Chapter 9 ACCOUNTING PDF

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Summary

Chapter 9: Standard Costing: A Functional-Based Control Approach Price and Quantity Standards and unit standard Cost - Price standards : Specify how much should be paid for the quantity of the input to be used - Quantity standards : Specify how much of the input should be used per unit of output - U...

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Chapter 9: Standard Costing: A Functional-Based Control Approach Price and Quantity Standards and unit standard Cost •

Price standards: Specify how much should be paid for the quantity of the input to be used

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Quantity standards: Specify how much of the input should be used per unit of output

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Unit standard cost: Product of standard price (S P) and standard quantity (S Q)

Standards • Sources of quantitative standards o Historical experience o Engineering studies o Input from operating personnel • Price standards are the joint responsibility of operations, purchasing, personnel, and accounting o Choices are limited by market forces, trade unions, and other external forces Classification of Standards • Ideal standards o Demand maximum efficiency o Achieved only if everything operates perfectly • Currently attainable standards o Can be achieved under efficient operating conditions o Allowance is made for normal breakdowns, interruptions, and less than perfect skill

Standard Costing systems •

Standard costs are developed for direct materials, direct labor, and overhead used in producing a product or service

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Total of standard costs yields the standard cost per unit o

Kaizen Standards •

Continuous improvement standards

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Reflect planned improvement and are a type of currently attainable standard

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Focus on cost reduction

Standards and activity-based costing •

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Purpose of a Standard Cost Sheet •

Reveals the quantity of each input that should be used to produce one unit of output o Unit quantity standards can be used to compute the total amount of inputs allowed for the actual output • Helps in the computation of standard quantity of materials allowed (S Q) and the standard hours allowed (S H) for the actual output

Activity cost is determined by the amount of resources consumed by each activity o

Standard consumption patterns are identified based on historical experience

o

Use standards for control

o

Activities are classified as either valueadded or non-value-added

Purpose of standards o

To facilitate cost assignments

Reasons for Adopting Standard Costing Systems •

Cost management

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Planning and control

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Decision making and product costing

Standard cost sheet: Provides the detail underlying the standard unit cost

Total Budget Variance • Difference between the actual cost of the input and its standard cost o Total budget variance = (A P × A Q) − (S P × S Q) •

A P = Actual price per unit

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A Q = Actual quantity of direct material used in production

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S P = Standard price per unit

o Actual yogurt usage: 745,000 ounces (no beginning or ending yogurt inventory)

Components of total Budget Variance • Price (rate) variance

o Actual price paid per ounce of yogurt: $0.05

o Difference between the actual and standard unit prices of an input multiplied by the actual quantity of input

• Unit quantity standard: 25 ounces of yogurt per quart • Standard price of yogurt: $0.04 per ounce

• Usage (efficiency) variance o Difference between the actual and standard quantity of input multiplied by the standard unit price of the input

• Direct labor standard: 0.01 direct labor hour per quart •

Calculate the ounces of yogurt that should have been used (S Q) for the actual production of frozen yogurt for the month of April

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Calculate M P V and M U V for April using the formula approach and the graphical approach

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Calculate the total direct materials variance for yogurt for April

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Total direct materials variance

Favorable and Unfavorable Variance •

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Favorable (F) variance: Occurs whenever actual prices or usage of inputs are lesser than standard prices or usage Unfavorable (U) variance: Occurs whenever actual prices or usage of inputs are greater than standard prices or usage

Direct materials price variance (M P V) •

M P V = (A P × A Q) − (S P × A Q) or

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M P V = (A P − S P)A Q

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o

M P V is unfavorable if the actual price is greater than the standard price

o

M P V is favorable if the actual price is less than the standard

Computed at one of two points: o

When the direct materials are issued for use in production

o

When they are purchased

Direct Materials Usage Variance (M U V) •

M U V = (S P × A Q) – (S P × S Q) or

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M U V = (A Q – S Q)S P

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o

If the actual quantity is greater than the standard quantity, the M U V is unfavorable

o

If the actual quantity is less than the standard, the M U V is favorable

= (A P × A Q) − (S P × S Q) = M P V + M U V

Should be computed as direct materials are issued for production o

Companies use standard bill of materials, color-coded excessive usage forms, and color-coded returned-materials forms to facilitate the process

= ($0.05 × 745,000) − ($0.04 × 750,000) = $37,250 − $30,000 = $7,250 U Standard Bill of Materials •

Identifies the quantity of direct materials that should be used to produce a predetermined quantity of output

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Acts as a materials requisition form

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Product: Quarts of Deluxe Strawberry Frozen Yogurt

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Output: 30,000 Quarts

Direct Materials Price and Materials Usage Variances • Helado Company provided the following information for the production of deluxe strawberry frozen yogurt during the month of April: o Actual production: 30,000 quarts

Accounting for Direct Materials Price and Usage Variances

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All inventories are carried at standard

Calculate the direct labor hours that should have been worked (S H) for the actual production of frozen yogurt for the month of April

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Calculate L R V and L E V for April using the formula and graphical approaches

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Calculate the total direct labor variance for yogurt for April

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Solution: o S H = Unit quantity standard × Actual output = 0.01 × 30,000 = 300 hours

o Direct materials price variance is computed at the point of purchase •

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Rules for recording variances o Unfavorable variances are always debits o Favorable variances are always credits

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Journal entry associated with the purchase of direct materials o Assumptions • Unfavorable M P V • A Q is defined as direct materials purchased

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Journal entry to record the issuance and usage of direct materials o Assumption - Unfavorable M U V

Direct labor rate variance (L R V) and Direct Labor Efficiency Variance (L E V) •

L R V = (A R × A H) − (S R × A H) or (A R − S R)A H o o o

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A R = Actual hourly wage rate S R = Standard hourly wage rate A H = Actual direct labor hours used

