Unformatted text preview: Chapter 10 Standard Costing Accounting 212 10 1 Learning Objective 1 Describe standard costing and indicate why standard costing is important.
Accounting 212 10 2 Why is Standard Costing Used?
A standard is a preestablished benchmark for desirable performance. A standard cost system is one in which a company sets cost standards and then uses them to evaluate actual performance. A variance is the difference between actual performance and the standard.
Accounting 212 10 3 Learning Objective 2 Explain the concept of management by exception.
Accounting 212 10 4 Management by Exception
Management by exception is the process where managers focus their attention on those areas where actual performance deviates from standards. Accounting 212 10 5 Quantity and Price Standards Quantity used Price paid Accounting 212 10 6 Learning Objective 3 Contrast ideal and practical standards. Accounting 212 10 7 Ideal versus Practical Standards
A standard that allows for no inefficiencies of any kind is an ideal standard. A standard that allows for the normal inefficiencies of production is called a practical standard. Accounting 212 10 8 The Standard Costing Process
Gather information and set standards. Compare actual performance to standard and prepare performance reports. Determine which variances to investigate.
Accounting 212 Investigate the cause of variances. Determine if corrective action is needed. Take corrective action.
10 9 Learning Objective 4 Identify and discuss the weaknesses of standard costing.
10 10 Accounting 212 Problems With Standard Costing
Employees may try to set low standards to make them easier to achieve. Using historical data to set standards may build in past inefficiencies. Managers might focus on the "numbers" to the exclusion of other important factors.
Accounting 212 10 11 Problems With Standard Costing
Focus on unfavorable variances may result in ignoring the favorable variances. Managers may lose sight of the big picture. Accounting 212 10 12 Learning Objective 5 Compare standard costing, actual costing, and normal costing.
10 13 Accounting 212 Comparison of Cost Systems
Cost classification Direct material Direct labor Manufacturing overhead
Accounting 212 Actual cost system Actual Actual Actual Normal cost system Actual Actual Standard cost system Estimated Estimated Estimated Estimated
10 14 Learning Objective 6 Determine standards for a manufacturing company.
10 15 Accounting 212 Basic Standard Costing for a Manufacturer
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
Accounting 212 10 16 Standard Cost Example
TREE TOP MAIL BOX COMPANY Income Statement For the Month Ended October 31, 2004 Sales (300 mail boxes @ $10 each) Less expenses: Direct material Direct labor (180 hours @ $10/hour) Rent Utilities (all variable) Miscellaneous variable cost Equipment depreciation Net income
Accounting 212 $3,000 $ 600 1,800 200 40 30 25 2,695 $ 305
10 17 Direct Material Standards
The direct materials standards are as follows: 21.6 SQ (standard quantity: board feet per unit) $0.0875 SP (standard price per foot of wood) What is the standard direct material cost per unit? 21.6 SQ $0.0875 SP = $1.89 per unit
Accounting 212 10 18 Direct Labor Standards
The direct labor standards are as follows: 0.6 SH (standard hours allowed per unit) $10.00 SR (standard rate per hour of labor What is the standard direct labor cost per unit? 0.6 SH $10.00 SR = $6.00 per unit
10 19 Accounting 212 Variable Overhead Standards
The standard variable OH rate is: $63 monthly 180 labor hours = $0.35/hour What is the expected variable overhead cost per unit? 0.6 SH $0.35 SR = $0.21 per unit Accounting 212 10 20 Fixed Overhead Standards
The Tree Top Mail Box Company has a budgeted monthly fixed overhead cost of $225. The standard fixed OH rate is: $225 monthly 180 labor hours = $1.25/hr. What is the expected fixed overhead cost per unit? 0.6 SH $1.25 SR = $0.75 per unit
Accounting 212 10 21 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 = .21 Fixed overhead: 0.6 $ 1.25 = .75 Total standard cost per mail box $8.85 Accounting 212 10 22 Learning Objective 7
Calculate standard cost variances for direct material, direct labor, variable manufacturing overhead, and fixed manufacturing overhead.
Accounting 212 10 23 Variance Analysis
TREE TOP MAIL BOX COMPANY Income Statement For the Month Ended November 30, 2004 Sales (225 mail boxes @ $10 each) Less expenses: Direct material (6,000 feet of week) Direct labor (162 hrs. @ $10.50/hr.) Rent Utilities (all variable) Miscellaneous variable cost Equipment depreciation Net income
Accounting 212 $2,250 $ 477 1,701 200 50 90 25 2,543 $ (293)
10 24 Direct Materials Variances
There are two variances calculated for direct materials. The direct materials quantity variance (also called the usage variance) is a measure of the amount of materials used. The direct materials price variance is a measure of the cost to buy the various materials that were purchased.
Accounting 212 10 25 Material Quantity Variance
Standard Number Standard quantity quantity of units = of direct material per unit produced allowed 21.60 feet 225 units = Standard quantity allowed Actual quantity used = 4,860 feet Quantity variance in feet 4,860 feet 6,000 feet = 1,140 unfavorable
Accounting 212 10 26 Material Quantity Variance Quantity Standard Quantity variance price of = variance in feet direct material in dollars 1,140 U $0.0875 = $99.75 U Accounting 212 10 27 Material Price Variance
Actual quantity purchased 6,000 feet Material standard price $0.0875 Standard cost of = direct material purchased = $525 Direct material price variance Standard cost of Actual cost of direct material direct material = purchased purchased $525
Accounting 212 $477 = $48 Favorable
10 28 Direct Labor Variances
The direct labor efficiency variance is 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 difference between the actual direct labor cost incurred and the standard cost for the actual hours worked.
