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Managerial Accounting
Standard Costing:
A Managerial Tool Control
Learning Objectives:
1) Basic Introduction Of The Standard Costing
2) What Is Standard Cost Per Unit And Standard Cost Sheet
3) General Definition Of Budget Variance
4) Direct Material Variance And Direct Labor Budget Variance
5) Variable And Fix Overhead Budget Variance
OBJECTIVES 1: BASIC INTRODUCTION OF THE STANDARD COSTING
Description
What is standard costing? Standard costing is the cost that maybe will
suffer (expected cost), that assigned by the company. To assess the
standard costing we must find the total of The Quantity standards x
Price Standards. Quantity standards basically came from Historical
experience, engineering studies, and input from operating personnel.
Meanwhile, Price Standards came from: purchasing, personnel, &
accounting. Standards are generally classified as either ideal or
currently attainable. Ideal standards demand maximum efficiency
and can be achieved only if everything operates perfectly. Currently
attainable standards can be achieved under efficient operating
conditions. Allowance is made for normal breakdowns, interruptions,
less than perfect skill, and so on. These standards are demanding but
achievable.
Why adopt a standard cost system? For planning & control such
as: To improve performance measures, To give manager more
information by decomposing total variances into price & usage
variances For product costing To use unit cost system that is
readily available in pricing. And help manager to get more specific
data.
Sub-Total
$ 0,045
Total Overhead
$0,145
control the total variance if they breaking the budget variances into
price and usage variances. We investigate variance if they are material
and if the benefits of corrective action are greater than the costs of
investigation. So after we assess the price rate minus usage variance
we can get the amount of the total variance.
OBJECTIVES 4: DIRECT MATERIAL VARIANCE AND DIRECT LABOR
BUDGET VARIANCE
The total variance measures the difference between the actual costs of
materials and labor and their budgeted costs for the actual level of
activity.
A. DIRECT MATERIALS VARIANCE: In direct materials managers
should calculate the material price variance and the materials usage
variance.
1. The materials price variance (MPV) measures the difference
between what should have been paid for materials and what was
actually paid. The formula for computing this variance is:
MPV: (AP x AQ) - (SP x AQ) or (AP - SP) AQ
AP: The actual price per unit
SP: The standard price per unit
AQ: The actual quantity of material used
efficiency variance
1. The labor rate variance: The labor rate variance (LRV)
computes the difference between what was paid to direct laborers and
what should have been paid. The formula is:
LRV: (AR x AH) - (SR x AH) or LRV : (AR - SR)AH
AR: The actual hourly wage rate
SR: The standard hourly wage rate
AH: The actual direct labor hours used
2. Labor Efficiency Variance: Formula Approach The labor
efficiency variance (LEV) measures the difference between the labor
hours that were actually used and the labor hours that should have
been used:
LEV = (AH X SR) - (SH X SR) or LEV = (AH - SH) SR
AH: The actual direct labor hours used
SH: The standard direct labor hours that should have been used
SR: The standard hourly wage rate
OBJECTIVES 5: VARIABLE AND FIX OVERHEAD BUDGET VARIANCE
The total overhead variance, the difference between applied and actual
overhead, is also broken down into component variances, we will divide
overhead into 2 categories: fixed and variable.
A. VARIABLE OVERHEAD VARIANCES
Total Variable Overhead Variance The total variable overhead
variance is the difference between the actual and the applied variable
overhead. There are 2 types of variable overhead variance. First is
Variable Overhead Spending Variance, and the second is Variable
Overhead Efficiency Variance
SUMMARY
sheet.Comparingactualoutcomeswithstandardsandbreakingthevarianceintoprice
andquantitycomponentsprovidedetailedfeedbackprovidedtomanagers.This
informationallowsmanagerstoexerciseagreaterdegreeofcostcontrolthanthatfound
inanormaloranactualcostingsystem.Decisionssuchasbiddingarealsomadeeasier
whenastandardcostingsystemisinplace.