Costs Standard and Variances
Chapter10
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
10-2
StandardCosts
Standards are benchmarks or norms for
measuring performance. In managerial accounting,
two types of standards are commonly used.
Quantity standards
specify how much of an
input should be used to
make a product or
provide a service.
Price standards
specify how much
should be paid for
each unit of the
input.
Examples: Firestone, Sears, McDonalds, hospitals,
construction, and manufacturing companies.
10-3
StandardCosts
Amount
Deviations from standards deemed significant
are brought to the attention of management, a
practice known as management by exception.
Standard
Direct
Labor
Direct
Material
Manufacturing
Overhead
Type of Product Cost
10-4
VarianceAnalysisCycle
10-5
SettingStandardCosts
Should we use
ideal standards that
require employees to
work at 100 percent
peak efficiency?
Engineer
I recommend using practical
standards that are currently
attainable with reasonable
and efficient effort.
Managerial Accountant
10-6
SettingDirectMaterialsStandards
Standard Price
per Unit
Standard Quantity
per Unit
Final, delivered
cost of materials,
net of discounts.
Summarized in
a Bill of Materials.
10-7
SettingDirectLaborStandards
Standard Rate
per Hour
Standard Hours
per Unit
Often a single
rate is used that reflects
the mix of wages earned.
Use time and
motion studies for
each labor operation.
10-8
SettingVariableManufacturing
OverheadStandards
Price
Standard
Quantity
Standard
The rate is the
variable portion of the
predetermined overhead
rate.
The quantity is
the activity in the
allocation base for
predetermined overhead.
10-9
TheStandardCostCard
A standard cost card for one unit
of product might look like this:
A
Inputs
Direct materials
Direct labor
Variable mfg. overhead
Total standard unit cost
B
AxB
Standard
Quantity
or Hours
Standard
Price
or Rate
Standard
Cost
per Unit
3.0 lbs.
2.5 hours
2.5 hours
$ 4.00 per lb.
$
14.00 per hour
3.00 per hour
$
12.00
35.00
7.50
54.50
10-10
UsingStandardsinFlexibleBudgets
Standard costs per unit for direct materials, direct
labor, and variable manufacturing overhead can be
used to compute activity and spending variances.
Spending variances become more
Spending
useful by breaking them down into
quantity and price variances.
quantity
10-11
AGeneralModelforVarianceAnalysis
Variance Analysis
Quantity Variance
Price Variance
Difference between
actual quantity and
standard quantity
Difference between
actual price and
actual
standard price
standard
10-12
QuantityandPriceStandards
Quantity and price standards are
Quantity
determined separately for two reasons:
determined
The purchasing manager is responsible for raw
material purchase prices and the production manager
is responsible for the quantity of raw material used.
The buying and using activities occur at different times.
Raw material purchases may be held in inventory for a
period of time before being used in production.
10-13
AGeneralModelforVarianceAnalysis
Variance Analysis
Quantity Variance
Price Variance
Materials quantity variance
Labor efficiency variance
VOH efficiency variance
Materials price variance
Labor rate variance
VOH rate variance
10-14
AGeneralModelforVarianceAnalysis
(1)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)
Quantity Variance
(2) (1)
(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)
Price Variance
(3) (2)
Spending Variance
(3) (1)
10-15
AGeneralModelforVarianceAnalysis
Actual quantity is the amount of direct materials, direct
labor, and variable manufacturing overhead actually used.
(1)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)
Quantity Variance
(2) (1)
(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)
Price Variance
(3) (2)
Spending Variance
(3) (1)
10-16
AGeneralModelforVarianceAnalysis
Standard quantity is the standard quantity allowed
for the actual output of the period.
(1)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)
Quantity Variance
(2) (1)
(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)
Price Variance
(3) (2)
Spending Variance
(3) (1)
10-17
AGeneralModelforVarianceAnalysis
Actual price is the amount actually
paid for the input used.
(1)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)
Quantity Variance
(2) (1)
(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)
Price Variance
(3) (2)
Spending Variance
(3) (1)
10-18
AGeneralModelforVarianceAnalysis
Standard price is the amount that should
have been paid for the input used.
(1)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)
Quantity Variance
(2) (1)
(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)
Price Variance
(3) (2)
Spending Variance
(3) (1)
10-19
LearningObjective1
Computethedirect
materialsquantityand
pricevariancesand
explaintheir
significance.
10-20
MaterialsVariancesAnExample
Glacier Peak Outfitters has the following direct
materials standard for the fiberfill in its mountain
parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month 210 kgs. of fiberfill were purchased and
used to make 2,000 parkas. The materials cost a
total of $1,029.
10-21
MaterialsVariancesSummary
Standard Quantity
Standard Price
200 kgs.
