Ch 10 PowerPoint Presentation 3rd Edition

Ch 10 PowerPoint Presentation 3rd Edition - Chapter 10...

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Unformatted text preview: Chapter 10 Standard Costing ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 1 ­ Why is Standard Costing Used? LO1 Describe standard costing and indicate why standard costing is important. • A standard is a preestablished standard benchmark for desirable performance. • A standard costing is the process in which is a company sets cost standards and then uses them to evaluate actual performance. • A variance is the difference between variance actual performance and the standard. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 2 LO1 Favorable versus Unfavorable • A favorable variance occurs when actual favorable performance is above the standard. • An unfavorable variance occurs when actual unfavorable performance falls below the standard. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 3 Management by Exception LO2 Explain the concept of management by exception. • Management by exception is the Management process where managers focus their attention on those areas where actual performance deviates from standards. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 4 LO2 Quantity and Price Standards Quantity used Price paid ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 5 Ideal versus Practical Standards LO3 Contrast ideal and practical standards. • A standard that allows for no inefficiencies standard of any kind is an ideal standard. • A standard that allows for the normal standard inefficiencies of production is called a practical standard. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 6 LO3 The Standard Costing Process Gather information and set standards. Investigate the cause of variances. Compare actual performance to standard and prepare performance reports. Determine if corrective action is needed. Determine which variances to investigate. Take corrective action. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 7 Problems With Standard Costing LO4 Identify and discuss the weaknesses of standard costing. • Employees may try to set low standards Employees to make them easier to achieve. • Using historical data to set standards Using may build in past inefficiencies. • Managers might focus on the “numbers” Managers to the exclusion of other important factors. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 8 LO4 Problems With Standard Costing • Focus on unfavorable variances may Focus result in ignoring the favorable variances. • Managers may lose sight of the big picture. Managers ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 9 Comparison of Cost Systems LO5 Compare standard costing, actual costing, and normal costing. Cost classification Actual cost system Normal cost system Standard cost system Direct material Actual Actual Estimated Direct labor Actual Actual Estimated Manufacturing overhead Actual Estimated Estimated ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 10 Basic Standard Costing for a Manufacturer LO6 Determine standards for a manufacturing company. Direct materials quantity standard Direct materials price standard Direct labor efficiency standard Direct labor rate standard Standard variable manufacturing overhead rate Standard fixed manufacturing overhead rate ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 11 LO6 Standard Cost Example TREE TOP MAIL BOX COMPANY Income Statement For the Month Ended October 31, 2009 Sales (300 mail boxes @ $10 each) $3,000 Less expenses: Direct material $ 600 Direct labor (180 hours @ $10/hour) 1,800 Rent 200 Utilities (all variable) 40 Miscellaneous variable cost 30 Equipment depreciation 25 2,695 Net income $ 305 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 12 LO6 Direct Material Standards • The direct materials standards are as follows: The – 21.6 SQ (standard quantity: board feet per unit) 21.6 – $0.0875 SP (standard price per foot of wood) $0.0875 • What is the standard direct material cost per unit? What • 21.6 SQ × $0.0875 SP = $1.89 per unit 21.6 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 13 LO6 Direct Labor Standards • The direct labor standards are as follows: The – 0.6 SH (standard hours allowed per unit) 0.6 – $10.00 SR (standard rate per hour of labor $10.00 • What is the standard direct labor cost per unit? What • 0.6 SH × $10.00 SR = $6.00 per unit 0.6 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 14 LO6 Variable Overhead Standards • The standard variable OH rate is: The $63 monthly ÷ 180 labor hours = $0.35/hour • What is the expected variable overhead What cost per unit? • 0.6 SH × $0.35 SR = $0.21 per unit 0.6 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 15 