Chapter%2011%20-%20ACCT%202332%20-%20spring%202010

# Chapter%2011%20-%20ACCT%202332%20-%20spring%202010 -...

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1 Chapter 11:     Standard Costs and Variance  Standard Costs and Variance  Analysis Analysis

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2 Investigating variances Investigating variances In the flexible budget, we saw that costs could be higher (or lower) than budgeted just because we sold more (or less) units than originally budgeted. However, How do we investigate the variances that still remain between the flexible budget and the actual results?
3 Investigating variances Investigating variances For example, according to the flexible budget, the material cost to produce 1,000 gallons of ice cream is \$3,500. However, actual cost of materials to produce 1,000 gallons was \$3,900. The \$400 variance could result from two different reasons: 1. We used more material than planned: due to material inefficiency in production, or maybe a misunderstanding of the recipe. 2. The prices of milk and sugar went up. It is important what is the cause of the variance in order for us to take the appropriate action. But in order to know what part of the variance belongs to prices and what belongs to quantity we need to first figure out was did we expect quantity to be per unit (standard quantity) and what did we expect prices to be (standard prices).

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4 Standard Costs and Budgets Standard Costs and Budgets The standard cost per unit is the budgeted cost for producing one unit under anticipated conditions. We use the standard cost to build the budget (by multiplying the standard cost by the planned amount to be produced). Standard cost systems enable us to compare standard costs to actual costs and interpret cost variances.
5 Standard cost For example, the standard cost of a gallon of ice cream is as follows (notice that a gallon of ice cream has air in it, and so does not require a gallon of raw material) :

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6 Developing Standard Costs Developing Standard Costs The standard quantity and price for material may be specified: In engineering plans that provide a list of material In recipes or formulas In price lists provided by suppliers The standard quantity and rate for direct labor may be specified: By time and motion studies Through analysis of past data By management expectations of rates to be paid In contracts that set labor rates and efficiency standards Standard costs for overhead involves procedures similar to those used to develop predetermined overhead rates in job order costing
7 Ideal vs. Attainable Cost Standards Ideal vs. Attainable Cost Standards Ideal (engineering) Standards may be a starting point but they assume that no obstacles will be encountered in the production process No breakdowns in equipment No defects in material No mix ups in labor scheduling No fatigue, breaks etc. If you use ideal standards in the budget then cost variances

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## This note was uploaded on 05/06/2010 for the course ACCT 2332 taught by Professor Howard during the Spring '10 term at University of Texas-Tyler.

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Chapter%2011%20-%20ACCT%202332%20-%20spring%202010 -...

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