Ma 6e PPT CH 10 Se New

CORNERSTONES
of Managerial Accounting, 6e
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
CHAPTER 10:
STANDARD COSTING: A
MANAGERIAL CONTROL TOOL
Cornerstones of Managerial
Accounting, 6e
Unit Standards
 Budgets set standards that are used to control
and evaluate managerial performance.
 To determine the unit standard cost for a
particular input, two decisions must be made:
 The quantity decision: The amount of input that should
be used per unit of output
 The pricing decision: The amount that should be paid
for the quantity of the input to be used
LO-1
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Quantity and Price Standards
 The quantity decision produces quantity
standards.
 The pricing decision produces price standards.
 The unit standard cost can be computed by
multiplying these two standards:
Standard cost per unit = Quantity standard x Price standard
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How Standards Are Developed
 Three potential sources of quantitative standards
are as follows:
 Historical experience: Can provide an initial guideline
for setting standards, but should be used with caution
because they can perpetuate existing inefficiencies.
LO-1
How Standards Are
Developed (cont.)
 Engineering studies: Engineering studies can identify
efficient approaches rigorous guidelines, but engineered
standards often are too rigorous.
 Input from operating personnel: Since operating
personnel are accountable for meeting standards, they
should have significant input in setting standards.
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Types of Standards
 Standards are generally classified as either ideal
or currently attainable.
 Ideal standards demand maximum efficiency and can
be achieved only if everything operates perfectly. No
machine breakdowns, slack, or lack of skill (even
momentarily) are allowed.
 Currently attainable standards can be achieved under
efficient operating conditions. Allowance is made for
normal breakdowns, interruptions, less than perfect
skill, and so on.
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Types of Standards (cont.)
 Of the two types, currently attainable standards
offer the most behavioral benefits.
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Why Standard Cost Systems
Are Adopted
 Two reasons for adopting a standard cost system
are frequently mentioned:
 To improve planning and control
 Comparing actual costs with budgeted costs identifies
variances, the difference between the actual and planned
costs for the actual level of activity.
 Overall variances can be further broken down into a price
variance or a usage or efficiency variance if unit price or
quantity standards have been developed.
LO-1
Why Standard Cost Systems
Are Adopted (cont.)
 To facilitate product costing
 Costs are assigned to products using quantity and price
standards for all three manufacturing costs: direct
materials, direct labor, and overhead.
 Standard costing and variance analysis for
controlling cost and evaluating performance can
have strong ethical implications.
LO-1
Cost Assignment Approaches
LO-1
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Standard Product Costs
 In manufacturing firms, standard costs are
developed for direct materials, direct labor, and
overhead.
 Using these costs, the standard cost per unit is
computed.
 The standard cost sheet provides the
production data needed to calculate the standard
unit cost.
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The Standard Cost Sheet
 The standard cost sheet also shows the quantity
of each input that should be used to produce one
unit of output.
 A manager should be able to compute the
standard quantity of materials allowed (SQ) and
the standard hours allowed (SH) for the actual
output, where
and
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The Standard Cost Sheet
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Variance Analysis:
General Description
 Actual input cost can be calculated as:
Actual cost = AP x AQ
where
AP = Actual price per unit
AQ = Actual quantity of input used
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Variance Analysis:
General Description (cont.)
 It is also possible to calculate the costs that
should have been incurred for the actual level of
activity.
Planned cost = SP x SQ
where
SP = Standard price per unit
SQ = Standard quantity of input allowed for actual

output
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Variance Analysis:
General Description (cont.)
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Total Budget Variance
 The total budget variance is the difference
between the actual cost of the input and its
planned cost:
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Total Budget Variance (cont.)
 Separate the total variance into price and usage
(quantity) variances:
 Deviations from planned prices tends to be located in
the purchasing or personnel department
 Deviations from planned usage of inputs tends to be
located in the production department, it is important to
separate the total variance into price and usage
(quantity) variances.
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Price and Usage Variances
 For labor, the price variance is usually called a
rate variance.
 Price (rate) variance is the difference between the
actual and standard unit price of an input
multiplied by the number of inputs used:
Price variance = (AP - SP) x AQ
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Price and Usage Variances (cont.)
 The usage (quantity) variance is called an
efficiency variance.
 Usage (efficiency) variance is the difference
between the actual and standard quantity of
inputs multiplied by the standard unit price of the
input:
Usage variance = (AQ - SQ) x SP
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The Decision to Investigate
 Investigation should be undertaken only if the
expected benefits are greater than the expected
costs.
 Managers determine whether variances are
significant based on an acceptable range that has
top and bottom measures called control limits.
LO-3
The Analysis of Variances
 The first step in variance analysis is to decide
whether the variance is significant.
 If so, what is its cause?
 Once the reason is known, corrective action can be
taken if necessary—and if possible.
 If it is due to a supply shortage, no action is
needed and the company will have to wait until
market conditions improve.
 If the variance is judged insignificant, no further
steps are needed.
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Accounting and Disposition of
Materials Variances
 Recognizing the price variance for materials at
the point of purchase also means that the raw
materials inventory is carried at standard cost.
 In general, materials variances are not
inventoried.
 Materials variances are added to cost of goods
sold if unfavorable and are subtracted from cost
of goods sold if favorable.
LO-4
Additional Cost
Management Practices
 In addition to standard costing, some companies
choose to employ other cost management
practices, such as kaizen costing and target
costing.
 Kaizen costing focuses on the continuous reduction of
the manufacturing costs of existing products and
processes.
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Additional Cost
Management Practices
 Target costing focuses on the reduction of the
design costs of existing and future products and
processes.
 A target cost is the difference between the sales price
needed to capture a predetermined market share and
the desired per-unit profit:
Target cost per unit = Expected sales price per unit -
Desired profit per unit
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Appendix:
Accounting for Variances
 The accounts containing the variances between
applied standard costs and actual costs are
closed
 Allows the amount of actual costs to impact the final
cost of goods sold number that appears in the financial
statements.
 In recording variances, unfavorable variances
always are debits, and favorable variances
always are credits.
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Disposition of
Materials and Labor Variances
 At the end of the year, the variances for materials
and labor usually are closed to Cost of Goods
Sold.
 If the variances are material, they must be prorated
among various accounts.
 Materials variances are prorated on the basis of the
materials balances in each of these accounts
 Labor variances are prorated on the basis of the labor
balances in the accounts.
LO-6

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CORNERSTONES

Standard cost per unit = Quantity standard x Price standard

AQ = Actual quantity of input used

SQ = Standard quantity of input allowed for actual

Price variance = (AP - SP) x AQ

Usage variance = (AQ - SQ) x SP

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