Accounting for Direct Labor Rate and Efficiency Variances • Assumptions o Favorable direct labor rate variance o Unfavorable direct labor efficiency variance

L E V = (A H × S R) − (S H × S R) or (A H − S H)S R o o o

A H = Actual direct labor hours used S H = Standard direct labor hours that should have been used S R = Standard hourly wage rate

Direct Labor Rate and Efficiency Variances – Example • Helado Company provided the following information for the production of deluxe strawberry frozen yogurt during the month of April: o Actual production: 30,000 quarts o Actual direct labor hours worked: 325 hours o Actual rate paid per hour to direct labor: $15.90

Establishing Acceptable Range of Performance •

Acceptable range is the standard set by the management, plus or minus one allowable deviation

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Control limits: Top and bottom measures of the allowable range o Upper control limit - Standard plus the allowable deviation o Lower control limit - Standard minus the allowable deviation o Set based on past experience, intuition, and judgment

Responsibility for the Direct Materials Variances • Price variance can be influenced by quality, quantity discounts, and distance of the source from the plant

Variable Overhead Spending Variance and Variable Overhead Efficiency Variance

o Factors are under the control of the purchasing agent • Production manager is responsible for direct materials usage o Standard can be met by minimizing scrap, waste, and rework • Limitations in using price variance to evaluate performance of purchasing

Variable Overhead Spending and efficiency Variances – Example •

o Emphasis on meeting or beating the standard can produce undesirable outcomes

Helado Company provided the following information for the month of May:

o Applying the usage variance to evaluate performance can lead to undesirable behavior Responsibility for the Direct Labor Variances •

Direct labor rate variances occur when: o

o

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An average wage rate is used for the rate standard

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Calculate the variable overhead spending variance using the formula approach

More skilled and more highly paid laborers are used for less skilled tasks

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Calculate the variable overhead efficiency variance using the formula approach

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Calculate the variable overhead spending variance and variable overhead efficiency variance using the three-pronged graphical approach

Use of direct labor is controllable by the production manager

Disposition of Direct Materials and Direct Labor Variances •

Immaterial variances are assigned to Cost of Goods Sold o

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Cost of Goods Sold must be increased at the end of the year to reflect the higher actual cost for unfavorable variances

Materials variances are prorated among Work in Process, Finished Goods, and Cost of Goods Sold o

Direct materials and direct labor variances can be assigned in proportion to the total prime costs in each of the inventory accounts

Four-Variance Method for Calculating Overhead Variances •

Calculates two variances for variable overhead and two variances for fixed overhead

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Total variable overhead variance is divided into:

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o

Variable overhead spending variance

Interpreting Variable Overhead Variances

o

Variable overhead efficiency variance

• Variable overhead spending variance

Total fixed overhead variance is divided into: o

Fixed overhead spending variance

o

Fixed overhead volume variance

o Affected by price changes and how efficiently an overhead is used o Variable overhead items are affected by several responsibility centers

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Assigning the cost to a specific area of responsibility requires that cost be traced to the area

Variable overhead efficiency variance o

If variable overhead is driven by direct labor hours, the variance is caused by efficient or inefficient use of direct labor

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Calculate the fixed overhead spending variance using the formula approach

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Calculate the volume variance using the formula approach

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Calculate the fixed overhead spending variance and volume variance using the three-pronged graphical approach

Fixed Overhead Spending Variance (F O S V) •

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FOSV=AFOH−BFOH o

A F O H = Actual fixed overhead

o

B F O H = Budgeted fixed overhead

If less is spent on fixed overhead items than was budgeted, the spending variance is favorable and vice versa

Fixed Overhead Volume Variance •

Volume variance = Budgeted fixed overhead – Applied fixed overhead

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If actual production is less than budgeted production, the volume variance will be unfavorable and vice versa

Interpreting Fixed Overhead Variances • Fixed overhead spending variance o Budget variance is usually small •

Many fixed overhead costs are affected primarily by long-run decisions and not by changes in production levels

• Fixed overhead volume variance o Measure of planned utilization of capacity if the budgeted volume is the amount that management believed could be produced and sold •

Volume variance is a direct measure of capacity utilization if practical capacity is used as the budgeted volume

Direct Materials Yield Variance •

Yield variance = (Standard yield − Actual yield)S P y o Standard yield = Yield ratio × Total actual inputs o Yield ratio = Total output ÷ Total input o S P y = Standard cost of the yield (equal to total cost of a standard batch divided by the amount of the yield)

Accounting for Overhead Variances •

Applying overhead to production o Work in Process is accumulated on the debit side o Variance and fixed overhead control accounts are accumulated on the credit side

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Recognizing the incurrence of actual overhead o Variable and fixed overhead control accounts are debited o Value of various accounts is credited

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Recognizing variances o Fixed overhead control account, fixed overhead spending variance account, and variable overhead spending and efficiency variance accounts are debited o Variable overhead control account and fixed overhead volume variance account are credited

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Overhead variance reports are prepared periodically

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Closing the variances to cost of goods sold o Fixed overhead volume variance account is debited and cost of goods sold is credited o Another entry is made to debit cost of goods sold and credit variable overhead spending and efficiency variance accounts and fixed overhead spending variance account

Mix and Yield Variances: Materials and Labor •

Mix variance: Created whenever the actual mix of inputs differs from the standard mix

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Yield variance: Occurs whenever the actual yield (output) differs from the standard yield

Direct Materials Mix Variance •

S M - Quantity of each input that should have been used given the total actual input quantity o

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S M = Standard mix proportion × Total actual input quantity

If relatively more of a more expensive input is used, the mix variance will be unfavorable and vice versa...