$5.00 per kg.
= $1,000
Actual Quantity
Standard Price
210 kgs.
$5.00 per kg.
= $1,050
Quantity variance
$50 unfavorable
Actual Quantity
Actual Price
210 kgs.
$4.90 per kg.
= $1,029
Price variance
$21 favorable
10-22
MaterialsVariancesSummary
Standard Quantity
Standard Price
Actual Quantity
Standard Price
200 kgs.
210 kgs.
0.1 kg per parka 2,000
parkas = 200 kgs
$5.00 per kg.
$5.00 per kg.
= $1,000
= $1,050
Quantity variance
$50 unfavorable
Actual Quantity
Actual Price
210 kgs.
$4.90 per kg.
= $1,029
Price variance
$21 favorable
10-23
MaterialsVariancesSummary
Standard Quantity
Standard Price
200 kgs.
$5.00 per kg.
= $1,000
Actual Quantity
Standard Price
210 kgs.
$1,029 210
$5.00= $4.90 per
kgs per kg.
kg
= $1,050
Quantity variance
$50 unfavorable
Actual Quantity
Actual Price
210 kgs.
$4.90 per kg.
= $1,029
Price variance
$21 favorable
10-24
MaterialsVariances:
UsingtheFactoredEquations
Materials quantity variance
MQV = (AQ SP) (SQ SP)
= SP(AQ SQ)
= $5.00/kg (210 kgs (0.1 kg/parka 2,000 parkas))
= $5.00/kg (210 kgs 200 kgs)
= $5.00/kg (10 kgs) = $50 U
Materials price variance
MPV = (AQ AP) (AQ SP)
= AQ(AP SP)
= 210 kgs ($4.90/kg $5.00/kg)
= 210 kgs ( $0.10/kg) = $21 F
10-25
ResponsibilityforMaterials
Variances
Materials Quantity Variance
Production Manager
Materials Price Variance
Purchasing Manager
The standard price is used to compute the quantity variance
so that the production manager is not held responsible for
the purchasing managers performance.
10-26
ResponsibilityforMaterialsVariances
I am not responsible for
this unfavorable materials
quantity variance.
You purchased cheap
material, so my people
had to use more of it.
Production Manager
Your poor scheduling
sometimes requires me to
rush order materials at a
higher price, causing
unfavorable price variances.
Purchasing Manager
10-27
QuickCheck
Zippy
Hanson Inc. has the following direct materials
standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 1,700 pounds of materials were
purchased and used to make 1,000 Zippies. The
materials cost a total of $6,630.
10-28
QuickCheck
How many pounds of materials should
Hanson have used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
d. 1,000 pounds.
Zippy
10-29
QuickCheck
Zippy
How many pounds of materials should
Hanson have used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
The standard quantity is:
d. 1,000 pounds.
1,000 1.5 pounds per Zippy.
10-30
QuickCheck
Hansons materials quantity variance (MQV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Zippy
10-31
QuickCheck
Zippy
Hansons materials quantity variance (MQV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs - 1,500 lbs)
MQV = $800 unfavorable
10-32
QuickCheck
Hansons materials price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Zippy
10-33
QuickCheck
Zippy
Hansons materials price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable. MPV = AQ(AP - SP)
MPV = 1,700 lbs. ($3.90 - 4.00)
MPV = $170 Favorable
10-34
QuickCheck
Standard Quantity
Standard Price
Zippy
Actual Quantity
Standard Price
Actual Quantity
Actual Price
1,500 lbs.
$4.00 per lb.
1,700 lbs.
$4.00 per lb.
1,700 lbs.
$3.90 per lb.
= $6,000
= $ 6,800
= $6,630
Quantity variance
$800 unfavorable
Price variance
$170 favorable
10-35
QuickCheck
Zippy
Recall the that standard quantity for 1,000 Zippies
is 1,000 1.5 pounds per Zippy = 1,500 pounds.
Standard Quantity
Standard Price
Actual Quantity
Standard Price
Actual Quantity
Actual Price
1,500 lbs.
$4.00 per lb.
1,700 lbs.
$4.00 per lb.
1,700 lbs.
$3.90 per lb.
= $6,000
= $ 6,800
= $6,630
Quantity variance
$800 unfavorable
Price variance
$170 favorable
10-36
LearningObjective2
Compute the direct labor
efficiency and rate
variances and explain
their significance.
10-37
LaborVariancesAnExample
Glacier Peak Outfitters has the following direct
labor standard for its mountain parka.
1.2 standard hours per parka at $10.00 per hour
Last month, employees actually worked 2,500
hours at a total labor cost of $26,250 to make
2,000 parkas.