Accounting 212 10 29 Direct Labor Efficiency Variance
Standard Number Standard hours hours allowed of units = of direct labor per unit produced allowed 0.6 hours 225 Actual hours worked = = 135 hours Efficiency variance in hours 27 hours U
10 30 Standard hours of direct labor allowed 135 hours
Accounting 212 162 hours = Direct Labor Efficiency Variance Efficiency variance in hours 27 hours Direct labor Standard efficiency rate of = variance direct labor in dollars $10/hour = $270 U Accounting 212 10 31 Direct Labor Rate Variance
Actual direct labor hours 162 hours Standard cost of actual labor hours worked $1,620
Accounting 212 Direct labor standard = rate Standard cost of actual labor hours worked $1,620 Direct labor rate variance $81 U
10 32 $10/hour =
Actual direct labor = cost $1,701 = Overhead Variances
Variable overhead efficiency variance Variable overhead spending variance Fixed overhead budget variance Fixed overhead volume variance Accounting 212 10 33 Variable Overhead Efficiency Variance Efficiency variance in hours 27 hours Variable OH Standard efficiency rate of = variance variable OH in dollars $0.35/hour = $9.45 U Accounting 212 10 34 Variable Overhead Spending Variance
Actual direct labor hours 162 hours Standard cost of variable OH for actual labor hours worked $56.70
Accounting 212 Variable OH standard = rate Standard cost of variable OH for actual labor hours worked $56.70 Variable OH spending variance $83.30 U
10 35 $0.35/hour = Actual variable OH cost $140 = = Fixed Overhead Budget Variance Actual fixed OH cost $225 Budgeted fixed OH cost $225 = Fixed OH budget variance $0 = Accounting 212 10 36 Fixed Overhead Volume Variance
Plant capacity 300 units Under or over production in units 75 units under Standard hours of under/over 45 hours
Accounting 212 Actual units produced 225 units Efficiency standard 0.6 hours/unit Standard fixed overhead rate $1.25/hour = = = = = = Under or over production in units 75 units under Standard hours of under/over 45 hours Fixed overhead volume variance $56.25 U
10 37 Fixed Overhead Standards
Standard Number Standard hours hours allowed of units = of direct labor per unit produced allowed 0.6 hours 225 = 135 hours The standard fixed OH rate is: $225 monthly 180 labor hours = $1.25/hr. Fixed OH applied is: 135 hours $1.25/hr = $168.75
Accounting 212 10 38 Fixed Overhead Variances
Actual fixed OH cost $225 Budgeted fixed OH cost $225 Applied FO $0 $168.75 $56.25 Accounting 212 10 39 Learning Objective 8
Describe the meaning of standard cost variances for direct material, direct labor, variable manufacturing overhead, and fixed manufacturing overhead.
Accounting 212 10 40 Using Standard Cost Variances
A performance report should be prepared on a periodic basis for the managers who are responsible for the standard cost variances. The management by exception concept would then be used by the managers to focus their attention on the most significant cost variances.
Accounting 212 10 41 Performance Report for Tree Top
TREE TOP MAIL BOX COMPANY Performance Report For November 2004 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
Accounting 212 10 42 Learning Objective 9 Prepare journal entries to record standard costs and variances.
Accounting 212 10 43 Material Variances (Actual material price Standard material price) Actual material quantity (Actual material quantity Standard material quantity) Standard material price
Accounting 212 10 44 Journal Entries for Materials
Tree Top purchased 6,000 feet of wood for $477.00 Direct Materials Inventory Accounts Payable Material Price Variance Work-in-Process Inventory Direct Materials Quantity Variance Raw Materials Inventory
Accounting 212 525 477 48 425.25 99.75 525.00
10 45 Labor Variances (Actual labor rate Standard labor rate) Actual labor hours (Actual labor hours Standard labor hours) Standard labor rate per hour
Accounting 212 10 46 Labor Variances
Work-in-process inventory Labor efficiency variance Labor rate variance Wages payable 1,350 270 81 1,701 Accounting 212 10 47 Overhead Variances
Variable Overhead Incurred Cash 140 140 47.25 Work-in-Process Inventory 47.25 Variable Overhead Applied Variable Overhead Applied 47.25 Variable Overhead Efficiency Variance 9.45 Variable Overhead Spending Variance 83.30 Variable Overhead Incurred 140.00
Accounting 212 10 48 Overhead Variances
Fixed Overhead Incurred 225 Cash Accumulated Depreciation Work-in-Process Inventory 168.75 Fixed Overhead Applied Fixed Overhead Applied 168.75 Fixed Overhead Budget Variance 0.00 Fixed Overhead Volume Variance 56.25 Fixed Overhead Incurred 200 25 168.75 Accounting 212 225.00 10 49 Variance Accounts
Debit Direct Material Price Variance Direct Material Quantity Variance Direct Labor Efficiency Variance Direct Labor Rate Variance Variable Overhead Efficiency Variable Overhead Spending Fixed Overhead Budget Variance Fixed Overhead Volume Variance Total $ 99.75 270.00 81.00 9.45 83.30 0.00 56.25 $599.75 Credit $48.00 $48.00 Accounting 212 10 50 To Close the Variance Accounts
Close standard cost variances to Cost of Goods Sold. Debit Cost of Goods Sold for unfavorable variances, and credit it for favorable variances. Accounting 212 10 51 End of Chapter 10 Accounting 212 10 52 ...
View Full Document