MAS 06 Standard Costing 2019 IE 412 PDF

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Republic of the Philippines BATANGAS STATE UNIVERSITY LIPA CITYMANAGEMENT (MANAGERIAL) ACCOUNTINGMODULE 6STANDARD COSTING AND VARIANCE ANALYSISMEMORY AID/LECTURE/FOCUS NOTESName :___ SR Code:__ Course/Year:_____ Date:__LEARNING OBJECTIVES Explain how unit standards are set and why standard cost sys...

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MAS 06 Republic of the Philippines BATANGAS STATE UNIVERSITY LIPA CITY

MANAGEMENT (MANAGERIAL) ACCOUNTING MODULE 6 STANDARD COSTING AND VARIANCE ANALYSIS MEMORY AID/LECTURE/FOCUS NOTES Name :_______________________ Course/Year:_____________

SR Code:__________________ Date:__________________

LEARNING OBJECTIVES      

Explain how unit standards are set and why standard cost systems are adopted. Explain the purpose of a standard cost sheet. Describe the basic concepts underlying variance analysis, and explain when variances should be investigated. Compute the materials variances, and explain how they are used for control. Compute the labor variances, and explain how they are used for control. Compute the Factory Overhead variances, and explain how they are used for control.

INTRODUCTION A standard cost system budgets quantities and costs on a unit basis. These unit budgets are for labor, materials, and overhead. Standard costs, therefore, are the amount that should be expended to produce a product or service. Standards are set by using historical experience, engineering studies, and input from operating personnel, marketing, and accounting Standard cost systems are adopted to improve planning and control and to facilitate product costing. By comparing actual outcomes with standards and breaking the variance into price and quantity components, detailed feedback is provided to managers. This information allows managers to exercise a greater degree of cost control than that found in a normal or actual cost system.

CHAPTER OUTLINE Standards – anything used as a basis of evaluation. It may be qualitatively or quantitatively expressed. - it is established to systematically manage people by defining order, harmony and normalcy.  Qualitative standards – may be expressed in terms of laws, policies, rules, order, promulgations, and the like. Quantitative standards - may be expressed in pesos or in any unit of measurement such as meters, pounds, grams, frequency, hours and other units of measurements. Uses of standards-setting in business 1. Motivation – to set objectives, reward system, recognition and models for performance evaluation. 2. Planning – predicting the future based on normal conditions; planning could also be done through scenario or simulation analysis; it follows the process of predicting the future event given the changes in its relevant variables or parameters. 3. Monitoring or controlling – on-line evaluation of activities in relation to plans to maintain operating normalcy and to institute corrective measures in times of unnecessary deviations from plans. 4. Evaluation – end-of-line evaluation of results in relation to standards. 

Types of Standards

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MAS 06 1. Ideal Standards (Theoretical) – highest performance (i.e., 100%) WITHOUT allowances for errors, mistakes, delays, inefficiencies, production stoppages, machine breakdowns, etc. 2. Practical Standards – highest standards less NORMAL allowances for errors, mistakes, delays, inefficiencies, production stoppages, machine breakdowns, etc. 3. Boogey Standards (Lax) - highest standards less MAXIMUM allowances for errors, mistakes, delays, inefficiencies, production stoppages, machine breakdowns, etc. 4. Expected Standards – predetermined level of capacity based on actual performance. 5. Normal Standards – the average performance of the firm over the long term under normal business condition. STANDARD – a benchmark set by management in aid of performance measurement. In manufacturing companies, standards are classified as follows:  Quantity Standard – indicates the quantity of raw materials or labor time required to produce a unit of a product. This normally expressed per unit of output (e.g., 3 pieces per unit).  Cost Standard – indicates what the cost of the quantity standard should be. This is normally expressed per unit of input (e.g., P2.OO per piece). STANDARD COST – systematically pre-determined costs established by management to be used as a basis for comparison with actual cost. BUDGETS VS. STANDARDS BUDGETS

STANDARDS

Purpose

Budgets are statements of expected costs.

Emphasi s

Budgets emphasize cost levels that should not exceeded.

Coverag e

Budgets are set for all departments in the firm (e.g., sales, administration, manufacturing).

Analysis

When actual data differ from the budget, it may be an indication of either good or bad performance.

Standards pertain to what costs should be given a certain level of performance. Standards emphasize the levels to which costs should be reduced. Standards are set only for the production or manufacturing divisions of the firm. The nature and cause of the significant variance are investigated so that necessary corrective actions are taken accordingly.

