PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIA

Cynthia J. Rooney, Ph.D., CPA

Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 9

Standard Costing and Variances

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Standard Cost Systems

Benchmarks formeasuring performance.

The expected levelof performance.

Based on carefullypredetermined amounts.

Used for planning labor, material,and overhead requirements.Standard

Costs are

In a standard cost system, all manufacturing costsare recorded at standard rather than actual amounts.

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Ideal versus Attainable Standards

I recommend using attainable standards

that can be achieved with

reasonableand efficient effort.

Should we useideal standards that require employees towork at 100 percent

peak efficiency?

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Types of Standards

Definition ExamplesQuantity The amount of input Ounces of aluminum in a can of Coca Cola Standard that should go into a Tons of steel in a Ford F-150 truck

single unit of product Yards of denim in a pair of Levi's 550 jeans Price The price that should Price per ounce of aluminum

Standard be paid for a specific Price per ton of steel quantity of input Price per yard of denim

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Master Budgets Versus Flexible Budgets

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Type of Product Cost

Am

ou

nt

DirectLabor

Standard

This variance is unfavorable because

the actual costexceeds the standard

cost.

DirectMaterial

These variances are favorable because the

actual costis less than the standard

cost.

ManufacturingOverhead

Variance Analysis

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Variance AnalysisCauses of Unfavorable Variances

• Paying a lower price than • Paying a higher price thanexpected for direct materials. expected for direct materials.

• Using less direct materials than • Using more direct materials thanexpected. expected.

• Paying a lower rate than expected • Paying a higher rate thanfor direct labor. expected for direct labor.

• Producing a unit in less time than • Producing a unit in more timeexpected. than expected.

• Paying less than expected for • Paying more than expected formanufacturing overhead costs. manufacturing overhead costs.

• Using less of a variable overhead • Using more of a variableresource than expected. overhead resource than expected.

• Producing more using a fixed • Producing less using a fixedoverhead resource than expected. overhead resource than expected.

Causes of Favorable Variances

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Flexible BudgetStandard Quantity (SQ)

×Standard Price (SP)

Actual CostsActual Quantity (AQ)

× Actual Price (AP)

Spending Variance

PriceVariance

QuantityVariance

Actual Quantity (AQ) ×

Standard Price (SP)

Total Spending Variance

Variable Cost Variances

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Materials Price VarianceMaterials Quantity Variance

The standard price is used to compute the quantity varianceso that the production manager is not held responsible for

the purchasing manager’s performance.

Direct Materials Variances

Production ManagerPurchasing Manager

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Flexible BudgetStandard Hours(SH)

×Standard Rate (SR)

Actual CostsActual Hours (AH)

× Actual Rate (AR)

Spending Variance

RateVariance

EfficiencyVariance

Actual Hours (AH) ×

Standard Rate (SR)

Total Spending Variance

Direct Labor Variances

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Responsibility for Labor Variances

Production managers areusually held accountable

for labor variancesbecause they can

influence the:

Mix of skill levelsassigned to work

tasks. Level of employee

motivation.

Quality of production supervision.

Quality of training provided to employees.

Production Manager

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Flexible BudgetStandard Hours(SH)

×Standard Rate (SR)

Actual CostsActual Hours (AH)

× Actual Rate (AR)

Spending Variance

RateVariance

EfficiencyVariance

Actual Hours (AH) ×

Standard Rate (SR)

Total Spending Variance

Variable Manufacturing Overhead Variances

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Variable Manufacturing Overhead Variances

Rate Variance Efficiency Variance

Results from paying moreor less than expected foroverhead items and from

excessive usage ofoverhead items.

A function of the selected allocation

measure (direct labor hours). It does not

reflect overhead control.

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Summary of Spending Variances• Variances are always calculated by comparing actual results

to budgeted, or standard, results.

• Companies try to hold specific managers responsible for specific variances, while removing the effects of factors that are beyond managers’ control.

• The formulas for variances allow only one factor, such as price, quantity or volume to change, while holding everything else constant at either actual or standard values (depending on the type of variance).

• The driving factor for a variance always appears in parentheses in the formula, as well as in the name of the variance. For example, the formula for the direct materials price variance is AQ X (SP - AP).

• Try not to memorize rules or rely on the formulas to determine whether a variance is favorable or unfavorable; just think about it. For example, paying more for material, or using more materials to produce the same number of units is unfavorable.

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Framework for Fixed Overhead Spending and Volume Variances

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• The initial debit to an inventory account (Raw Materials, Work in Process, or Finished Goods) and the eventual debit to Cost of Goods Sold should be based on the standard cost, not the actual cost.• Cash, payables, or other accounts, such as accumulated depreciation or prepaid assets, should be credited for the actual cost incurred.• The difference between the standard cost (a debit) and the actual cost (a credit) should be recorded as the cost variance.• Unfavorable variances should appear as debit entries; favorable variances should appear as credit entries.• At the end of the accounting period, all the variances should be closed to the Cost of Goods Sold account to adjust the standard cost up or down to the actual cost.

Common Rules

Supplement 9B – Recording Standard Costs and Variances in a Standard Cost System

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End of Chapter 9