Chapter 9 HM

Review from Last Meeting

Budgeting
1.

2.
3.
4.

Discuss budgeting & its role in

planning, control, & decision
making.
Define & prepare a master budget
Describe flexible budgeting
Explain how activity-based
budgeting works.
2

LEARNING
LEARNING OBJECTIVES
OBJECTIVES
Tell how unit standards are set;
why standard costing systems are
adopted.
2. State the purpose of a standard
cost sheet.
3. Describe basic concepts
underlying variance analysis &
explain how they are used for
Continued
control.
1.

LEARNING
LEARNING OBJECTIVES
OBJECTIVES
Compute materials & labor
variances; explain how they are
used for control.
5. Calculate variable & fixed
overhead variances & give their
definitions.
6. Prepare journal entries for
variances (Appendix).
4.

PLANNING

CONTROL

Standard Costing
Quantity

standards : the amount of

input that should be used per unit of
output.

Price

standards : the amount that

should be paid for the quantity of input
used. 5 ounce fructose used per bottle (standard quantity)
The price of fructose $0.05/ounce (standard price)
Then
Standard cost of fructose per bottle = $0.25 (5 x $0.05)
6

Where do quantity & price

standards come from?

Quantity
Quantity standards come from
experience, studies, & personnel.
Price
Price standards come from
operations, purchasing, personnel,
& accounting.
7

Ideal Standard vs Attainable

Standard
Ideal

standards only work under

perfect conditions
Attainable standards can be
achieved under efficient
operating conditions.

STANDARD COST
SYSTEMS
Why adopt a standard cost system?
For planning & control
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

Standard Product Costs

STANDARD

COST PER UNIT: the

sum of standards costs for direct materials
(DM), direct labor (DL), & overhead

Provides the
details
underlying
standard unit
cost

10

Standard cost sheet

Reveals

the quantity of each

input used to produce one unit of
output

The

number could be used to

Unit
quantity standard x actual output
compute
standard quantity of materials
allowed (SQ)
Unit labor standard x actual output
11

Exercise 9-3

SH

= 1.5 x 1,700
= 2,550 hour
SQ = 4 x 1,700
= 6,800 components
12

Variance Analysis
difference

between actual cost &

planned cost of production
The difference between actual &
planned can be:
favorable (actual price or usage <
standard)
or
unfavorable (actual price or usage
> standard).
Does not mean good or bad!
13

LO 3

What should we do when we find

variances?
Control

limit
should be used
to determine
variances are
significant or
not.
If variances are
significant, they
should be
investigated if it
is cost beneficial
to do so.

14

15

LO 3

Total Variance
Total

variance is Actual cost Applied

cost or Total cost Standard cost.

Total Variance

= (AP X AQ) (SP X SQ)

= (Actual price x Actual quantity)
(Standard Price x Standard Quantity)

16

LO 3

How can we make total

variances more useful?

Total variances provide more

information if they are divided
into Price variances & Efficiency
variances.

17

18

Types of Variance
Material

Variances

Materials Price Variance (MPV):

Materials Usage Variance (MUV):
Direct

Labor Variances

Labor Rate Variance (LRV)

Labor Efficiency Variance (LEV)
Variable

Overhead Variances
Variable Overhead Spending Variance
Variable Overhead Efficiency Variance
Fixed Overhead Variances
Fixed Overhead Spending Variance
Fixed Overhead Volume Variance
19

LO 4

MATERIALS VARIANCES
Decompose total
materials variance
into price & usage
variances.

20

LO 4

Who is responsible for a

materials price variance?

Purchasing
agent Agent.
The Purchasing
The price variance can be influenced by
such factors as quality, quantity discounts,
distance of the source from the plant, and so
on. These factors are often under the control
of the agent.
21

LO 4

FORMULA:
Materials

Price Variance (MPV): measure

different between actual & standard price
MPV = (AP x AQ) - (SP x AQ)
= (AP SP)AQ

Materials

Usage Variance (MUV): tells

whether a company used more raw
materials than expected
MUV = (AQ X SP) (SQ X SP)
= (AQ SQ)SP

22

Direct Labor Variances

labor

rate variance (LRV) :

computes the difference between
what actually paid to direct laborers
and what should have been paid
LRV = (AR X AH) (SR X AH)

labor

efficiency variance (LEV):

tells whether a company paid more
than expected for labor :
LEV = (AH X SR) (SH X SR)
23

24

LO 4

Who is responsible for a

labor efficiency variance?

The Production &

Maintenance Managers.

25

Variance Analysis: Overhead

Costs
Total overhead variance is the difference between
actual and applied variable overhead
Variable

Overhead Variances

variable overhead spending variance

variable overhead efficiency
variance
Fixed

Overhead Variances

fixed overhead spending variance

fixed overhead volume variance
26

Variable Overhead Spending

Variance
arises

because prices change. It

includes things such as indirect
materials, indirect labor,
electricity maintenance, etc
Increase or decrease in these
items is beyond control of
managers.
Formula:
= (AVOR SVOR) AH
27

Variable Overhead Efficiency

Variance
Variable

overhead efficiency
variance measures change in
variable overhead consumption
because relies on direct labor
Depends on validity of relationship
between variable overhead costs
and direct labor hours
Formula:
= (AH SH)SVOR
28

LO 5

FIXED OVERHEAD
VARIANCES

Decompose total
fixed overhead
variance into
spending &
volume variances.

29

LO 5

Fixed Overhead Spending

Variance
difference

between actual and

budgeted fixed overhead.
includes things such as salaries,
depreciation, taxes, and
insurance.
Increase or decrease in these
items is beyond control of
managers
Formula:
Budgeted Fixed Overhead Actual Fixed
Overhead

30

Fixed Overhead Volume Variance

measures

the effect of actual

output differing from output used
to compute predetermined
standard fixed overhead rate
Can be interpret as a measure of
capacity utilisation
Formula:
Applied Fixed Overhead Budgeted Fixed
Overhead
31

Exercise 9-14

32

Accounting for
Variances
Assumption

All inventories (or labor rate) are carried at standard

cost
Actual costs are never entered into an inventory
account
In

recording variances:

unfavorable variances are always debits

favorable variances are always credits
At

the end of the year, the variances are

usually closed to COGS
If the variances are material, they must be
prorated among Materials Inventory, Work in
Process, Finished Goods, and COGS
33

Entries for Materials

Variances
Material Price Variance

Material Usage Variance

34

Entries for Direct Labor

Variances

35

CHAPTER 9

THE
THE END
END

36