STANDARD COST VARIANCE ANALYSIS VARIANCE = Actual Costs (AC) –Standard Costs (SC) AC > SC: Unfavorable (debit balance) AC < SC: Favorable (credit balance) Materials variance Actual Materials Cost - Standard Materials Cost Materials Cost Variance Analysis: Quantity Variance: Q x SP Price variance: AQ x P Labor Variance Actual Labor Cost - Standard Labor Cost

Actual Quantity (AQ) x Actual Price (AP) Standard Quantity (SQ) x Standard Price (SP)

= Difference in quantities x Standard Price = Actual quantity x Difference in prices Actual Hours (AH) x Actual Rate (AR) Standard Hours (SH) x Standard Rate (SR)

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MAS 06 Labor Cost Variance Analysis: Efficiency variance HxSR = Difference in hours x standard rate Rate variance: AHx R = Actual hours x Difference in rate Factory Overhead (FOH) Variance = (Actual FOH cost) – (Standard FOH cost) Materials Price, Mix and Yield Variances These variances are calculated whenever the production the process involves combining several materials in varying proportions to produce a unit of product; mix and yield variances also apply to direct labor. Materials variance = Actual Cost – Standard Cost Analysis: Price variance: A Q x P = Actual Quantity x (Actual Price – Standard Price) Mix variance: A Q x S P Less: Total Actual Quantity at Average Standard Price [TAQASP] MIX Variance Yield variance: TAQASP Less: Standard Cost YIELD Variance IMPORTANT NOTES: MATERIALS and LABOR VARIANCE ANALYSIS 1. Material PRICE variance is also known as: Material spending variance, material money variance, material rate variance 2. Material QUANTITY variance is also known as: Material usage variance, material efficiency variance 3. Material usage variance is quantity variance while material price usage variance is a price variance. 4. Labor RATE variance is also known as: Labor price variance, labor spending variance, labor money variance 5. Labor EFFICIENCY variance is also known as: Labor hours variance, labor usage variance, labor time variance, 6. Labor efficiency variance excludes idle time spent in the production. If any, idle time is separately explained through the Idle Time Variance, which is regarded as unfavorable. IDLE TIME variance = Idle Time x Standard Labor Rate FACTORY OVERHEAD (FOH) VARIANCE ANALYSIS One-way variance analysis: Computation: FOH Variance AFOH – SFOH Two-way variance analysis: Controllable variance rate) Volume variance

AFOH – BASH BASH – SFOH

Legend AFOH: Actual FOH SFOH: Standard FOH = (SH x SR) BASH: Budget Adjusted for Standard Hours BASH: Budgeted FFOH + (SH x Variable FOH

FFOH: Fixed Factory Overhead Three-way variance analysis: Spending variance AFOH – BAAH Efficiency variance BAAH – BASH rate) Volume variance BASH - SFOH Four-way variance analysis: Variable Spending variance AFOH (V) – BAAH (V

BAAH: Budget Adjusted for Actual Hours BAAH: Budgeted FFOH + (AH x Variable FOH

AFOH (V): Actual variable FOH

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MAS 06 Fixed spending variance AFOH (F) – BAAH (F) Efficiency variance (variable) BAAH – BASH Volume variance (fixed) BASH – SFOH

AFOH (F): Actual FFOH BAAH (V): Actual hours x Variable FOH Rate BAAH (F): Budgeted FFOH

IMPORTANT NOTES: FACTORY OVERHEAD VARIANCE ANALYSIS 1. Standard Factory Overhead (SFOH) = Standard Hours x Standard FOH Rate. Under standard costing, SFOH is likewise referred to as the Applied Factory Overhead. 2. If AFOH is more than SFOH, then factory overhead is said to be under-applied; hence, underapplication indicates an unfavorable variance, while over-application indicates a favorable variance. 3. The term capacity variance is also used to mean the volume variance. 4. Budget Variance = Actual Cost – Budgeted Cost = Actual FOH – Budgeted FOH (BFOH)  If BFOH is adjusted based on standard hours (BASH), then budget variance is spending variance.  If BFOH is adjusted based on actual hours (BAAH), then budget variance is spending variance. 5. Volume Variance is actually the Fixed Volume Variance; there is no such thing as a variable volume or variable capacity variance. 6. Under the 3-way approach, the FOH Efficiency Variance is actually the Variable Efficiency Variance. Other than BAAH – BASH, variable overhead efficiency variance may also be computed based on: Change in hours x variable FOH rate = (AH – SH) VR 7. FOH variances may classified into:  Variable FOH Variances = Variable Spending Variance + Efficiency Variance (variable)  Fixed FOH Variances = Fixed Spending Variances + Volume Variance (fixed) 8. Alternatively, another FOH variance analysis may include the following variances (NOTE: This version is not included in the board exam syllabus for Management Services):  IDLE Capacity variance: BAAH – (AH x SR)  TOTAL Efficiency vari ce: H x SR  FIXED Efficiency (Effectiveness) variance: H x FR (where: FR is the fixed FOH rate) 9. Manufacturing Efficiency Variance incorporates the effect of both FOH Efficiency Variance and Labor Efficiency Variance. In rare cases, the material quantity variance may also be included. 10. DM Variance + DL Variance + FOH Variance = Production or Manufacturing Cost Variance.