10-38
LaborVariancesSummary
Standard Hours
Standard Rate
Actual Hours
Standard Rate
Actual Hours
Actual Rate
2,400 hours
$10.00 per hour
2,500 hours
$10.00 per hour
2,500 hours
$10.50 per hour
= $24,000
= $25,000
= $26,250
Efficiency variance
$1,000 unfavorable
Rate variance
$1,250 unfavorable
10-39
LaborVariancesSummary
Standard Hours
Standard Rate
2,400 hours
$10.00 per hour
= $24,000
Actual Hours
Standard Rate
Actual Hours
Actual Rate
2,500 hours
2,500 hours
1.2 hours parka 2,000
per
parkas = 2,400
$10.00 per hour hours$10.50 per hour
= $25,000
Efficiency variance
$1,000 unfavorable
= $26,250
Rate variance
$1,250 unfavorable
10-40
LaborVariancesSummary
Standard Hours
Standard Rate
Actual Hours
Standard Rate
Actual Hours
Actual Rate
2,400 hours
2,500 hours
$26,250 2,500 hours
$10.00 per hour = $10.50 per hour
$10.00 per hour
2,500 hours
$10.50 per hour
= $24,000
= $25,000
Efficiency variance
$1,000 unfavorable
= $26,250
Rate variance
$1,250 unfavorable
10-41
LaborVariances:Usingthe
FactoredEquations
Labor efficiency variance
LEV = (AH SR) (SH SR)
= SR (AH SH)
= $10.00 per hour (2,500 hours 2,400 hours)
= $10.00 per hour (100 hours)
= $1,000 unfavorable
Labor rate variance
LRV = (AH AR) (AH SR)
= AH (AR SR)
= 2,500 hours ($10.50 per hour $10.00 per hour)
= 2,500 hours ($0.50 per hour)
= $1,250 unfavorable
10-42
ResponsibilityforLaborVariances
Production managers are
usually held accountable
for labor variances
because they can
influence the:
Mix of skill levels
assigned to work tasks.
Level of employee
motivation.
Quality of production
supervision.
Production Manager
Quality of training
provided to employees.
10-43
ResponsibilityforLaborVariances
I am not responsible for
the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
time to process it.
I think it took more time
to process the
materials because the
Maintenance
Department has poorly
maintained your
equipment.
10-44
QuickCheck
Hanson Inc. has the following direct labor
standard to manufacture one Zippy:
1.5 standard hours per Zippy at
$12.00 per direct labor hour
Last week, 1,550 direct labor hours were
worked at a total labor cost of $18,910
to make 1,000 Zippies.
Zippy
10-45
QuickCheck
Hansons labor efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
Zippy
10-46
QuickCheck
Zippy
Hansons labor efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable
10-47
QuickCheck
Hansons labor rate variance (LRV) for the
week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Zippy
10-48
QuickCheck
Zippy
Hansons labor rate variance (LRV) for the
week was:
a. $310 unfavorable.
b. $310 favorable.
LRV
c. $300 unfavorable. = AH(AR - SR)
LRV = 1,550 hrs($12.20 - $12.00)
d. $300 favorable. RV = $310 unfavorable
L
10-49
QuickCheck
Zippy
Standard Hours
Standard Rate
Actual Hours
Standard Rate
Actual Hours
Actual Rate
1,500 hours
$12.00 per hour
hour
1,550 hours
$12.00 per hour
1,550 hours
$12.20 per
= $18,000
= $18,600
Efficiency variance
$600 unfavorable
= $18,910
Rate variance
$310 unfavorable
10-50
LearningObjective3
Compute the variable
manufacturing overhead
efficiency and rate
variances and explain
their significance.
10-51
VariableManufacturingOverhead
VariancesAnExample
Glacier Peak Outfitters has the following direct
variable manufacturing overhead labor standard
for its mountain parka.
1.2 standard hours per parka at $4.00 per hour
Last month, employees actually worked 2,500
hours to make 2,000 parkas. Actual variable
manufacturing overhead for the month was
$10,500.