LO6 Fixed Overhead Standards • The Tree Top Mail Box Company has a budgeted The monthly fixed overhead cost of $225. monthly overhead • The standard fixed OH rate is: The $225 monthly ÷ 180 labor hours = $1.25/hr. • What is the expected fixed overhead cost per unit? What • 0.6 SH × $1.25 SR = $0.75 per unit 0.6 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 16 LO6 Total Standard Cost per Unit Direct material: 21.6 × $.0875 = $1.89 Direct labor: 0.6 × $10.00 = 6.00 Variable overhead: 0.6 × $ 0.35 = 0.21 Fixed overhead: 0.6 × $ 1.25 = 0.75 Total standard cost per mail box $8.85 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 17 Variance Analysis LO7 Calculate standard cost variances for direct material, direct labor, variable manufacturing overhead, and fixed manufacturing overhead. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 18 LO7 Variance Analysis TREE TOP MAIL BOX COMPANY Income Statement For the Month Ended November 30, 2009 Sales (225 mail boxes @ $10 each) $2,250 Less expenses: Direct material (6,000 feet) $ 477 Direct labor (162 hrs. @ $10.50/hr.) 1,701 Rent 200 Utilities (all variable) 50 Miscellaneous variable cost 90 Equipment depreciation 25 2,543 Net income $ (293) ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 19 LO7 Direct Materials Variances • There are two variances calculated for There direct materials. • The direct materials quantity variance The (also called the usage or efficiency variance) is a measure of the amount of materials used. • The direct materials price variance is a The measure of the cost to buy the various materials that were purchased. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 20 LO7 Material Quantity Variance Standard quantity per unit × Number of units produced = Standard quantity of direct material allowed 21.60 feet × 225 units = 4,860 feet Standard quantity allowed – Actual quantity used = Quantity variance in feet 4,860 feet – 6,000 feet = 1,140 unfavorable ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 21 LO7 Material Quantity Variance Quantity variance in feet 1,140 U × Standard price of direct material = Quantity variance in dollars × $0.0875 = $99.75 U ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 22 LO7 Material Price Variance Actual quantity purchased 6,000 feet × Material standard price Standard cost of = direct material purchased × $0.0875 = Standard cost of Actual cost of direct material – direct material = purchased purchased $525 – $477 = $525 Direct material price variance $48 Favorable ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 23 LO7 Direct Labor Variances • The direct labor efficiency variance is the The difference between actual hours worked and the standard hours allowed, valued at the standard rate of labor. • The direct labor rate variance is the The difference between the actual direct labor cost incurred and the standard cost for the actual hours worked. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 24 LO7 Direct Labor Efficiency Variance Standard hours allowed per unit × Number of units produced = Standard hours of direct labor allowed 0.6 hours × 225 = 135 hours Standard hours of direct labor allowed – Actual hours worked = Efficiency variance in hours 135 hours – 162 hours = 27 hours U ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 25 LO7 Direct Labor Efficiency Variance Efficiency variance in hours 27 hours × Standard rate of direct labor = Direct labor efficiency variance in dollars × $10/hour = $270 U ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 26 LO7 Direct Labor Rate Variance Actual direct labor hours 162 hours Standard cost of actual labor hours worked $1,620 Direct labor × standard = rate Standard cost of actual labor hours worked $10/hour $1,620 × = Actual – direct labor = cost Direct labor rate variance $1,701 $81 U – = ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 27 LO7 Overhead Variances • Variable overhead efficiency variance Variable • Variable overhead spending variance Variable • • Fixed overhead budget variance Fixed Fixed overhead volume variance Fixed ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 28 LO7 Variable Overhead Efficiency Variance Efficiency variance in hours 27 hours × Standard rate of variable OH = Variable OH efficiency variance in dollars × $0.35/hour = $9.45 U ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 29 Variable Overhead Spending Variance LO7 Actual direct labor hours Variable OH × standard = rate Standard cost of variable OH for actual labor hours worked 162 hours × $0.35/hour = $56.70 Standard cost of variable OH for actual labor hours worked – Actual variable OH cost = Variable OH spending variance $56.70 – $140 = $83.30 U ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 30 LO7 