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© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Standard Cost SystemsChapter
23
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Benchmarks formeasuring performance.
The expected levelof performance.
Based on carefullypredetermined amounts.
Used for planning labor, materialand overhead requirements.Standard
Costs are
Standard Cost SystemsStandard Cost Systems
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
DirectMaterial
Type of Product Cost
Am
ou
nt
DirectLabor
ManufacturingOverhead
Standard cost
A standard cost varianceis the amount by which
an actual cost differs fromthe standard cost.
Standard Cost SystemsStandard Cost Systems
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Type of Product Cost
Am
ou
nt
This variance is unfavorable because the actual cost
exceeds the standard cost.
This variance isfavorable because
the actual costis less than thestandard cost.
Standard cost
Standard Cost SystemsStandard Cost Systems
DirectLabor
ManufacturingOverhead
DirectMaterial
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Prepare standard cost performance
report
Conduct next period’s
operations
Analyze variances
Identifyquestions
Receive explanations
Takecorrective
actions
Begin
Variance AnalysisVariance Analysis
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Should we usenormal standards
or ideal standards?
EngineerManagerialAccountant
Establishing and RevisingStandard Costs
Establishing and RevisingStandard Costs
Normal standards should beset at levels that are currentlyattainable with reasonable and
efficient effort.
Productionmanager
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
I agree. Ideal standards, that are based on perfection, are
unattainable and therefore discouraging to most employees.
HumanResourcesManager
Establishing and RevisingStandard Costs
Establishing and RevisingStandard Costs
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Are standards the same as budgets?
A standard is the expected cost for one
unit.
A budget is the expected cost for all
units.
Use of Standard Costs in Developing Budgets
Use of Standard Costs in Developing Budgets
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Use product design specifications.
Use competitivebids for the quality
and quantity desired.
QuantityStandards
Direct Material Standards Direct Material Standards
PriceStandards
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The standard material cost for one unit of product is:
standard quantity standard price for of material one unit of material required for one
unit of product
×
Direct Material Standards Direct Material Standards
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
TimeStandards
RateStandards
Direct Labor Standards Direct Labor Standards
Use time and motion studies for
each labor operation.
Use wage surveys and
labor contracts.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The standard labor cost for one unit of product is:
standard number standard wage rate of labor hours for one hour for one unit of product
×
Setting Direct Labor StandardsSetting Direct Labor Standards
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ActivityStandards
RateStandards
Manufacturing Overhead Standards Manufacturing Overhead Standards
The activity is the cost driver used to
calculate the overhead rate.
The rate is basedon an estimate of totaloverhead at the normal
level of activity.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
×
The standard overhead cost for one unit of product is:
standard variable standard number overhead rate for of activity units one unit of for one unit of activity product
×
Manufacturing Overhead Standards Manufacturing Overhead Standards
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Standard Cost Variances
Quantity VariancePrice Variance
A General Model forVariance Analysis
A General Model forVariance Analysis
The difference betweenthe actual price and the
standard price
The difference betweenthe actual quantity andthe standard quantity
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Standard price is the amount that should have been paid for the resources acquired.
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance Quantity Variance
A General Model forVariance Analysis
A General Model forVariance Analysis
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance Quantity Variance
A General Model forVariance Analysis
A General Model forVariance Analysis
Standard quantity is the quantity that should have been used for the actual good output.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Let’s use the concepts of the
general model to calculate standard
cost variances, starting with
direct material.
Standard Costs and Variance Analysis: An Illustration
Standard Costs and Variance Analysis: An Illustration
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Hanson Inc. has the following material standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Records last week show 1,700 pounds of material were purchased on May 10 at a
total cost of $6,630. The material was used to make 1,000 Zippies that were completed
on May 15.
Standard Costs and Variance Analysis: An Illustration
Standard Costs and Variance Analysis: An Illustration
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance Quantity Variance
Materials price variance Materials quantity variance Labor rate variance Labor efficiency variance Variable overhead Variable overhead spending variance efficiency variance
AQ(AP - SP) SP(AQ - SQ)
AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity
Material Price and Quantity Variances
Material Price and Quantity Variances
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The actual price per pound paid forthe material was
a. $4.00 per pound.
b. $4.10 per pound.
c. $3.90 per pound.
d. $6.63 per pound.
The actual price per pound paid forthe material was
a. $4.00 per pound.
b. $4.10 per pound.
c. $3.90 per pound.
d. $6.63 per pound.
Material VariancesQuestion 1
Material VariancesQuestion 1
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The actual price per pound paid forthe material was
a. $4.00 per pound.
b. $4.10 per pound.
c. $3.90 per pound.
d. $6.63 per pound.
