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Standard Costs
4/26/04
Standard Costs
Predetermined.
Used for planning labor, material and overhead requirements. Benchmarks for measuring performance. Used to simplify the accounting system.
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Standard Costs
Managers focus on quantities and costs that differ from standards by a significant amount, a practice known as management by exception.
Amount
Direct Labor
Manufacturing Overhead
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Engineer
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Managerial Accountant
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Production manager
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Note
The argument that ideal standards are discouraging has been persuasive for many years. So normal defects and waste were built into the standards. In recent years, TQM and other initiatives have sought to eliminate all defects and waste.
Ideal standards, that allow for no waste, have become more popular. The emphasis is on improvement over time, not attaining the ideal standards right now.
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Time required to complete a unit of product, use time and motion study
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B
Standard Price or Rate
AxB
Standard Cost per Unit
12.00 35.00 7.50 54.50
Inputs
Direct materials Direct labor Variable mfg. overhead Total standard unit cost
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Standard Cost
This variance is unfavorable because the actual cost exceeds the standard cost.
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Price Variance
Quantity Variance
The difference between the actual price and the standard price
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The difference between the actual quantity and the standard quantity
The McGraw-Hill Companies, Inc., 2003
Price Variance
Quantity Variance
Standard price is the amount that should have been paid for the resources acquired.
McGraw-Hill/Irwin
Price Variance
Quantity Variance
Standard quantity is the quantity allowed for the actual good produced.
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2003
Price Variance
AQ(AP - SP) AQ = Actual Quantity AP = Actual Price
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Quantity Variance
SP(AQ - SQ) SP = Standard Price SQ = Standard Quantity
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Favorable/Unfavorable Variances
If AQ(AP-SP) = positive = unfavorable (actual is greater than standard) If AQ(AP-SP) = negative = favorable (actual is less than standard) If SP(AQ-SQ) = positive = unfavorable If SP(AQ-SQ) = negative = favorable
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Standard Costs
Lets use the general model to calculate all standard cost variances, starting with direct material.
McGraw-Hill/Irwin
Zippy
Hanson Inc. has the following direct material standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week 1,700 pounds of material were purchased and used to make 1,000 Zippies. The material cost a total of $6,630.
McGraw-Hill/Irwin
Quick Check
What is the actual price per pound paid for the material? a. $4.00 per pound. b. $4.10 per pound. c. $3.90 per pound. d. $6.63 per pound.
Zippy
McGraw-Hill/Irwin
Quick Check
Zippy
What is the actual price per pound paid for the material? a. $4.00 per pound. b. $4.10 per pound. AP = $6,630 1,700 lbs. c. $3.90 per pound. AP = $3.90 per lb. d. $6.63 per pound.
The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Quick Check
Zippy
Hansons material price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.
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Quick Check
Zippy
Hansons material price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. = AQ(AP - SP) MPV MPV d. $800 favorable. = 1,700 lbs. ($3.90 - 4.00)
MPV = $170 Favorable
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2003
Quick Check
The standard quantity of material that should have been used to produce 1,000 Zippies is: a. 1,700 pounds. b. 1,500 pounds. c. 2,550 pounds. d. 2,000 pounds.
McGraw-Hill/Irwin
Zippy
Quick Check
Zippy
The standard quantity of material that should have been used to produce 1,000 Zippies is: a. 1,700 pounds. b. 1,500 pounds. c. 2,550 pounds. SQ d. 2,000 pounds. = 1,000 units 1.5 lbs per unit
SQ = 1,500 lbs
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Quick Check
Zippy
Hansons material quantity variance (MQV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.
McGraw-Hill/Irwin
Quick Check
Zippy
Hansons material quantity variance (MQV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.
MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable
The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Zippy
Standard Quantity Standard Price 1,500 lbs. $4.00 per lb. = $6,000
Material Variances
Hanson purchased and used 1,700 pounds. How are the variances computed if the amount purchased differs from the amount used?
McGraw-Hill/Irwin
The price variance is computed on the entire quantity purchased. The quantity variance is computed only on the quantity used.
The McGraw-Hill Companies, Inc., 2003
Zippy
Last week 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700 pounds were used to make 1,000 Zippies.
The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Zippy
Zippy
Standard Quantity Standard Price 1,500 lbs. $4.00 per lb. = $6,000
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Note
Materials variances:
Material price variance MPV = AQ (AP - SP) Material quantity variance MQV = SP (AQ - SQ) Labor rate variance LRV = AH (AR - SR) Labor efficiency variance LEV = SR (AH - SH)
Actual hours Actual rate Standard rate Standard hours allowed for the actual good output
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Labor variances:
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Zippy
Hanson Inc. has the following direct labor standard to manufacture one Zippy:
1.5 standard hours per Zippy at $12.00 per direct labor hour
Last week 1,550 direct labor hours were worked at a total labor cost of $18,910 to make 1,000 Zippies.
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2003
Quick Check
What was Hansons actual rate (AR) for labor for the week? a. $12.20 per hour. b. $12.00 per hour. c. $11.80 per hour. d. $11.60 per hour.
