allowancesshould be made for rest periods,
cleanup, machine setup and machine downtime
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Direct Labor
The standard direct labor cost per unit iscalculated as follows:
STANDARDDIRECT
LABOR RATE
x =STANDARD
DIRECTLABOR HOURS
STANDARDDIRECT
LABOR COSTPER UNIT
PRICEP x =
QUANTITYQ STANDARD
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Manufacturing Overhead Standard
For manufacturing overhead, a standard
predetermined overhead rate is used. The predetermined rate is computed by dividing budgeted
overhead costs by an expected standard activity index.
The standard manufacturing overhead rate per unit is the
predetermined overhead rate times the activity index quantity
standard(for example, direct labor hours).
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Standard Cost Per Unit
Standard cost per unit Sum of the standard costsfor direct materials, direct labor, and
manufacturing overhead
Is determined for each productand often recorded on astandard cost card which provides the basis for determining
variances from standards
ManufacturingOverhead
FactoryLabor
Materials
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Variances from Standards
Variances from standards Differencesbetween total actual costs and total
standard costs
Unfavorable variancesoccur when too much is paid
for materials and labor or when there are inefficienciesin using materials and labor.
Favorable variancesoccur when there are efficienciesin incurring costs and in using materials and labor. A variance is not favorable if quality control standards are
sacrificed.
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Analyzing variances
Variances must be analyzed todetermine their significance
First, determine the cost elementsthat comprise the
variance. For each manufacturing cost element, a total dollar
variance is computed. Then this variance is analyzed
into aprice variance and a quantity variance.
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Variance Relationships
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DeterminingMaterials Variance
Actual Quantityx Actual Price(AQ) x ($AP)
What did youactual ly pay??
Standard Quantityx Standard Price
(SQ) x ($SP)
What should youhave paid based on the
Standard (consider
how much is produced)?
Total MaterialsVariance
(TMV) U or F=_
The total materials varianceis computedfrom the following formula:
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Analyzing Materials VarianceIsolate Price Component
Actual Unit PriceStandard Price($AP- $SP)U or F
Actual Quantity Materials PriceVariance
(MPV)U or F=x
Break thematerials variancedowninto price and quantity.
Compute P variance as follows:
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Analyzing Materials VarianceIsolate Quantity Component
Actual TotalQuantity Used- Standard Total
Quantity(AQ) - (SQ)U or F
$ Standard Price MaterialsQuantityVariance
(MQV)U or F
=x
Break thematerials variancedown intoprice and quantity.
Compute Q variance as follows:
For SQ : consider how muchQ should have been purchased forhow much is produced(SQ per unit x units produced).
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Check your answer:Cross Foot Materials Variances
Materials PriceVariance
U or F
Materials QuantityVarianceU or F
Total MaterialsVariance
(TMV)U or F=+
Qvariance + P variance = total variance
Is your answer correct???
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Causes of Materials Variances
Materials variances may be caused by avariety of factors, including bothinternal and external factors.
Investigating materials price variancesbegins in thepurchasing department, but the variance may be beyondthe control of purchasing (for ex., prices rise faster thanexpected).
Investigating materials quantity variancebegins in theproduction department, but the variance may be beyondthe control of production (for ex., faulty machinery).
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DeterminingLaborVariance
Actual (Q) Hoursx Actual (P) Rate
(AQ) x ($AP)
What did youactual ly payFor Labor??
Standard Hours (Q)x Standard Rate (P)
(SQ) x ($SP)
What should youhave paid based on the
Standard (consider
how much is produced)?
Total LaborVariance
(TLV) U or F=_
The total Labor varianceis computed fromthe following formula:
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Analyzing Labor VarianceIsolate Price Component
Actual Rate/hrStandard Rate/hr($AP- $SP)U or F
Actual hours(AQ)
Labor PriceVariance
(LPV)U or F=x
Break theLabor variancedown intoprice and quantity.
Compute Labor Price variance as follows:
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Analyzing Labor VarianceIsolate Quantity Component
Actual Total Hoursused (AQ) -Standard Total
Hours (SQ)(AQ) - (SQ)U or F
$ Standard Rate(P)
LaborQuantityVariance
(LQV)U or F
=x
Break thelabor variancedown into priceand quantity.
Compute Labor Quantity variance as follows:
For SQ : consider how many hoursshould have been worked forhow much is produced(SQ or hours per unit x units produced).
Ch k
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Check your answer:Cross Foot Labor Variances
Labor PriceVariance
U or F
Labor QuantityVarianceU or F
Total LaborVariance
(TLV)U or F=+
Qvariance + P variance = total variance
Is your answer correct???
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Causes of Labor Variances
Labor variances may be caused by avariety of factors.
Labor price variances usually result from eitherpaying
workers higher wagesthan expected or misallocatingworkers (for ex., using skilled workers in place ofunskilled workers).
Labor quantity variances relate to the efficiency ofworkers and are usually related to the production
department.
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Actual Overhead Costs
Thetotal overhead variance is thedifference between actual overhead costs
and overhead costs applied to work done.
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Reporting Variances
Reporting variances All variances should be reportedto appropriate levels of
management as soon as possible so that corrective action
can be taken. The form, content, and frequency of variance reports
vary considerably among companies.
Variance reports facilitate the principle of management
by exception. In using variance reports, top management normally
looks for significant variances.
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Formula for TotalOverhead Variance
ActualOverhead
OverheadApplied basedon Standard
Hours Allowed
TotalOverheadVariance
=_
With standard costs, manufacturingoverhead costs are applied to work inprocess on the basis of the standard hoursallowed for the work done. Standard hoursallowedare the hours that should have beenworked for the units produced. The formulafor the total overhead variance is:
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Lets Review
The setting of standards is:
a. A managerial accounting decision.
d.Preferably set at the ideal level of
performance.
c.A worker decision.
b.A management decision
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Lets Review
The setting of standards is:
a. A managerial accounting decision.
d.Preferably set at the ideal level of
performance.
c.A worker decision.
b.A management decision
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The Need for Standards
Lets think about standards..
how much does it cost to make a.?
DM
DL
OH
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In Class Exercise on Standards
StandardDL
Cost
StandardP
StandardCost per unit
=
Lets think about standards..how much does it cost to make a.?
Use your product to create example costs
StandardDM
Cost
Standard P(Pre-determined
OH rate)
Standard Q(Activity)
StandardQ
StandardP
StandardQ
=
= X
X
X
StandardOH
Cost
SP
+
+
=
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