This preview shows pages 1–9. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: MGMT 201 (Ganguly) MGMT
Lecture 23: Introduction to Lecture Standard Costs & Variances Standard What is a variance?
Standard performance level Comparison between standard and actual performance level Actual performance level Cost variance
2 Standard Costs
Based on carefully predetermined amounts. Used for planning labor and material requirements. The expected level of performance. Benchmarks for measuring performance.
3 Standard Costs are Management by Exception
Managers focus on quantities and costs that exceed standards, a practice known as management by exception. Standard Direct Material Amount Direct Labor Type of Product Cost
4 Variance Analysis Cycle
Identify questions. Receive explanations. Take corrective actions. Analyze variances. Conduct next period’s operations. Prepare standard cost performance report.
5 Begin Cost Variance Analysis
Standard Cost Variances Price Variance Quantity Variance The difference between the actual price and the standard price The difference between the actual quantity and the standard quantity
6 A General Model for Variance General Analysis
Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price Price Variance Quantity Variance Standard price is the amount that should have been paid for the resources acquired.
7 A General Model for Variance General Analysis
Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price Price Variance Quantity Variance Standard quantity is the quantity allowed for the actual good output.
8 A General Model for Variance General Analysis
Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price Price Variance
Materials price SP) AQ(AP  variance Labor rate variance AQ =Variable overhead Actual Quantity AP = spendingPrice Actual variance Quantity Variance
Materials quantity variance SP(AQ  SQ) Labor efficiency variance SVariable overhead P = Standard Price Sefficiency variance Q = Standard Quantity
9 Standard Costs
Let’s use the concepts of the general model to calculate standard cost variances. For today’s lecture, we’ll deal only with direct material.
10 10 Material Variances Material Zippy Hanson Inc. has the following direct material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Last week 1,700 pounds of material were purchased and used to make 1,000 Zippies. The material cost a total of $6,630. 11 11 Material Variances Zippy What is the actual price per pound paid for the material? a. b. c. d. $4.00 per pound. $4.10 per pound. $3.90 per pound. $6.63 per pound.
12 12 Material Variances Zippy Hanson’s material price variance (MPV) for the week was: a. b. c. d. $170 unfavorable. $170 favorable. $800 unfavorable. $800 favorable.
13 13 Material Variances Zippy The standard quantity of material that should have been used to produce 1,000 Zippies is: a. b. c. d. 1,700 pounds. 1,500 pounds. 2,550 pounds. 2,000 pounds. 14 14 Material Variances Zippy Hanson’s material quantity variance (MQV) for the week was: a. b. c. d. $170 unfavorable. $170 favorable. $800 unfavorable. $800 favorable.
15 15 Material Variances Summary
Actual Quantity × Actual Price 1,700 lbs. × $3.90 per lb. $6,630 Actual Quantity × Standard Price 1,700 lbs. × $4.00 per lb. $ 6,800 Standard Quantity × Standard Price 1,500 lbs. × $4.00 per lb. $6,000 Price variance $170 favorable Quantity variance $800 unfavorable
16 16 So far, we have looked at variances computed when the amount purchased is the same as the amount used. same
But of course, that’s not always going But to be the case! to Material Variances Zippy Hanson purchased and used 1,700 pounds. How are the variances computed if the amount purchased differs from the amount used? The price variance is computed on the entire quantity purchased. The quantity variance is computed only on the quantity used.
18 18 So let’s modify the “Zippy” problem… problem… Material Variances Material Zippy Hanson Inc. has the following material standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound Last week 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700 pounds were used to make 1,000 Zippies.
20 20 Material Variances
Actual Quantity Purchased × Actual Price 2,800 lbs. × $3.90 per lb. $10,920 Actual Quantity Purchased × Standard Price 2,800 lbs. × $4.00 per lb. $11,200 Zippy Price variance $280 favorable Price variance increases because quantity purchased increases. 21 21 Material Variances
Actual Quantity Used × Standard Price 1,700 lbs. × $4.00 per lb. $6,800 Quantity variance is unchanged because actual and standard quantities are unchanged. Zippy Standard Quantity × Standard Price 1,500 lbs. × $4.00 per lb. $6,000 Quantity variance $800 unfavorable
22 22 Isolation of Material Variances
I need the variances as soon as possible so that I can better identify problems and control costs. You accountants just don’t understand the problems we production managers have. Okay. I’ll start computing the price variance when material is purchased and the quantity variance as soon as material is used. 23 23 Responsibility for Material Responsibility Variances Variances
I am not responsible for this unfavorable material quantity variance. You purchased cheap material, so my people had to use more of it. You used too much material because of poorly trained workers and poorly maintained equipment. Also, your poor scheduling sometimes requires me to rush order material at a higher price, causing unfavorable price variances. 24 24 Labor Cost variances Labor in the next lecture… in
Let’s set the standard a little higher. 25 25 ...
View
Full
Document
This note was uploaded on 03/18/2011 for the course MGMT 201 taught by Professor Rowe during the Spring '08 term at Purdue University.
 Spring '08
 ROWE

Click to edit the document details