USES OF STANDARD COST 1. Cost control 2. Pricing decision 3. Motivation and performance appraisal standards 4. Cost awareness and cost reduction 5. Preparation of budgets 6. Costing of inventories 7. Preparation of cost report 8. Management by exception

STANDARD COSTING PROCEDURES 1. Establishing Standards 2. Measuring actual performance 3. Comparing actual performance with 4. Taking corrective action when needed 5. Revising standards when needed

Production standard cost sheet  A standard cost sheet is a product of a long series and technical studies conducted under the supervision of the management committee (or budget committee). The management

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MAS 06 committee may form a technical working group who would use logical, investigative and developmental techniques to gather inputs and established standards in an organization.  Once established. The standards become the basis of organizational expectations in terms of goals, output and behavior. An example of standard cost sheet is as follows: Direct materials : x lbs. @ Px/lb = P x p.u. Direct labor : x hrs. @ x/hr = x p.u. Variable Overhead: x hrs @ x/hr = x p.u. Fixed Overhead : x hrs. @ x/hr = x p.u. Standard unit cost Px The following functions are considered in establishing production cost variances;  materials input quantity per product  materials price per unit  number of materials needed  materials loss in process  materials increase in process  labor rate per hour  labor hours used per product  number of laborers needed per unit  total fixed factory overhead  variable overhead rate per hour  normal capacity in hours and in units  total standard overhead rate per hour  total standard unit cost Production cost variance  Generally, a variance (i.e., error or planning gap) is the difference between the actual and standards (i.e., expectations).  A variance may also be established and analyzed in any organizational segment such as marketing, design and engineering, purchasing, warehousing, customer services, accounting and controllership, human resources and all functions and segments of business organizations.  Our concern here is only for production costs variances distribution and analysis.  Cost variance = Actual costs – Standard costs  Types of variance Cost Variance if Treatment Other label Unfavorable Actual costs > Standard costs Added to Std. CGS Debit variance Favorable Actual costs < Standard costs Deducted from Std. Credit variance CGS  An unfavorable variance is also called under-absorbed or under-applied variance. A favorable variance is also called over-absorbed or over-applied variance.  Cost variances are accountabilities of managers who have been given the authority to decide or influence the incurrence of the production costs variances is the Chief Executive Officer. However down the organizational line, the hands-on operating officers that are accountable for the costs variances are: Cost Variance Primarily accountable operating officer Materials price variance Purchasing manager Materials quantity variance Production manager Direct labor rate variance Human resource manager Direct labor efficiency variance Production manager Variable OH variance Production manager, HR manager, Purchasing manager and others Fixed OH variance Production manager Cost Variance Disposition  Normal costs variance – closed to COGS  Material (or abnormal) cost variance – allocated among WIP inventory, FG inventory, and COGS.

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MAS 06 FORMULAS  Direct materials cost MQV = MPV = MPPV = MUPV = AQ = SQ = AP = SP = Q = P =

variances Material quantity variance Materials price variance Materials purchase-price variance Materials usage-price variance Actual quantity Standard quantity Actual price Standard price Change in quantity (AQ - SQ) Change in price (AP - SP)

 2 way analysis: MPPV = ( P - SP) x AQ MQV = ( Q - SQ) x SP

= =

 3 way analysis MPPV = (AP - SP) x SQ MQV = (AQ - SQ) x SP Joint materials variance

= = =

P x AQ Purchased Q x SP

P x AQ Purchased Q x SP Qx P

Notes:  Alternatively, a materials usage-price variance may be calculated as: MUPV = (AP - SP) x AQ used  In case, the problem does not specify the price variance to be computed, the materials purchase-price variance is the one to be computed because it determines price variance at the earliest possible date, which is a better internal control technique rather than determining the price variance at the date of use.  Total SQ = Actual (or equivalent) production x SQ per unit. In case, actual production and equivalent production are given, the equivalent production should be prioritized. 