The actual price per pound paid forthe material was
a. $4.00 per pound.
b. $4.10 per pound.
c. $3.90 per pound.
d. $6.63 per pound.
AP = $6,630 ÷ 1,700 lbs.AP = $3.90 per lb.
Material VariancesQuestion 1
Material VariancesQuestion 1
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Material VariancesQuestion 2
Material VariancesQuestion 2
Hanson’s material price variance (MPV)for the week was
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Hanson’s material price variance (MPV)for the week was
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Hanson’s material price variance (MPV)for the week was
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Hanson’s material price variance (MPV)for the week was
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
MPV = AQ(AP - SP) MPV = 1,700 lbs. × ($3.90 - 4.00) MPV = $170 favorable
Material VariancesQuestion 2
Material VariancesQuestion 2
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The standard quantity of material thatshould have been used to produce
1,000 Zippies is
a. 1,700 pounds.
b. 1,500 pounds.
c. 2,550 pounds.
d. 2,000 pounds.
The standard quantity of material thatshould have been used to produce
1,000 Zippies is
a. 1,700 pounds.
b. 1,500 pounds.
c. 2,550 pounds.
d. 2,000 pounds.
Material VariancesQuestion 3
Material VariancesQuestion 3
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The standard quantity of material thatshould have been used to produce
1,000 Zippies is
a. 1,700 pounds.
b. 1,500 pounds.
c. 2,550 pounds.
d. 2,000 pounds.
The standard quantity of material thatshould have been used to produce
1,000 Zippies is
a. 1,700 pounds.
b. 1,500 pounds.
c. 2,550 pounds.
d. 2,000 pounds.
SQ = 1,000 units × 1.5 lbs per unit SQ = 1,500 lbs
Material VariancesQuestion 3
Material VariancesQuestion 3
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Hanson’s material quantity variance (MQV) for the week was
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Hanson’s material quantity variance (MQV) for the week was
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Material VariancesQuestion 4
Material VariancesQuestion 4
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Hanson’s material quantity variance (MQV) for the week was
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Hanson’s material quantity variance (MQV) for the week was
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable
Material VariancesQuestion 4
Material VariancesQuestion 4
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
1,700 lbs. 1,700 lbs. 1,500 lbs. × × × $3.90 per lb. $4.00 per lb. $4.00 per lb.
$6,630 $ 6,800 $6,000
Price variance$170 favorable
Quantity variance$800 unfavorable
Material VariancesSummary
Material VariancesSummary
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
I am not responsible for this unfavorable material
quantity variance.
You purchased cheapmaterial, so my peoplehad to use more of it.
Responsibility forMaterial VariancesResponsibility forMaterial Variances
You used too much material because of poorly trained
workers and poorly maintained equipment.
Also, your poor scheduling sometimes requires me to
rush order material at a higher price, causing
unfavorable price variances.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Let’s turn our
attention to labor
variances.
Labor Rate and Efficiency Variances
Labor Rate and Efficiency Variances
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Hanson Inc. has the following labor standard to manufacture one Zippy:
1.5 standard hours per Zippy at $8.00 per hour
Payroll records last week show 1,450 hours were worked at a total labor cost of $11,890 to make 1,000 Zippies that
were completed on May 15.
Standard Costs and Variance Analysis: An Illustration
Standard Costs and Variance Analysis: An Illustration
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
Rate Variance Efficiency Variance
Materials price variance Materials quantity variance Labor rate variance Labor efficiency variance Variable overhead Variable overhead spending variance efficiency variance
AH(AR - SR) SR(AH - SH)
AH = Actual Hours SR = Standard Rate AR = Actual Rate SH = Standard Hours
Labor Rate and Efficiency Variances
Labor Rate and Efficiency Variances
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Hanson’s actual rate (AR) for laborfor the week was
a. $8.20 per hour.
b. $8.00 per hour.
c. $7.80 per hour.
d. $7.60 per hour.
Hanson’s actual rate (AR) for laborfor the week was
a. $8.20 per hour.
b. $8.00 per hour.
c. $7.80 per hour.
d. $7.60 per hour.
Labor VariancesQuestion 1
Labor VariancesQuestion 1
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Hanson’s actual rate (AR) for laborfor the week was
a. $8.20 per hour.
b. $8.00 per hour.
c. $7.80 per hour.
d. $7.60 per hour.
Hanson’s actual rate (AR) for laborfor the week was
a. $8.20 per hour.
b. $8.00 per hour.
c. $7.80 per hour.
d. $7.60 per hour.
AR = $11,890 ÷ 1,450 hours AR = $8.20 per hour
Labor VariancesQuestion 1
Labor VariancesQuestion 1
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Hanson’s labor rate variance (LRV) forthe week was
a. $290 unfavorable.
b. $290 favorable.
c. $400 unfavorable.
d. $400 favorable.