Fixed Overhead Budget or Spending Variance Budget fixed OH cost $225 – Actual fixed OH cost = Fixed OH budget variance – $225 = $0 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 31 Fixed Overhead Volume Variance LO7 Plant capacity – Actual units produced = Under or over production in units 300 units – 225 units = 75 units under Under or over × production in units Efficiency standard = Standard hours of under/over = 45 hours 75 units under × 0.6 hours/unit Standard hours of under/over × Standard fixed = overhead rate 45 hours × $1.25/hour Fixed overhead volume variance = ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones $56.25 U 10 ­ 32 Using Standard Cost Variances LO8 Describe the meaning of standard cost variances for direct material, direct labor, variable manufacturing overhead, and fixed manufacturing overhead. • A performance report should be prepared performance on a periodic basis for the managers who are responsible for the standard cost variances. • The management by exception concept The would then be used by the managers to focus their attention on the most significant cost variances. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 33 LO8 Performance Report for Tree Top TREE TOP MAIL BOX COMPANY Performance Report For November 2009 Variance Amount F/U Direct material quantity variance $ 99.75 U Direct material price variance 48.00 F Direct labor efficiency variance 270.00 U Direct labor rate variance 81.00 U Variable overhead efficiency variance 9.45 U Variable overhead spending variance 83.30 U Fixed overhead budget variance 0.00 Fixed overhead volume variance 56.25 U $551.75 U ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 34 Material Variances LO9 Prepare journal entries to record standard costs and variances. (Actual material price – Standard material price) × Actual material quantity (Actual material quantity – Standard material quantity) × Standard material price ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 35 LO9 Material Variances Standard cost of direct material – purchased Actual cost of direct material purchased = Direct material price variance – $477 = $48 Favorable Quantity variance in feet × Standard price of direct material = Quantity variance in dollars 1,140 U × $0.0875 = $99.75 U $525 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 36 LO9 Journal Entries for Materials • Tree Top purchased 6,000 feet of wood for $477.00 Tree Direct Materials Inventory Accounts Payable Material Price Variance 525.00 Work-in-Process Inventory Direct Materials Quantity Variance Raw Materials Inventory 425.25 477.00 48.00 99.75 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 525.00 10 ­ 37 LO9 Labor Variances (Actual labor rate – Standard labor rate) × Actual labor hours (Actual labor hours – Standard labor hours) × Standard labor rate per hour ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 38 LO9 Labor Variances Work-in-process inventory Labor efficiency variance Labor rate variance Wages payable 1,350 270 81 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 1,701 10 ­ 39 LO9 Overhead Variances Variable Overhead Incurred Cash 140.00 140.00 Work-in-Process Inventory Variable Overhead Applied 47.25 Variable Overhead Applied Variable Overhead Efficiency Variance Variable Overhead Spending Variance Variable Overhead Incurred 47.25 47.25 9.45 83.30 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 140.00 10 ­ 40 LO9 Overhead Variances Fixed Overhead Incurred Cash Accumulated Depreciation 225.00 Work-in-Process Inventory Fixed Overhead Applied 168.75 Fixed Overhead Applied Fixed Overhead Budget Variance Fixed Overhead Volume Variance Fixed Overhead Incurred 168.75 200.00 25.00 168.75 0.00 56.25 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 225.00 10 ­ 41 LO9 Variance Accounts Debit Credit $48.00 Direct Material Price Variance Direct Material Quantity Variance $ 99.75 Direct Labor Efficiency Variance 270.00 Direct Labor Rate Variance 81.00 Variable Overhead Efficiency 9.45 Variable Overhead Spending 83.30 Fixed Overhead Budget Variance 0.00 Fixed Overhead Volume Variance 56.25 Total $599.75 $48.00 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 42 LO9 To Close the Variance Accounts • Close standard cost variances Close to Cost of Goods Sold. • Debit Cost of Goods Sold for Debit unfavorable variances, and credit it for favorable variances. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 43 End of Chapter 10 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10 ­ 44 ­ ...
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This note was uploaded on 01/19/2012 for the course ACC 212 taught by Professor Quintanna during the Spring '08 term at University of Miami.

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