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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

•

Unit standard cost: Product of standard price (SP) and standard quantity (SQ)

Standards •

•

Sources of quantitative standards –

Historical experience

–

Engineering studies

–

Input from operating personnel

Price standards are the joint responsibility of operations, purchasing, personnel, and accounting –

Choices are limited by market forces, trade unions, and other external forces

Classification of Standards •

•

Ideal standards –

Demand maximum efficiency

–

Achieved only if everything operates perfectly

Currently attainable standards –

Can be achieved under efficient operating conditions

–

Allowance is made for normal breakdowns, interruptions, and less than perfect skill

Kaizen Standards •

Continuous improvement standards

•

Reflect planned improvement and are a type of currently attainable standard

•

Focus on cost reduction

Standards and activity-based costing •

•

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

Standard consumption patterns are identified based on historical experience

–

Use standards for control

–

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

Purpose of standards –

To facilitate cost assignments

Reasons for Adopting Standard Costing Systems •

Cost management

•

Planning and control

•

Decision making and product costing

EXHIBIT 9.1 - Cost Assignment Approaches Manufacturing Costs: Direct Materials

Manufacturing Direct Labor

Costs:

Manufacturing Overhead

Actual costing system

Actual

Actual

Actual

Normal costing system

Actual

Actual

Budgeted

Standard costing system

Standard

Standard

Standard

Costs:

EXHIBIT 9.2 - Standard Cost Sheet for Deluxe Strawberry Frozen Yogurt Description

Standard Price

Standard Usage

Standard Cost

Subtotal

Direct materials: Yogurt

$ 0.04

×

25 oz.

=

$1.00

Strawberries

0.02

×

10 oz.

=

0.20

Milk

0.03

×

8 oz.

=

0.24

Cream

0.05

×

4 oz.

=

0.20

Gelatin

0.02

×

1 oz.

=

0.02

Container

0.06

×

1

=

0.06

Total direct materials

$1.72

Direct labor: Machine operators

16.00

×

0.01 hr.

=

$0.16

Total direct labor

0.16

Overhead: Variable overhead

12.00

×

0.01 hr.

=

$0.12

Fixed overhead

40.00

×

0.01 hr.

=

0.40

Total overhead

0.52

Total standard unit cost

$2.40

Standard Costing systems •

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

•

Total of standard costs yields the standard cost per unit –

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

Purpose of a Standard Cost Sheet •

Reveals the quantity of each input that should be used to produce one unit of output –

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 (SQ) and the standard hours allowed (SH) for the actual output

Total Budget Variance •

Difference between the actual cost of the input and its standard cost –

•



AP = Actual price per unit



AQ = Actual quantity of direct material used in production



SP = Standard price per unit

Components of total Budget VariancePrice (rate) variance –

•

Total budget variance = (AP × AQ) – (SP × SQ)

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

Usage (efficiency) variance –

Difference between the actual and standard quantity of input multiplied by the standard unit price of the input

Favorable and Unfavorable Variance •

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 (MPV) •

MPV = (AP × AQ) – (SP × AQ) or

•

MPV = (AP – SP) AQ

•

–

MPV is unfavorable if the actual price is greater than the standard price

–

MPV is favorable if the actual price is less than the standard

Computed at one of two points: –

When the direct materials are issued for use in production

–

When they are purchased

Direct Materials Usage Variance (MUV) •

MUV = (SP × AQ) – (SP × SQ) or

•

MUV = (AQ – SQ)SP

•

–

If the actual quantity is greater than the standard quantity, the MUV is unfavorable

–

If the actual quantity is less than the standard, the MUV is favorable

Should be computed as direct materials are issued for production

Companies use standard bill of materials, color-coded excessive usage forms, and color-coded returnedmaterials forms to facilitate the process Direct Materials Price and Materials Usage Variances – Example (1 of 5) •

Helado Company provided the following information for the production of deluxe strawberry frozen yogurt during the month of April: –

Actual production: 30,000 quarts

–

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

–

Actual price paid per ounce of yogurt: $0.05 

Unit quantity standard: 25 ounces of yogurt per quart



Standard price of yogurt: $0.04 per ounce



Direct labor standard: 0.01 direct labor hour per quart

Direct Materials Price and Materials Usage Variances – Example (2 of 5) •

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

•

Calculate MPV and MUV for April using the formula approach and the graphical approach

