module 10 standard costs

8/16/2019 Module 10 Standard Costs

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Using Variances

under StandardCost System

ACG 2071

Module 10

Chapter 22

Fall 2007


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Standards Are performance goals.

Service, merchandising, and manufacturingbusinesses may all use standards to evaluate andcontrol operations.

Manufacturers normally use standard costs foreach of the three manufacturing costs Direct materials

Direct labor

Factory overhead


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Standard Cost Systems Accounting systems that use standards for these

costs are called standard cost systems. Management determines how much a product should

cost – Standard Cost

ow much it does cost – Actual Cost !he causes of any differences – "ariances

#hen actual costs are compared with standard costs,only the e$ceptions or variances are reported for costcontrol. Called %rinciple of &$ceptions.

Standard costs assists management in controlling costsand in motivating employees to focus on costs.


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Types of Standards Theoretical or ideal standards – achieved

only under perfect conditions

Currently attainable or normal standards –

attained with reasonable effort


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Budgetary Performance

Evaluation #hen using standard cost system, directmaterials, direct labor, and factoryoverhead are separated into two

components A price standard

A 'uantity standard


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Example Assume that Halycon Balloons produced and sold 5,000 hot air balloons.

It incurred direct material costs of $40,50, direct labor costs of$!",500, and factory o#erhead costs of $,400. The standard costs forthe company are listed belo%&

ManufacturingCosts

Standard Price StandardQuantity per

unit

StandardCost per

Unit

Direct materials $5.00 per yard 1.5 yards $7.50

Direct labor $9.00 per hour 0.80 hour per unit $7.20

Factory overhead $6.00 0.80 hour per unit $.80

!otal standard cost per unit $19.50


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Budget Performance Report

ManufacturingCosts

Actual Costs StandardCosts at ActualVolume

Cost Variance(Favorable)Unfavorable

Direct materials $40,150 $37,500 $2,650

Direct labor $38,500 $36,000 $2,500

Factoryoverhead

$22,400 $24,000 ($1,600)

!otal standardcost per unit

$101, 050 $97,500 $3,550


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Budget Performance Report Favorable cost variance occurs when the

actual cost is less than the standard cost

(nfavorable variance occurs when the

actual cost is greater than the standardcost


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Variance Analysis !ypes of variances

Direct Materials

Direct )abor

Factory *verhead


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Direct aterials Variance

Price variance (Actual price – Standard Price) X Actual uantit!

Quantity variance (Actual uantit! – Standard uantit!) X Actual Price

!otal "irect Materials Variance

uantit! "ariance # Price "ariance


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Example Material used in the production of +

Cleaner has a standard cost of - per lb.and standard use of /,/// lbs. Actual

records show 0,/// lbs were used withan actual cost of 1.0/ per lb. Computethe direct material variances.


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ExamplePrice Variance

= (Actual Price – Standard Price) X Actual Quantity

2 31.0/ – -4 5 0,/// lbs 2 6/.0/ 5 0,/// lbs

!"7#$00 %a&ora'le

Quantity Variance =(Actual Quantity – Standard Quantity) X Standard Price

2 30,/// lbs – /,/// lbs4 5 -.//

2 0,/// lbs $ -.// "1$#000 n%a&ora'leTotal direct materials variance =

Quantity variance + Price variance ' $5, 000 ( )*$+,500 = $7,500 Unfavorable


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Direct !a"or Variance

#ate variance (Actual ate – Standard ate) X Actual %&ur'

!ime variance (

Actual %&ur' – Standard %&ur') X Actual ate

!otal "irect $abor Variance ie "ariance # ate "ariance


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Example *a+ple ,- Factory records show that

each product produced re'uires - directlabor hours. %roduction during the period

consisted of /,/// units with 17,0//hours of labor used. )abor has a standardcost of / per hour and actual cost was per hour. Compute the direct labor

variances.


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Example

Rate Variance = 3Actual 8ate – Standard 8ate4 5 Actual hours

2 3 6 /4 5 17,0// hours

2 17,0// (nfavorable


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Example

Time Variance '3Actual hrs – Standard hrs4 5 Standard rate

2 917,0// hrs – 3 - $ /,///4: $ /

2 60// hours $ /

!"$#000 Fa&ora'le


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Example

Total irect labor variance '-ate #ariance ( Time #ariance

' $,500 ( )*$5,000

' $4,500 /nfa#orable


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#actory $ver%ead Variance Determine the impact of changing production on

fi$ed and variable factory overhead cost.

"ariances from standard for factory overhead costresult from; Actual variable factory overhead cost greater or less

than budgeted variable factory overhead for actualproduction Controllable variance for variable factory overhead

Actual production at a level above or below //< ofnormal capacity. "olume variance for fi$ed factory overhead


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Example Percent of normal capacity 80% 90% 100% 110%

Units produced 5,000 5,625 6,250 6,875

Direct labor hours ( .8 per unit !,000 !,500 5,000 5,500

"ud#eted factory o$erhead

%ariable costs& 'ndirect factory a#es )8,000 )*,000 )+0,000 )++,000

Poer and li#ht !,000 !,500 5,000 5,500

'ndirect materials 2,!00 2,700 ,000 ,00

-otal $ariable cost )+!,!00 )+6,200 )+8,000 )+*,800

i/ed costs&

uper$isory salaries )5,500 )5,500 )5,500 )5,500

Depreciation !,500 !,500 !,500 !,500

'nsurance 2,000 2,000 2,000 2,000

-otal fi/ed cost )+2,000 )+2,000 )+2,000 )+2,000


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Controlla"le Variance

Controlla'le .ariance

eals %ith #ariable cost

Actual variable factory overhead

6=udgeted variable factory overhead>Controllable "ariance

>at actual production level


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Example alycon produced 0,/// balloons and each

unit re'uired /.?/ standard labor hour forproduction. Actual variable factory

overhead was /,@// and fi$ed factoryoverhead was 1,/// (sing theinformation on alycon =alloons, computethe controllable variance.


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Standard direct la"or %ours

0,/// units produced $ /.?/ per hour

2 @,/// direct labor

=ased on units produced


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Variable costs per unit

.aria'le co/t/ per unit

!otal variable factory overhead

!otal hours

2 ?,/// 2 -./ per hour

0,///


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Budgeted Varia"le #actory$ver%ead Standard direct labor hours for units produced

$ Standard variable factory overhead per D)

=udgeted variable factory overhead

2 @,/// hours $ -./ 2 @,@//


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Controlla"le Variance

Actual variable factory overhead ,///

=udgeted variable factory overhead @,@//

Controllable variance ,//

(BFA"*8A=)&


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Volume Variance & #ixed

costs

//< capacity direct labor hours6Standard direct labor hours at actualCapacity not used5 standard fi$ed overhead rate

"olume variance


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Example - (sing the information on alycon =alloons,

assume actual production at ?/< capacity.Compute the volume variance.

From the factory overhead cost budget, wecompute;

Fi*ed co/t/ per unit 2 !otal fi$ed factory overhead !otal hours

2 1,/// 2 1.@/ per hour 0,/// based on 001 capacity


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Volume Variance

//< capacity direct labor hours 0,/// hours6Standard direct labor hours at actual @,/// hours

Capacity not used ,/// hours5 standard fi$ed overhead rate $ 1.@/"olume "ariance 1,@// unfavorable

module 10 standard costs

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