10-52
VariableManufacturingOverhead
VariancesSummary
Standard Hours
Standard Rate
2,400 hours
$4.00 per hour
= $9,600
Actual Hours
Standard Rate
2,500 hours
$4.00 per hour
= $10,000
Efficiency variance
$400 unfavorable
Actual Hours
Actual Rate
2,500 hours
$4.20 per hour
= $10,500
Rate variance
$500 unfavorable
10-53
VariableManufacturingOverhead
VariancesSummary
Standard Hours
Actual Hours
Actual Hours
Standard Rate
Standard Rate
Actual Rate
2,400 hours
2,500 hours
2,500 hours
1.2 hours parka 2,000
per
$4.00 per hour
$4.00 = 2,400
parkasper hour hours $4.20 per hour
= $9,600
= $10,000
Efficiency variance
$400 unfavorable
= $10,500
Rate variance
$500 unfavorable
10-54
VariableManufacturingOverhead
VariancesSummary
Standard Hours
Actual Hours
Standard Rate
Standard Rate
2,400 hours
2,500 hours
$10,500 2,500 hours
$4.00 per hour
$4.00 per hour
= $4.20 per hour
= $9,600
= $10,000
Efficiency variance
$400 unfavorable
Actual Hours
Actual Rate
2,500 hours
$4.20 per hour
= $10,500
Rate variance
$500 unfavorable
10-55
VariableManufacturingOverhead
Variances:UsingFactoredEquations
Variable manufacturing overhead efficiency variance
VMEV = (AH SR) (SH SR)
= SR (AH SH)
= $4.00 per hour (2,500 hours 2,400 hours)
= $4.00 per hour (100 hours)
= $400 unfavorable
Variable manufacturing overhead rate variance
VMRV = (AH AR) (AH SR)
= AH (AR SR)
= 2,500 hours ($4.20 per hour $4.00 per hour)
= 2,500 hours ($0.20 per hour)
= $500 unfavorable
10-56
QuickCheck
Zippy
Hanson Inc. has the following variable
manufacturing overhead standard to
manufacture one Zippy:
1.5 standard hours per Zippy at
$3.00 per direct labor hour
Last week, 1,550 hours were worked to make
1,000 Zippies, and $5,115 was spent for
variable manufacturing overhead.
10-57
QuickCheck
Zippy
Hansons efficiency variance (VMEV) for
variable manufacturing overhead for the week
was:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.
10-58
QuickCheck
Zippy
Hansons efficiency variance (VMEV) for
variable manufacturing overhead for the week
was:
a. $435 unfavorable.
b. $435 favorable.
1,000 units 1.5 hrs per unit
c. $150 unfavorable.
d. $150 favorable.
VMEV = SR(AH - SH)
VMEV = $3.00(1,550 hrs - 1,500 hrs)
VMEV = $150 unfavorable
10-59
QuickCheck
Hansons rate variance (VMRV) for variable
manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
Zippy
10-60
QuickCheck
Zippy
Hansons rate variance (VMRV) for variable
manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
V
c. $335 unfavorable.MRV = AH(AR - SR)
VMRV = 1,550 hrs($3.30 - $3.00)
d. $300 favorable. VMRV = $465 unfavorable
10-61
QuickCheck
Zippy
Standard Hours
Standard Rate
Actual Hours
Standard Rate
Actual Hours
Actual Rate
1,500 hours
$3.00 per hour
hour
1,550 hours
$3.00 per hour
1,550 hours
$3.30 per
= $4,650
= $5,115
= $4,500
Efficiency variance
$150 unfavorable
Rate variance
$465 unfavorable
10-62
MaterialsVariancesAnImportant
Subtlety
The quantity variance
is computed only on
the quantity used.
The price variance is
computed on the entire
quantity purchased.
10-63
MaterialsVariancesAnImportant
Subtlety
Glacier Peak Outfitters has the following direct
materials standard for the fiberfill in its mountain
parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month 210 kgs. of fiberfill were purchased at a
cost of $1,029. Glacier used 200 kgs. to make
2,000 parkas.
10-64
MaterialsVariancesAnImportant
Subtlety
Standard Quantity
Standard Price
200 kgs.
$5.00 per kg.
= $1,000
Actual Quantity
Standard Price
200 kgs.
$5.00 per kg.
= $1,000
Quantity variance
$0
10-65
MaterialsVariancesAnImportant
Subtlety
Actual Quantity
Standard Price
210 kgs.
$5.00 per kg.
= $1,050
Actual Quantity
Actual Price
210 kgs.
$4.90 per kg.
= $1,029
Price variance
$21 favorable
10-66
VarianceAnalysisand
ManagementbyException
How do I know
which variances to
investigate?
Larger variances, in
dollar amount or as
a percentage of the
standard, are
investigated first.
10-67
AStatisticalControlChart
Warning signals for investigation
Favorable Limit
Desired Value
Unfavorable Limit
1
2
3
4
5
6
7
Variance Measurements
8
9
10-68
AdvantagesofStandardCosts
Management by
exception
Promotes economy
and efficiency
Advantages
Simplified
bookkeeping
Enhances
responsibility
accounting
10-69
PotentialProblemswithStandard
Costs
Emphasizing standards
may exclude other
important objectives.
Standard cost
reports may
not be timely.
Invalid assumptions
about the relationship
between labor
cost and output.
Potential
Problems
Favorable
variances may
be misinterpreted.
Emphasis on
negative may
impact morale.
Continuous
improvement may
be more important
than meeting standards.