Cornerstones Fundamental of Managerial Accounting
Chapter Eight
Standard Costing: A Managerial Control Tool
Heitger/Mowen/Hansen
Copyright 2008 Cengage Learning South-Western.
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Objective # 1
Explain how units standards are set and why standard cost systems are adopted.
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Unit Standards
Developing standards enhances control.
Need to determine the unit standard cost for a particular input
Two decisions:
Quantity decision
Pricing decision
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Quantity Decision
The amount of input that should be used per unit of output
Called "Quantity Standard"
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Price Decision
The amount that should be paid for the quantity of input to be used.
Called "Price Standard"
Quantity Standard x Price Standard = Unit Standard
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Unit Standard
Used to enhance cost control Are budgeted `unit' costs
Unlike budgets which contain aggregate amounts of total revenue and total costs
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Development of Standards
Quantity Standards are developed by:
Historical experience
Engineering studies Input from operating personnel
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Development of Standards
Price Standards are the joint responsibility of:
Operations
Purchasing
Personnel
Accounting
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Types of Standards
Ideal standards --demand maximum efficiency and can be achieved only if everything operates perfectly
Currently attainable standards
--- can be achieved under efficient operating conditions
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Why Standard Cost Systems Are Adopted Two reasons:
To improve planning and control
To facilitate product costing
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Planning and Control
Standards:
Enhance planning and control Improve performance management Fundamental requirement for a flexible budgeting system
Actual costs are compared to budgeted costs and variances are computed
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Product Costing
Costs are assigned to products using standards for:
Direct materials quantity Direct materials price
Direct labor quantity
Direct labor price
Overhead quantity
Overhead price
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Standard Costing
Advantages:
Greater capacity for control
Provides readily available unit cost information
Simplifies cost assignments in both process and job costing systems
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Objective # 2
Explain the purpose of a standard cost sheet.
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Example
Corn allowed:
SQ
=
Unit Quantity Standard
x
Actual Output
Standard quantity of materials allowed
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Example
SQ = SQ =
Unit Quantity Standard 18
x x
Actual Output 100,000
SQ = 1,800,000 ounces
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Example
Operator hours allowed:
SH =
Unit Quantity Standard
x
Actual Output
Standard hours allowed
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Example
Operator hours allowed:
SH = SH =
Unit Quantity Standard 0.01
x x
Actual Output 100,000
SH
= 1,000 direct labor hours
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Objective # 3
Describe the basic concepts underlying variance analysis, and explain when variances should be investigated.
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Variance Analysis Components
SP = Standard unit price of an input
SQ = Standard quantity of input for the actual output
AP = Actual price per unit of the input AQ = Actual quantity of the input used
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Total Budget Variance
Total = Variance
Actual Cost (AP x AQ)
Planned Cost (SP x SQ)
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Price (Rate) Variance
Actual Price
-
Standard Price
Number of x inputs used
Favorable variance = Actual price is less than standard price
Unfavorable variance = Actual is price greater than standard price
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Usage (Efficiency) Variance
Actual Quantity Standard Quantity
x Standard Unit Price
Favorable variance = Actual quantity is less than standard quantity
Unfavorable variance = Actual quantity is greater than standard quantity
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The Decision to Investigate
Performance rarely meets established standards exactly Random variations around the standard are expected Management should determine an acceptable range of performance
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Cornerstone 9-2
HOW TO Use Control Limits to Trigger a Variance Investigation
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Example
Information: Standard cost: $100,000; allowable deviation: $10,000; actual costs for six months:
June July $97,500 105,000 95,000 September $102,500
October November
107,500 112,500
August
Required: Plot the actual costs over time against the upper and lower control limits. Determine when a variance should be investigated.
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Example
$120,000 110,000
Acceptable Range (Don't Investigate)
100,000
Standard
90,000
June July August September October November
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Example
$120,000 110,000
Investigate
100,000
90,000
June July August September October November
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Objective # 4
Compute the materials variances, and explain how they are used for control.
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Direct Material Variances
Materials Price Variance
Measures the difference between what should have been paid for raw materials and what was actually paid
MPV
=
(AP
SP) x AQ
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Direct Material Variances
Materials Usage Variance Measures the difference between the direct materials actually used and the direct materials that should have been used for the actual output
MUV
=
(AQ
SQ) SP
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Responsibility for the Materials Price Variance
Belongs to the purchasing agent
Price can be influenced by: Quality Quantity discounts Distance of the source from the plant
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Responsibility for the Materials Usage Variance
Belongs to the production manager
Variance can be influenced by minimizing: Scrap Waste Rework
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Analysis of the Variances
First step:
Decide whether the variance is significant Second step:
Find out why it occurred
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Accounting and Disposition of Materials Variances
Materials variances are ADDED to cost of goods sold if they are UNFAVORABLE.
Materials variances are SUBTRACTED from cost of goods sold if FAVORABLE
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Direct Labor Variances
Labor Rate Variance
Computes the difference between what was paid to direct laborers and what should have been paid
LRV
=
(AR - SR) AH
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Direct Labor Variances
Labor Efficiency Variance
Measures the difference between the labor hours that were actually used and the labor hours that should have been used
LEV =
(AH SH) SR
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Objective # 5
Compute the labor variances and explain how they are used for control.
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Causes of Labor Rate Variance
Labor rates are largely determined by such external forces as labor markets and union contracts. Labor rates can vary when: More skilled and more highly paid laborers are used for less skilled tasks
Unexpected overtime occurs
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Responsibility for the Labor Efficiency Variance
Generally speaking, production managers are responsible for the use of direct labor
But once the cause is discovered, responsibility may be assigned elsewhere.
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