of OVERVIEW
Cost Goods Manufactured Schedule
Direct Materials
Direct Labour
Manufacturing Overhead
Product Costs vs. Period Costs
Product Costcost to manufacture
Inventoriable
Period Cost---expensed as incurred
Fixed Costs and Variable Costs
Cost behaviour related to activity
Contribution Margin
Sales less variable costs
Behavioural format income statement
Job Order Costing
Accumulating costs by job
Use of predetermined overhead rate
Overapplied/underapplied overhead
Activity Based Costing
Activity cost pools
Cost drivers
Multiple rates
Budgeting
Forecasted Income Statement
Balance Sheet
Cash Flow
STANDARD COSTING
A standard is a benchmark or norm that is used as a basis for
determining the quantity of resources required to carry out a
certain activity.
A manufacturer will develop standards for the inputs required
to produce a unit of output. Inputs consist of raw materials,
labour and manufacturing overhead. These are called
quantity standards.
We can also develop cost or price standards by costing the
inputs.
A standard cost is computed as the standard quantity of input
required to produce one unit of a product or provide one unit
of a service multiplied by the standard price of the input.
Managers can compare actual performance to standards,
isolate and investigate variances, and take corrective action as
necessary.
Standard costing can be integrated into the accounting system.
TYPES OF STANDARDS
Ideal standards assume a perfect environment ---they do not
allow for machine breakdowns or work interruptions ---they
can be attained by working at peak effort 100% of the time.
Practical standards are realistic and incorporate all the items
that can reasonably occur such as machine down time,
employee rest periods and similar items. These standards are
attainable with efficient operations.
SETTING STANDARDS
An example.
Speeds Inc. makes a popular jogging suit. The company wants
to develop standards for material, labour, and variable
overhead.
Direct Material Standard
The standard quantity per unit is the amount of material that
should go into a finished unit. It should reflect the amount set
by design, an allowance for reasonable spoilage and
unavoidable waste, and materials in expected scrapped units.
The standard quantity of polar fleece in one jogging suit is
Bill of materials design quantity
Allowance for waste
Allowance for rejects
Standard quantity per jogging suit
2.8 meters
.6 meters
.2 meters
3.5 meters
The standard price per unit of material should be the delivered
cost of materials including the purchase price net of discounts
for quantity purchases and early cash payments, if any,
freight in(transportation) costs and receiving and handling
costs.
The standard price (cost) of one meter of polar fleece is
Purchase price
(Quantity purchase discount)
Freight
Receiving and handling
Standard price per meter
$5.70
(.20)
.40
.10
$6.00
The standard cost per jogging suit is then 3.5 x $6.00=$21.00.
Direct Labour Standard
The standard hours per unit for direct labour specifies the
amount of time required to complete one unit of product.
This includes engineered labour time per unit, allowances for
breaks and clean up, allowance for setup and machine
downtime and allowance for rejects (scrapped units).
The standard hours required to produce one jogging suit is
Basic labour time per unit
1.4 hours
Allowance for breaks and cleanup
.1 hours
Allowance for setup and downtime
.3 hours
Allowance for rejects
.2 hours
Standard hours per jogging suit
2.0 hours
The standard labour rate per hour should include all the costs
of the direct labour workers including hour wage rates,
employment based taxes and fringe benefits.
The standard rate per hour is
Average wage rate per hour
Average employment taxes
Average fringe benefits
Standard labour rate per hour
$13.00
1.00
4.00
$18.00
The standard labour cost per jogging suit is 2.0 x
$18.00=$36.00
Variable Overhead Standard
A standard cost system uses a predetermined overhead and
segregates the variable and fixed portions of the rate.
Overhead is applied to the product as follows
Overhead applied= Predetermined x Activity Measure
Overhead Rate
(Usually direct
labour hours or
machine hours
The standard variable overhead per unit is determined by
multiplying the standard base times the predetermined rate.
If Speeds uses direct labour hours as the activity measure and
the predetermined overhead rate is $4.00 per direct labour
hour
The standard variable overhead per jogging suit is
2.0 x $4.00=$8.00
A Standard Cost Card for Jogging Suits
Standard
Standard
Standard
Quantity
Price/Rate
Cost
Direct materials 3.5 meters
Direct labour
2.0 hours
Variable mfg o/h 2.0 hours
Total standard cost per unit
$6 per meter
18 per hour
4 per hour
$21.00
36.00
8.00
$65.00
VARIANCE ANALYSIS
A GENERAL MODEL
(1)
Actual quantity
of inputs,
at actual prices
(AQ X AP)
(2)
Actual quantity
of inputs,
at standard price
(AQ X SP)
(3)
Standard quantity
allowed for output
at standard price
(SQ X SP)
Materials price
variance
Materials quantity
variance
Labour rate
variance
Labour efficiency
variance
Variable overhead
spending variance
Variable overhead
efficiency variance
Variances are labeled either as favourable (F) or unfavourable
(U).
When actual prices or quantities exceed standards the variance
is unfavourable.
When actual prices or quantities are less than standars the
variance is favourable.