Hanson’s labor rate variance (LRV) forthe week was
a. $290 unfavorable.
b. $290 favorable.
c. $400 unfavorable.
d. $400 favorable.
Labor VariancesQuestion 2
Labor VariancesQuestion 2
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Hanson’s labor rate variance (LRV) forthe week was
a. $290 unfavorable.
b. $290 favorable.
c. $400 unfavorable.
d. $400 favorable.
Hanson’s labor rate variance (LRV) forthe week was
a. $290 unfavorable.
b. $290 favorable.
c. $400 unfavorable.
d. $400 favorable.
LRV = AH(AR - SR) LRV = 1,450 hrs($8.20 - $8.00) LRV = $290 unfavorable
Labor VariancesQuestion 2
Labor VariancesQuestion 2
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The standard hours (SH) of labor thatshould have been worked to produce
1,000 Zippies is
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.
The standard hours (SH) of labor thatshould have been worked to produce
1,000 Zippies is
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.
Labor VariancesQuestion 3
Labor VariancesQuestion 3
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The standard hours (SH) of labor thatshould have been worked to produce
1,000 Zippies is
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.
The standard hours (SH) of labor thatshould have been worked to produce
1,000 Zippies is
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.
SH = 1,000 units × 1.5 hours per unit SH = 1,500 hours
Labor VariancesQuestion 3
Labor VariancesQuestion 3
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Hanson’s labor efficiency variance (LEV) for the week was
a. $290 unfavorable.
b. $290 favorable.
c. $400 unfavorable.
d. $400 favorable.
Hanson’s labor efficiency variance (LEV) for the week was
a. $290 unfavorable.
b. $290 favorable.
c. $400 unfavorable.
d. $400 favorable.
Labor VariancesQuestion 4
Labor VariancesQuestion 4
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Hanson’s labor efficiency variance (LEV) for the week was
a. $290 unfavorable.
b. $290 favorable.
c. $400 unfavorable.
d. $400 favorable.
Hanson’s labor efficiency variance (LEV) for the week was
a. $290 unfavorable.
b. $290 favorable.
c. $400 unfavorable.
d. $400 favorable.
LEV = SR(AH - SH) LEV = $8.00(1,450 hrs - 1,500 hrs) LEV = $400 favorable
Labor VariancesQuestion 4
Labor VariancesQuestion 4
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Rate variance$290 unfavorable
Efficiency variance$400 favorable
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
1,450 hours 1,450 hours 1,500 hours × × × $8.20 per hour $8.00 per hour $8.00 per hour
$11,890 $11,600 $12,000
Labor VariancesSummary
Labor VariancesSummary
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
High skill,high rate
Low skill,low rate
Using highly paid skilled workers toperform unskilled tasks results in an
unfavorable rate variance.
Production managers who make work assignmentsare generally responsible for rate variances.
Production managers who make work assignmentsare generally responsible for rate variances.
Labor Rate VarianceLabor Rate Variance
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
UnfavorableEfficiencyVariance
Poorlytrainedworkers
Poorsupervisionof workers
Poorquality
materials
Poorlymaintainedequipment
Labor Efficiency VarianceLabor Efficiency Variance
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
I am not responsible for the unfavorable labor
efficiency variance!
You purchased cheapmaterial, so it took more
time to process it.
You used too much time because of poorly
trained workers and poor supervision.
Responsibility for Labor VariancesResponsibility for Labor Variances
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Maybe I can attribute the laborand material variances to personnel
for hiring the wrong peopleand training them poorly.
Responsibility for Labor VariancesResponsibility for Labor Variances
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Let’s turn our attention to
manufacturing overhead
Manufacturing Overhead VariancesManufacturing Overhead Variances
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Recall that overhead costs are applied to products and services using a
predetermined overhead rate (POHR):
POHR =
Applied Overhead = POHR × Standard Activity
Estimated total overhead costs
Estimated activity
Manufacturing Overhead VariancesManufacturing Overhead Variances
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Overhead Rate
Contains variableoverhead thatincreases as
activity increases.
Contains fixedoverhead that
remains constant asactivity changes.
Function of activity levelchosen to determine rate.
Manufacturing Overhead VariancesManufacturing Overhead Variances
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Hanson, Inc. has the following manufacturing overhead at three different levels of activity:
Hanson applies overhead based on machine hour activity.