Direct Costs Variances LEV = Labor efficiency variance LRV = Labor rate variance AH = Actual hours SH = Standard hours AR = Actual rate SR = Standard rate H = Change in hours (AH - SH) R = Change in rate (AP - SR)

 2 way analysis LEV = (AR - SR) x AH LEV = (AH - SH) x SR

= =

R x AH H x SR

 3 way analysis LRV = (AR - SR) x AH LEV = (AH - SR) x SR Joint Labor Variance

= = =

R x SH H x SR RxH

Notes:  Total SH = Actual (or equivalent) production x SH per unit. In case, actual production and equivalent production are given. The equivalent production should be prioritized.

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MAS 06



Factory overhead costs variances AFOH = Actual factory overhead SFOH = Standard factory overhead Fx OHR = Fixed overhead rate VOHR = Variable overhead rate SR = Standard rate (total) BASH = Budget allowed on standard hours BAAH = Budget allowed on actual hours



Standard Overhead rates FOHR (Budgeted Fx Overhead/Normal Capacity) P x/hr. VOHR (Budgeted VOH/Budgeted Capacity) x Total standard OH rate P x/hr. Note that the overhead rates are expressed based on hours, not in units. This would facilitate the determination of the overhead efficiency variances.



Overhead variances AFOH SFOH (SH x SR) OH Var – UF (F)

Fixed Px x Px

Variable Px x Px

Total Px x Px

Mathematically, the overhead variances may e classified as follows: Fixed Variable Total Spending variances Px Px Px Efficiency variances x x x Capacity variance x -_ x Net OH Var – UF (F) Px Px Px Practically, however, the overhead variances are classified as follows:

Spending variances Variable Efficiency variances Volume Variance Net OH Var – UF (F)

Fixed Px x Px

Variable Px x Px

Total Px x x Px



Notice that the fixed efficiency variance is eliminated. This is because fixed overhead is not related to hours or efficiency but rather to units. Hence, the fixed efficiency is always equal to zero, and is an irrelevant overhead variance. Also notice that, in the final version, the fixed overhead variance is composed of the fixed spending variance and the volume variance. The fixed spending variance relates to pesos while the fixed volume variance related to units. The volume variance is the sum of the fixed efficiency variance and the capacity variance.



Spending variance (AFOH - BAAH)



AFOH -BAAH (NC x FxOHR)

Fixed Px (x)

Variable Px (x)

Total Px

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MAS 06 (AH x VOHR) OH Spending Var – UF (F) 

(x) Px

-_ Px

(x) Px

Variable OH efficiency variances [(AH - SH) x Std. VOH Rate] Actual hours x - Standard hours x Inefficiency (Efficiency) in hrs. x x Fx OHR Px VOH Eff. Var – UF (F) Px

Capacity Variance Normal capacity x hrs. - Actual capacity x hrs. Under (over) absorbed capacity x UF (F) x FxOHR Px Capacity variance P x UF (F)  2-way analysis (Con Vol) Controllable Variance: AFOH - BASH Fixed (Normal Cap x FxOH Rate) Variable (SH x VOH Rate) Volume variance: BASH SH x SR Net OH Variance  3-way analysis (SVV) Spending (Budget) Variance: AFOH - BAAH Fixed (Normal Cap x FxOH Rate) Variable (AH x VOH Rate) Variable Spending Variance: BAAH BASH x Volume Variance: BASH SH x SR Net OH Variance  3-way analysis (BuCe) Budget (Spending) Variance: AFOH - BAAH Fixed (Normal Cap x FxOH Rate) Variable (AH x VOH Rate) Capacity Variance: BAAH AH x SR Volume Variance: AH x SR SH x SR Net OH Variance 

-

-

-

-

Px Px x

x

x

x x

Px

Px Px Px x

x

Px

x x x

x x Px Px

Px x

x

x

x x

x

x x

Summary of factory overhead variances 2-way 3-way (SVV) AFOH Spending

Px

Px 3-way (BuCe) Budget (Spending)

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MAS 06 BAAH

Controllable Variable efficiency

BASH AH x SR

Capacity Volume

Volume Efficiency

SH x SR

-

-

Materials price, mix, and yield variances Materials price variance = R x AQ Purchased Px Materials mix variances: Actual materials input x Std. prices Px Total actual mats input x Std mats input cost(1) x x Materials yield variance: Total actual mats input x Std. mats input cost x (...