An example
Number of units (suits) completed
Materials purchased 20,000 meters @5.40
Materials used
5,000
$108,000
20,000 meters
Labour hours
Cost of labour $210,000
10,500
$20 per hour
Actual variable overhead costs
$40,950
MATERIALS PRICE AND QUANTITY VARIANCES
Actual Quantity
Actual Price
Actual Quantity
Standard Price
(AQ X AP)
(AQ X SP)
Standard
Quantity
Standard Price
(SQ* X SP)
20,000 x $5.40
$108,000
20,000 x $6
$120,000
17,500 x $6
$105,000
Price Variance PV
$12,000 F
Quantity Variance QV
$15,000 U
Total Variance TV $3.000 U
* For good output5,000 units x 3.5 meters per unit
MPV= (AQ X AP) (AQ X SP)
= (20,000 x $5.40)-(20,000 x $6)
= $12,000 F
MPV= AQ (AP-SP)
=20,000(5.40-6) = $12,000 F
MQV= (AQ X SP) - (SQ X SP)
= (20,000 x $6)- (17,500 x $6)
= $15,000 U
MQV= SP (AQ-SQ)
= $6(20,000-17,500)
= $15,000 U
POSSIBLE CAUSES OF MATERIAL VARIANCES
-Change in supplier,
-Change in quality, positive or negative impact
-Production effectiveness
DIRECT LABOUR RATE AND EFFICIENCY VARIANCES
Actual Hours
x Actual Rate
(AH X AR)
Actual Hours
x Standard Rate
(AH X SR)
Standard Hours*
x Standard Rate
(SH X SR)
10,500 x $20
$210,000
10,500 x $18
$189,000
10,000 x $18
$180,000
Rate
Variance
$21,000 U
Efficiency
Variance
$9,000 U
Total Variance $30,000 U
*Allowed for good output 5,000 units x 2.0 hours per unit.
LRV= (AH X AR) (AH X SR)
=(10,500 x $20)-(10,500 x $18)
=$21,000 U
LRV = AH ( AR SR)
=10,500($20-$18)
=$21,000 U
LEV = (AH X SR) (SH X SR)
=(10,500 x $18)-(10,000 x $18)
= $9,000 U
LEV = SR ( AH SH)
=$18 (10,500-10,000)
= $9,000 U
Possible causes of labour variances
-different mix of employees, different average rate per hour
-workers working efficiently or inefficiently
-variance in the quality of materials
VARIABLE OVERHEAD VARIANCES
Actual
Variable
Overhead
(AH x AR)
Actual hours
x Standard rate
Standard hours*
x Standard rate
(AH X SR)
(SH X SR)
$40,950
10,500 x $4
$42,000
10,000 x $4
$40,000
Spending
Variance
$1050 F
Efficiency
Variance
$2000 U
Total Variance $950U
VOSV = (AH X AR) (AH X SR)
= ( $40950)-(10,500 x $4)
= $1050F
VOSV= AH ( AR-SR)
= 10,500 ($3.90*-$4) * $40950/10,500=$3.90
VOEV = (AH X SR) (SH X SR)
= (10,500 x $4)- (10,000 x $4)
= $2,000 U
VOEV = SR (AH SH) =$4(10,500-10,000)=$2,000 U
VARIANCE ANALYSIS AND MANAGEMENT BY
EXCEPTION
Like budgets, standard costs reflect managements plans.
More often than not, there will be variances.
Not every variance is news, or worthy of investigation (eg a
$500 variance on $1,000,000 of activity).
Management needs to set a criterion that triggers investing
time in investigating the causes of variances with a view to
improving processes or efficiencies.
This is called management by exception.
The criterion could be an absolute dollar amount, for example,
all variances over $5,000 are to be investigated.
The criterion could also be a % of standard costs, for example
all variances over 2% of standard costs are to be investigated.
ADVANTAGES OF STANDARD COST SYSTEMS
-Facilitate management by exception
-Can promote improvements and efficiency if standards are
viewed by employees as reasonable. Benchmarking.
-Can simplify record keeping
-Primary indicator of whether or not costs are under control.
POTENTIAL PROBLEMS WITH USING STANDARD
COSTING
1. Reports, particularly if monthly, determine variances too
late for effective corrective action.
2. If standards are use as a pressure tool or for punishing
people the effect on morale and motivation may be negative.
3. A focus on labour efficiency encourages high output and can
lead to a build up of excessive work in process.
4. Favourable variances may be as bad as unfavourable
variances particularly when they relate to quantities and
product quality.
5. Standards may not encourage an environment of continuous
improvement.
6. Just meeting the standards may not be sufficient to achieve
overall objectives.
JOURNAL ENTRIES AND STANDARD COSTING.
1. The purchase of materials
Raw Material Inventory
Materials Price Variance
Accounts Payable
120,000
12,000
108,000
2. The use of materials
Work in process (SQ X SP)
Materials Quantity Variance
Raw Material Inventory
105,000
15,000
120,000
3. Direct labour costs
Work in process (SH X SR)
Labour rate variance
Labour efficiency variance
Wages Payable
180,000
21,000
9,000
210,000
4. Variable manufacturing overhead actual
Variable Manufacturing Overhead 40,950
Accounts Payable etc.
40,950
5. Applying variable manufacturing overhead
Work in Process (SH X SR)
40,000
VOH Efficiency Variance
2,000
VOH Spending Variance
1,050
Variable Manufacturing Overhead
40,950
6. Finished Goods Inventory
Work in process
5,000 units at $65 standard cost
325,000
325,000
At the end of the accounting period variances are usually
closed to Cost of Goods Sold. If significant amounts are
involved in the variances and inventories, it may be necessary
to prorate the variances to Work in Process, Finished Goods
Inventory, and Cost of Goods Sold.