09 Standard Costing; A Managerial Control Tool

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AGUS SISWANDI

01153056

MANAGEMENT ACCOUNTING

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Chapter Nine

Standard Costing: A Managerial Control Tool

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Learning Objectives

Explain how unit standards are set and why standard cost systems are adopted.

Explain the purpose of a standard cost sheet.

Describe the basic concepts underlying variance analysis and explain when variances should be investigated.

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Learning Objectives (continued)

Compute the materials and labor variances and explain how they are used for control.

Compute the variable and fixed overhead variances and explain their meanings.

Prepare journal entries for materials and labor variances and describe the accounting for overhead variances. (Appendix)

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Unit Standard Cost

To determine the unit standard cost for a particular input, two decisions must be made:

1. How much of the input should be used per unit of output (Quantity decision)?

2. How much should be paid for the quantity of the input to be used (Pricing decision)?

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Types of Standards

Ideal Standards demand maximum efficiency and can be achieved only if everything operates perfectly.

Currently attainable standards can be achieved under efficient operating conditions.

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Sources for Quantitative Standards

1. Historical experience

2. Engineering studies

3. Input from operating personnel

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Factors for Price Standards - Materials

1. Market forces

2. Discounts

3. Freight

4. Quality

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Factors for Price Standards - Labor

1. Market forces

2. Trade unions

3. Payroll taxes

4. Qualifications

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Purposes of Standards

To improve planning and control

To facilitate product costing

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Cost Assignment Approaches

Manufacturing Costs

Direct Direct

Materials Labor Overhead

Actual costing system Actual Actual Actual

Normal costing system Actual Actual Budgeted

Standard costing system Standard Standard Standard

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A Standard Cost Sheet

Standard Standard Standard

Description Price Usage Cost/Unit

Direct materials $1.50/lb. 10 lbs. $15.00

Direct labor $6.00/hr. 2 hours 12.00

Variable overhead $10.00/hr. 2 hours 20.00

Fixed Overhead1 $8.00/hr. 2 hours 16.00

$63.00

Other Operating Data for Period:

Units produced 20,000 units

210,000 pounds purchased @ $1.55 per pound; 205,000 lbs. used

Direct labor costs $39,000 hours @ $6.10 per hour

Variable overhead $410,000

1Fixed overhead $300,000; Rate = ($310,000/38,750 hrs)

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Variance Analysis: General Description

Actual Quantity of Input at Actual Price

AQ x AP

Actual Quantity ofInput at Standard Price

AQ x SP

Standard Quantity ofInput at Standard Price

SQ x SP

PriceVariance

AQ x (AP - SP)

UsageVariance

SP x (AQ - SQ)

BudgetVariance

(AQ x AP) - (SQ x SP)

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Variance Investigation

Variances are investigated if two conditions are met:

1. The variance is material

2. The benefits of investigating and taking correctiveaction are greater than its costs

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Control Limits: Standard + Allowable Deviation

Investigating occurs for values outside the allowable range.

Example: Assume the allowable deviation may be the lesser of $8,000 or 10% of the standard. Suppose the standard is $50,000 and the actual deviation from standard is $6,000. Will the variance be investigated.

Answer: Yes. Ten percent of standard is $5,000. Since $6,000 is larger than the allowable deviation, an investigation will take place.

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Material Variances

Formula Approach:

MPV = (AP - SP)AQ MUV = (AQ - SQ)SP

= ($1.55-$1.50)210,000 = (205,000 - 200,000)$1.50

= $10,500 U = $7,500U

Diagram Approach:

AQ x AP AQ x SP AQ x SP SQ x SP

210,000 x $1.55 210,000 x $1.50 205,000 x $1.50 200,000 x $1.50

MPV = $10,500U MUV = $7,500U

Flexible Budget Variance = $18,000U

Responsibility: Responsibility:

Purchasing Manufacturing

SQ = 20,000 units x 10 lbs per unit

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Labor Variances

Formula Approach:

LRV = (AR - SR)AH LEV = (AH - SH)SR

= ($6.10 - $6.00)39,000 = (39,000 - 40,000)$6.00

= $3,900 U = $6,000 F

Diagram Approach:

AH x AR AH x SR SH x SR 39,000 x $6.10 39,000 x $6.00 40,000 x $6.00

LRV = $3,900 U LEV = $6,000 U

Flexible Budget Variance = $2,100 F

Responsibility: Responsibility:

Human Resources Manufacturing

SQ = 20,000 units x 2 hrs. per unit

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Variable Overhead Variances

Formula Approach:

OSV = (AVOR - SVOR)AH OEV = (AH - SH)SVOR

= $410,000 - ($10 X 39,000 hrs) = (39,000 - 40,000)$10.00

= $20,000 U = $10,000 F

Diagram Approach: AH x AVOR AH x SVOR SH x SVOR

$410,000 39,000 x $10.00 40,000 x $10.00

OSV = $20,000 U OEV = $10,000 F

Flexible Budget Variance = $10,000 U

Responsibility: Responsibility:

Manufacturing Manufacturing

SQ = 20,000 units x 2 hrs. per unit

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Fixed Overhead VariancesActual Overhead Budgeted Overhead Applied Overhead

$300,000 $310,000 SOR x SH($8 x40,000)

OSV = $10,000F OVV = 10,000F Responsibility: Responsibility:

Manufacturing Difficult to Assess

Alternative Approach for Computing Overhead Volume Variance

Planned level 38,750 hrs.

Applied level (SOR) 40,000 hrs.

Over 1,250 hrs.

x $8

Overhead Volume Variance $10,000 F

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Accounting for Variances

Journal Entry for Purchase of Direct Materials

Materials (AQ x SP) 315,000

MPV (AP - SP)AQ 10,500

Accounts Payable (AQ x AP) 325,500

Rule: Unfavorable variances are debited and favorable variances

are credited.

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Accounting for Variances (continued)

Recording the Issuance of Materials to Production

Work in Process (SQ x SP) 300,000

MUV [(AQ - SQ)SP] 7,500

Materials (AQ x SP) 307,500

AQ = Actual quantity used in production

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Accounting for Variances (continued)

Recording the Direct Labor Costs

Work in Process (SH x SR) 240,000

LEV [(AH - SH) SR] 3,900

Accrued Payroll (AH x AR) 237,900

LRV [(AR - SR) AH] 6,000

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Accounting for Variances (continued)

Recording Variable Overhead

Work in Process (SQ x SP) 400,000

Manufacturing Applied (SQ x SP) 400,000

Manufacturing Overhead (Actual Cost) 410,000

Various Accounts 410,000

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Accounting for Variances (continued)

Recording Fixed Overhead

Work in Process (SQ x SP) 320,000

Manufacturing Overhead Applied 320,000

Manufacturing Overhead (Actual Cost) 300,000

Various Accounts 300,000

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Accounting for Variances (continued)

Recording Overhead Variances and Closing the Overhead Accounts

Manufacturing Overhead Applied (Variable) 400,000

Manufacturing Overhead Applied (Fixed) 320,000

OSV (Variable) 20,000

Manufacturing Overhead (Variable) 410,000

Manufacturing Overhead (Fixed) 300,000

OEV 10,000

OSV (Fixed) 10,000

PVV 10,000

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Accounting for Variances (continued)

Disposition of Variances

OEV 20,000

OSV (Fixed) 10,000

PVV 10,000

OSV (Fixed) 10,000

Cost of Goods Sold 30,000

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End of Chapter 9