•

Calculate the total direct materials variance for yogurt for April

Direct Materials Price and Materials Usage Variances – Example (3 of 5) •

Solution –

SQ = Unit quantity standard × Actual output

= 25 × 30,000 = 750,000 ounces –

Materials price variance (MPV)

= (AP − SP) AQ = ($0.05 − $0.04) 745,000 = $0.01 × 745,000 = $7,450 U –

Materials usage variance (MUV)

= (AQ − SQ) SP = (745,000 − 750,000) $0.04 = (5,000 × $0.04) = $200 F Direct Materials Price and Materials Usage Variances – Example (4 of 5)

Direct Materials Price and Materials Usage Variances – Example (5 of 5)



Total direct materials variance

= (AP × AQ) − (SP × SQ) = MPV + MUV = ($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

•

Acts as a materials requisition form

•

Product: Quarts of Deluxe Strawberry Frozen Yogurt

•

Output: 30,000 Quarts

Direct Material

Unit Standard

Total Requirements

Yogurt

25 oz.

750,000 oz.

Strawberries

10 oz.

300,000 oz.

Milk

8 oz.

240,000 oz.

Cream

4 oz.

120,000 oz.

Gelatin

1 oz.

30,000 oz.

Container

1 container

30,000 containers

Accounting for Direct Materials Price and Usage Variances (1 of 3) •

All inventories are carried at standard –

•

Direct materials price variance is computed at the point of purchase

Rules for recording variances –

Unfavorable variances are always debits

–

Favorable variances are always credits

Accounting for Direct Materials Price and Usage Variances (2 of 3) •

Journal entry associated with the purchase of direct materials –

Assumptions 

Unfavorable MPV



AQ is defined as direct materials purchased Debit

Materials

(SP × AQ)

Direct Materials Price Variance

(AP – SP)AQ

Accounts Payable

Credit

(AP × AQ)

Accounting for Direct Materials Price and Usage Variances (3 of 3) •

Journal entry to record the issuance and usage of direct materials –

Assumption - Unfavorable MUV Debit

Work in Process

(SP × SQ)

Direct Materials Usage Variance

(AQ – SQ)SP

Materials

(SP × AQ)

Direct labor rate variance (LRV) and Direct Labor Efficiency Variance (LEV) •

•

Credit

LRV = (AR × AH) – (SR × AH) or (AR – SR) AH –

AR = Actual hourly wage rate

–

SR = Standard hourly wage rate

–

AH = Actual direct labor hours used

LEV = (AH × SR) – (SH × SR) or (AH – SH) SR

–

AH = Actual direct labor hours used

–

SH = Standard direct labor hours that should have been used

–

SR = Standard hourly wage rate

Direct Labor Rate and Efficiency Variances – Example (1 of 4) •

•

Helado Company provided the following information for the production of deluxe strawberry frozen yogurt during the month of April: –

Actual production: 30,000 quarts

–

Actual direct labor hours worked: 325 hours

–

Actual rate paid per hour to direct labor: $15.90

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

Direct Labor Rate and Efficiency Variances – Example (2 of 4) •

Calculate LRV and LEV for April using the formula and graphical approaches

•

Calculate the total direct labor variance for yogurt for April

•

Solution –

SH = Unit quantity standard × Actual output = 0.01 × 30,000 = 300 hours

Direct Labor Rate and Efficiency Variances – Example (3 of 4) –

Labor rate variance (LRV) = (AR − SR) AH = ($15.90 − $16.00)325 = $0.10 × 325 = $32.50 F

–

Labor efficiency variance (LEV) = (AH – SH) SR = (325 − 300) $16.00 = (25 × $16.00) = $400 U

–

Total direct labor variance = (AR × AH) – (SR×SH) = LRV + LEV = ($15.90 × 325) – ($16.00 × 300) = $5,167.50 − $4,800 = $367.50 U

Direct Labor Rate and Efficiency Variances – Example (4 of 4)

