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Direct-Cost Variances,
and
Management Control
Standard
Amount
Direct
Material
Direct
Labor
Comparison between
standard and actual
performance
level
Cost
variance
Standard
A standard can be thought of as a budget for
one unit of product.
Standards, as used in variance analysis, have
two advantages:
They seek to exclude past inefficiencies
They take into account changes expected to
occur in the budget period.
Standards also simplify product costing,
enabling the company to cost a product
immediately upon its completion.
2009 Pearson Prentice Hall. All rights reserved.
Setting Standards
Cost
Standards
Analysis of Task
Historical Data Analysis
SETTING STANDARDS
Managers set standards by analyzing historical data.
However, past data must be adjusted for expected
changes in technology, the production process,
inflation, and other similar factors.
In using task analysis, the emphasis shifts from
what the product did cost in the past to what it
should cost in the future. The managerial
accountant typically works with engineers to
conduct studies in an effort to determine exactly
how much direct material should be required, how
machinery should be used in the production process,
and how many direct labor hours are required(e.g.,
time and motion studies) .
2009 Pearson Prentice Hall. All rights reserved.
Participation in
Setting Standards
Standards should not be determined by the managerial
accountant alone. People generally will be more committed to
meeting standards if they are allowed to participate in setting
them. For example, production supervisors should have a role
in setting production cost standards, and sales managers
should be involved in setting targets for sales prices and
volume.
Knowledgeable people such as engineers, purchasing agents,
production supervisors, and accountants should be brought
into the standard-setting process. Cross-functional teams are
very useful here.
Standard cost
analysis may be used
in any organization
with repetitive tasks.
A relationship
between tasks and
output measures
must be established.
Standard
A standard is a carefully determined, price, cost,
or quantity that is used as a benchmark for judging
performance. It is usually expressed on a per-unit
basis.
a)A standard input is a quantity of input such as 2
pounds of raw material for each completed unit.
b)A standard price is the price a company expects
to pay for a unit of input, such as $10 per direct
labor hour.
c)A standard cost is the cost the company expects
a unit of finished product to cost the company.
AQ(AP
Materials price- SP)
variance SP(AQ
Materials - SQ)
quantity variance
Labor rate variance Labor efficiency variance
AQ =Variable
Actual overhead
Quantity SP = Standard
Variable Price
overhead
AP = spending
Actual Price
variance SQ = Standard
efficiency Quantity
variance
2009 Pearson Prentice Hall. All rights reserved.
Actual Quantity Actual Quantity Standard Quantity
Actual Price Standard Price Standard Price
20,000