Zippy
McGraw-Hill/Irwin
Quick Check
Zippy
What was Hansons actual rate (AR) for labor for the week? AR = $18,910 1,550 hours a. $12.20 per hour. AR = $12.20 per hour b. $12.00 per hour. c. $11.80 per hour. d. $11.60 per hour.
McGraw-Hill/Irwin
Quick Check
Hansons labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable.
Zippy
McGraw-Hill/Irwin
Quick Check
Zippy
Hansons labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. LRV c. $300 unfavorable. = AH(AR - SR) LRV = 1,550 hrs($12.20 - $12.00) d. $300 favorable. = $310 unfavorable LRV
McGraw-Hill/Irwin
Quick Check
The standard hours (SH) of labor that should have been worked to produce 1,000 Zippies is: a. 1,550 hours. b. 1,500 hours. c. 1,700 hours. d. 1,800 hours.
Zippy
McGraw-Hill/Irwin
Quick Check
Zippy
The standard hours (SH) of labor that should have been worked to produce 1,000 Zippies is: a. 1,550 hours. b. 1,500 hours. c. 1,700 hours. SH = 1,000 units 1.5 hours per unit d. 1,800 hours. = 1,500 hours SH
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2003
Quick Check
Hansons labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable.
Zippy
McGraw-Hill/Irwin
Quick Check
Hansons labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable.
Zippy
LEV = SR(AH - SH) LEV = $12.00(1,550 hrs - 1,500 hrs) LEV = $600 unfavorable
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2003
Zippy
Standard Hours Standard Rate 1,500 hours $12.00 per hour = $18,000
Overtime Premium
Turnover of Employees
Wage increase
Production managers who make work assignments are generally responsible for rate variances.
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Note
Labor variances:
Labor rate variance LRV = AH (AR - SR) Labor efficiency variance LEV = SR (AH - SH)
Actual hours of the allocation base Actual variable overhead rate Standard variable overhead rate
Variable overhead spending variance VOSV = AH (AR - SR) Variable overhead efficiency variance VOEV = SR (AH SH) Standard hours allowed for the actual good output
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Quick Check
Hansons spending variance (VOSV) for variable manufacturing overhead for the week was: a. $465 unfavorable. b. $400 favorable. c. $335 unfavorable. d. $300 favorable.
Zippy
McGraw-Hill/Irwin
Quick Check
Zippy
Hansons spending variance (VOSV) for variable manufacturing overhead for the week was: a. $465 unfavorable. b. $400 favorable. SV = AH(AR - SR) c. $335 unfavorable. = 1,550 hrs($3.30 - $3.00) SV d. $300 favorable. SV = $465 unfavorable
McGraw-Hill/Irwin
Quick Check
Hansons efficiency variance (VOEV) for variable manufacturing overhead for the week was: a. $435 unfavorable. b. $435 favorable. c. $150 unfavorable. d. $150 favorable.
Zippy
McGraw-Hill/Irwin
Quick Check
Zippy
Hansons efficiency variance (VOEV) for variable manufacturing overhead for the week was: a. $435 unfavorable. b. $435 favorable. 1,000 units 1.5 hrs per unit c. $150 unfavorable. d. $150 favorable. = SR(AH - SH) EV
EV = $3.00(1,550 hrs - 1,500 hrs) EV = $150 unfavorable
McGraw-Hill/Irwin
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Zippy
Standard Hours Standard Rate 1,500 hours $3.00 per hour = $4,500
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Larger variances, in dollar amount or as a percentage of the standard, are investigated first.
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Responsibility Accounting
Simplify Bookkeeping
Advantages
Better Information for planning and decision making
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Potential Problems
Favorable variances may be misinterpreted. Continuous improvement may be more important than meeting standards. Emphasizing standards may exclude other important objectives.
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Standard cost reports may not be timely. Incentives to build Inventories, to absorb excess McGraw-Hill/Irwin overhead
Wait Time
Process Time + Inspection Time + Move Time + Queue Time Throughput Time Delivery Cycle Time
Wait Time
Process Time + Inspection Time + Move Time + Queue Time Throughput Time Delivery Cycle Time
Quick Check
A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Inspection 0.4 days Process 0.2 days Move 0.5 days Queue 9.3 days
What is the throughput time? a. 10.4 days b. 0.2 days c. 4.1 days d. 13.4 days
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2003
Quick Check
A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Inspection 0.4 days Process 0.2 days Move 0.5 days Queue 9.3 days
What is the throughput time? a. 10.4 days b. 0.2 days Throughput time = Process + Inspection + Move + Queue c. 4.1 days 0.2 days + 0.4 days + 0.5 days + 9.3 days = = d. 13.4 days 10.4 days
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2003
Quick Check
A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Inspection 0.4 days Process 0.2 days Move 0.5 days Queue 9.3 days
Quick Check
A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Inspection 0.4 days Process 0.2 days Move 0.5 days Queue 9.3 days
What is the MCE? a. 50.0% MCE = Value-added time Throughput time b. 1.9% = Process time Throughput time c. 52.0% = 0.2 days 10.4 days d. 5.1% = 1.9%
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End of Chapter 10
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