Accounting for Direct Labor Rate and Efficiency Variances •

Assumptions –

Favorable direct labor rate variance

–

Unfavorable direct labor efficiency variance Debit

Work in Process

(SH × SR)

Direct Labor Efficiency Variance

(AH – SH)SR

Credit

Direct Labor Rate Variance

(AR − SR)AH

Wages Payable

AH × AR

Establishing Acceptable Range of Performance •

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

•

Control limits: Top and bottom measures of the allowable range –

Upper control limit - Standard plus the allowable deviation

–

Lower control limit - Standard minus the allowable deviation

–

Set based on past experience, intuition, and judgment

Responsibility for the Direct Materials Variances (1 of 2) •

Price variance can be influenced by quality, quantity discounts, and distance of the source from the plant –

•

Factors are under the control of the purchasing agent

Production manager is responsible for direct materials usage –

Standard can be met by minimizing scrap, waste, and rework

Responsibility for the Direct Materials Variances (2 of 2)

•

Limitations in using price variance to evaluate performance of purchasing –

Emphasis on meeting or beating the standard can produce undesirable outcomes

–

Applying the usage variance to evaluate performance can lead to undesirable behavior

Responsibility for the Direct Labor Variances •

•

Direct labor rate variances occur when: –

An average wage rate is used for the rate standard

–

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

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 –

•

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 –

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

•

Total variable overhead variance is divided into:

•

–

Variable overhead spending variance

–

Variable overhead efficiency variance

Total fixed overhead variance is divided into: –

Fixed overhead spending variance

–

Fixed overhead volume variance

Variable Overhead Spending Variance and Variable Overhead Efficiency Variance •

Variable overhead spending variance = (AVOR × AH) – (SVOR × AH) = (AVOR – SVOR) AH

•

–

Variable overhead changes in proportion to changes in the direct labor hours used

–

AVOR = Actual variable overhead rate

–

SVOR = Standard variable overhead rate

Variable overhead efficiency variance = (SVOR × AH) – (SVOR × SH) = (AH – SH) SVOR

Variable Overhead Spending and efficiency Variances – Example (1 of 4)

•

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

Variable overhead rate (standard)

$12.00 per direct labor houra

Actual variable overhead costs

$16,120

Actual hours worked

1,300

Quarts of deluxe strawberry frozen yogurt produced

120,000

Hours allowed for actual production

1,200b

Applied variable overhead

$14,400c

Variable Overhead Spending and efficiency Variances – Example (2 of 4) •

Calculate the variable overhead spending variance using the formula approach

•

Calculate the variable overhead efficiency variance using the formula approach

•

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

Variable Overhead Spending and efficiency Variances – Example (3 of 4) •

Solution: –

Variable overhead spending variance = (AVOR – SVOR) AH = [($16,120/1,300) – $12] 1,300 = ($12.40 − $12) ×1,300 = $520 U

–

Variable overhead efficiency variance = (AH – SH) SVOR = (1,300 – 1,200) $12 = $1,200 U

Variable Overhead Spending and efficiency Variances – Example (4 of 4)

Interpreting Variable Overhead Variances •

Variable overhead spending variance –

Affected by price changes and how efficiently an overhead is used

–

Variable overhead items are affected by several responsibility centers 

•

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

Variable overhead efficiency variance –

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

Exhibit 9.4 - Variable Overhead Spending Variance by Item Helado Company Performance Report for the Month Ended May 31, 2013 Cost Formulaa

Actual Costs

Budgetb

Spending Variance

Natural gas

$ 7.60

$ 9,640

$ 9,880

$240 F

Electricity

4.00

5,850

5,200

650 U

Water

0.40

630

520

110 U

Total

$12.00

$16,120

$15,600

$520 U

a

Per direct labor hour.

b

The budget allowance is computed using the cost formula and 1,300 actual direct labor hours.

Exhibit 9.5 - Variable Overhead Spending and Efficiency Variances by Item Helado Company Performance Report For the Month Ended May 31, 2013 Cost

Actual

Formulaa

Costs

Budgetb

Spending

Budget for

Efficiency

Variance

Standard

Variance

Hoursc Natural gas

$ 7.60

$ 9,640

$ 9,880

$240 F
...