Machine Hours 2,000 3,000 4,000 Zippies 1,000 1,500 2,000
Variable Overhead 4,000$ 6,000$ 8,000$ Fixed Overhead 9,000 9,000 9,000 Total Overhead 13,000$ 15,000$ 17,000$
Manufacturing OverheadVariances Example
Manufacturing OverheadVariances Example
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Overhead Variances Question 1
Overhead Variances Question 1
Zippy
The total overhead rate for an estimated activity of 3,000 machine hours (MH) is:
a. $5.00 per machine hour.
b. $4.00 per machine hour.
c. $3.00 per machine hour.
d. $2.00 per machine hour.
The total overhead rate for an estimated activity of 3,000 machine hours (MH) is:
a. $5.00 per machine hour.
b. $4.00 per machine hour.
c. $3.00 per machine hour.
d. $2.00 per machine hour.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The total overhead rate for an estimated activity of 3,000 machine hours (MH) is:
a. $5.00 per machine hour.
b. $4.00 per machine hour.
c. $3.00 per machine hour.
d. $2.00 per machine hour.
The total overhead rate for an estimated activity of 3,000 machine hours (MH) is:
a. $5.00 per machine hour.
b. $4.00 per machine hour.
c. $3.00 per machine hour.
d. $2.00 per machine hour.
$15,000 ÷ 3,000 machine hours
Overhead Variances Question 1
Overhead Variances Question 1
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The total overhead rate for an estimated activity of 3,000 machine hours (MH) is:
a. $5.00 per machine hour.
b. $4.00 per machine hour.
c. $3.00 per machine hour.
d. $2.00 per machine hour.
The total overhead rate for an estimated activity of 3,000 machine hours (MH) is:
a. $5.00 per machine hour.
b. $4.00 per machine hour.
c. $3.00 per machine hour.
d. $2.00 per machine hour.
$15,000 ÷ 3,000 machine hours
The $5.00 overhead rate containsa variable portion:
$6,000 ÷ 3,000 MH = $2.00 per MHand a fixed portion:
$9,000 ÷ 3,000 MH = $3.00 per MH
Overhead Variances Question 1
Overhead Variances Question 1
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Budgeted Applied Actual Overhead at Overhead at Overhead Actual Activity Standard Hours
Spending Variance
VolumeVariance
Manufacturing Overhead VariancesManufacturing Overhead Variances
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Budgeted Applied Actual Overhead at Overhead at Overhead Actual Activity Standard Hours
Spending Variance
VolumeVariance
Manufacturing Overhead VariancesManufacturing Overhead Variances
Shows how economicallyoverhead services were
purchased and howefficiently overheadservices were used.
Contains both fixedand variable costs.
A controllable variance.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Budgeted Applied Actual Overhead at Overhead at Overhead Actual Activity Standard Hours
Spending Variance
VolumeVariance
Manufacturing Overhead VariancesManufacturing Overhead Variances
Caused by producing ata level other than that
used for computing thestandard overhead rate.
Contains only fixed costs.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Hanson’s actual production for theperiod was 1,600 Zippies resulting in
3,200 standard machine hours. Actual total overhead cost for the period was
$15,450.
Compute the overhead spending and volume variances.
Manufacturing OverheadVariances Example
Manufacturing OverheadVariances Example
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Budgeted Applied Actual Overhead at Overhead at Overhead Standard Hours Standard Hours $15,450 $9,000 fixed 3,200 hrs. + × $6,400 variable $5.00 per hr.
$2.00 per hr. × 3,200 hrs.
Manufacturing OverheadVariances Example
Manufacturing OverheadVariances Example
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Budgeted Applied Actual Overhead at Overhead at Overhead Standard Hours Standard Hours
Spending variance$50 unfavorable
Volume variance$600 favorable
$15,450 $9,000 fixed 3,200 hrs. + × $6,400 variable $5.00 per hr.
$15,450 $15,400 $16,000
Manufacturing OverheadVariances Example
Manufacturing OverheadVariances Example
Zippy
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Standard Cost Variances
Immaterial Amounts
Close toCost of Goods Sold
Work in ProcessFinished GoodsCost of Goods Sold.
Material Amounts
Close byapportioning to:
Disposing of VariancesDisposing of Variances
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Advantages
Improved cost control and performance
evaluation.
Better informationfor planning anddecision making.
Possible reductionsin production costs.
Advantages of Standard CostsAdvantages of Standard Costs
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
DisadvantagesEmphasis onnegative
exceptions mayimpact morale.
Emphasis on negativeexceptions may
lead to under-reporting.
It may be difficultto determine
which variancesare significant.
Disadvantages of Standard CostsDisadvantages of Standard Costs
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
JIT systems may reduce unfavorable variances.
Long-term agreementswith suppliers eliminate
price variances.
Emphasis on qualityreduces material
quantity variances.
Well-trained flexiblework force reduces labor
efficiency variance.
JIT Systems and Variance AnalysisJIT Systems and Variance Analysis
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
End of Chapter 23End of Chapter 23