tut 6 slides managerial acc

8/13/2019 Tut 6 Slides Managerial ACC

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Standard Costing

Tutorial 6 summary


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Standard CostsStandards are benchmarks or norms for

measuring performance. In managerial accounting,two types of standards are commonly used.

Quantity standards

specify how much of aninput should be used to

make a product orprovide a service.

Price standards

specify how muchshould be paid for

each unit of theinput.

Examples: Retail, consumer, hospitality, hospitals,construction and manufacturing companies.


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Why a Standard Costing system canstrengthen cost management

Standard costing allows for management by exception.

Timely reporting of variances allows managementto take corrective action before costs get out of hand.

The breakdown of variances into various componentshelps management trace the source of potential costproblems.

Standard costing may also motivate employees tooperate more efficiently if they are allowed to participatein setting the standards.


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Material and Labour Standards

Labour Standards: Rate standards Time standards

Often Actual costs differ from Standards and thisdeviation is called VARIANCE.

Deviations deemed significant are brought tomanagements attention, a practice known asmanagement by exception.

Material Standards: Price standards Qty standards


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Variance Analysis

Materials Price VarianceLabor Rate Variance

VOH Rate/Spending Variance

Materials Quantity VarianceLabor Efficiency VarianceVOH Efficiency Variance

Types of Variances

Types of Price Variance Types of Quantity Variance


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Price Variance Quantity Variance

Actual Quantity Actual Quantity Standard Quantity Actual Price Standard Price Standard Price

A Columnar Model for Variance Analysis

Actual quantityis the amount of direct

materials, direct labor, and Variablemanufacturing overhead actually used.


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Standard quantityis the standard quantityallowed for the actual output of the period.


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Actual priceis the amount actuallypaid for the purchased input.


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Standard priceis the amount that shouldhave been paid for the input used.




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Direct Material Variance Analysis


Actual Quantity Actual Qty Standard Quantity Purchased/ Used

X X X

Actual Price Standard Price Standard Price

MPVis based on QtyPurchased (not used)because it relates topurchasing function.

MQVis based on amount ofmaterial used (not purchased)in production because it relatesto production function.


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Direct Material Variances - formulae


= (AQP AP) (AQP SP) = (AQU SP) (SQ SP)

or AQP(AP - SP) or SP(AQU SQ)

AQU= Actual Quantity Used; SP= Standard Price

AQP= Actual Quantity Purchased;AP = Actual Price; SQ= Standard Quantity


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Note: Material Variances

The pricevariance is computed on theentire quantitypurchased. (MPV)

The quantityvariance is computed onlyon the quantityused. (MQV)

Total Material variance = MPV +MQV


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Direct Labour Variance Analysis

(AH

AR) (AH

SR) (AH

SR) (SH

SR)or AH(AR - SR) or SR(AH SH)

AH =Actual Hours SR =Standard Rate

AR =Actual Rate SH =Standard Hours

Rate Variance EfficiencyVariance

Actual Hours Actual Hours

Standard Hours Actual Rate Standard Rate Standard Rate


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Direct Labour Variances

Total Direct Labour Variance = LRV + LEV

DL Rate variance (LRV) changes in labour rate.

DL Efficiency variance (LEV) actual labour hours isless than budget based on the actual production

output. So, the workers are deemed more/less efficient


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Investigating the Cost Variances

Size of variance as in $ amount or % of total cost

Recurring variances

Trends what are the patterns?

Controllability investigate costs which are controllable

Favorable variances to find out if need to adjust the standards orapply in other units, are the standards set realistic?

Costs and benefits considerations


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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 managers performance.

Responsibility for Material Variances,

who should it be?

Usually Production

Manager

Generally the

PurchasingManager


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I am not responsible forthis unfavorable material

quantity variance. Youpurchased sub-quality cheapmaterial, so people had to usemore of it. Maintenance dept.

also did not service themachines and caused various

breakdowns resulting inmaterial spoilage.

Your poor scheduling sometimesrequires me to rush order material at

a higher price, causing unfavorableprice variances.

Cross-Responsibility for Material Variances

ProductionManager

Purchasing

Manager

We regularly serviced the machines,but these equipment are very old so

they breakdown often. We alreadysuggested to management toreplace them with new equipment.

Maintenance

Manager


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Responsibility for Labour Variances

Production managers are

usually held accountablefor labour variancesbecause they can

influence the:

Mix of skill levels

assigned to work tasks.

Level of employeemotivation.

Quality of productionsupervision.

Quality of trainingprovided to employees.

Production

Managers


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I am not responsible forthe unfavorable labor

efficiency variance!You purchased cheap

material, so it took moretime to process it.

HR recruited

the wrong skill sets.

I think it took more time toprocess the materials

because the Maintenance

Department has poorlymaintained your equipment.

Responsibility for Labour Variances

Production

Manager

Purchasing

Manager

Its a tight labour marketand it is difficult to recruit

desired workers, so Iexpected you to conducton the job training

HR Manager


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Important point to note in Standard

costing for product costing vs traditionalcosting:

WIP - use only std material cost and std

labour cost instead of actual costs. i.e. stdqty at std price or std rate at std hrs

All variances are closed off to the COGS(Pls refer journal entries in lecture notes & textbk.)


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Other points(refer Lecture notes)

Advantages and potential problems with

standard costs

Disposal of Variances to the COGS

account. This is often reflected in theIncome Statement as Adjusted COGS

Journal entries to record the variances


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Tut 7 - Flexible Budgets, Managing MOH costs

Group K15, & K17

Team 1 = Qn 1 & Qn 2, Prob.12-12 & 12-14 Team 2 = Qn 3, Problem 12- 20

Team 3 = Qn 4, Problem 12A-10,

Team 4 = Qn 5 & Qn 6, Prob. 11 25 & 11-26

Group K 16

Teams 1 = Qn 1 & 2 Teams 2 to 5 = Question 3 to 6 respectively

tut 6 slides managerial acc

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