Standard Costing and Variance Analysis UAA ACCT 202

Standard Costing and Variance Analysis UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee

The Work of Management Planning Evaluating Decision Making Controlling Organizing & Directing

The Control Process Establish Standards Measure Actual Revise? Take Action Compare Actual/Std.

Standard Costs Predetermined Used for planning labor, material, and overhead requirements Benchmarks for measuring performance. Standard Costs are Used to simplify the accounting system.

Standard Costs Amount Managers focus on quantities and costs that exceed standards, a practice known as management by exception. Standard Direct Labor Direct Material Manufacturing Overhead Type of Product Cost

Setting Standard Costs Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations.

Setting Standard Costs Should we use practical standards or ideal standards? Engineer Managerial Accountant

Setting Standard Costs Practical standards should be set at levels that are currently attainable with reasonable and efficient effort. Production manager

Setting Standard Costs I agree. Ideal standards, based on perfection, are unattainable and discourage most employees. Human Resources Manager

A Standard is. . . l. A benchmark or “norm” for measuring performance. l They are “expected” levels of performance. l They are monetary measures to which actual costs are compared.

Standard Costs. . . l Are realistically predetermined costs for l Direct materials l Direct labor l Factory overhead l They are typically expressed as cost per unit of finished product.

Why Standard Costs? l They are useful in preparing operating budgets. l They make it easier to pinpoint production costs that must be controlled. l They are useful in evaluating performance of managers and workers.

Why Standard Costs? l They help in setting realistic prices. simplify accounting procedures for inventories and product costing.

Cost Assignment Approaches Manufacturing Costs Cost System DM DL MOH Actual Normal Actual Budgeted Standard

Setting DM Standards Price Standards Final, delivered cost of materials, net of discounts. Quantity Standards Use product design specifications.

Setting DL Standards Rate Standards Time Standards Use wage surveys and labor contracts. Use time and motion studies for each labor operation.

Setting VOH Standards Rate Standards Activity Standards The rate is the variable portion of the predetermined overhead rate. The activity is the base used to calculate the predetermined overhead.

Standards vs. Budgets Are standards the same as budgets? A budget is set for total costs. A standard is a per unit cost. Standards are often used when preparing budgets.

Standard Cost Variances A standard cost variance is the amount by which an actual cost differs from the standard cost. Cost Standard This variance is unfavorable because the actual cost exceeds the standard cost.

HOTS, Inc. l To illustrate the use of standard costs, consider Herman O Thompson Sports, Inc. (HOTS, Inc. ), a manufacturer of a popular jogging suit. The company wishes to have standard costs developed for the suit in terms of Direct Material, Direct Labor and Manufacturing Overhead.

Determining Standard Cost l The Quantity Decision – the amount of input to be used for a standard unit of output. l The Pricing Decision – the amount that should be paid for the quantity of the input to be used.

Standard DM Price/Unit l The standard price per unit for DM should be the final, delivered cost of materials. l Specified quantity of materials, l Quantity discounts, l Transportation (freight) costs, l Receiving and handling costs, l Seasonal availability (if any).

Standard DM Price/Unit l. A material known as crylon is used in the jogging suits. The standard price for a yard of crylon is determined as follows: Purchase Price, Grade A Crylon Freight, by Truck Receiving & Handling Less Discount (20, 000 yard lots) Standard Price Per Yard $5. 70. 40. 10 (. 20) $6. 00

Standard DM Quantity/Unit l The amount of materials that should go into each finished unit of product l Engineered (bill of materials) requirements, l Expected spoilage of RM, l Unavoidable waste, l DM in scrapped WIP (Rejects).

Standard DM Quantity/Unit l The standard quantity of crylon that goes into one jogging suit is computed as follows: Bill of Materials Requirement Allowance for Waste Allowance for Rejects Standard Quantity/Jogging Suit 2. 8 Yds 0. 6 Yds 0. 1 Yds 3. 5 Yds

Standard DM Quantity/Unit l Once the price and standard quantities have been set, the standard cost of materials (crylon) for one unit of finished product can be computed. 3. 5 Yards per jogging suit x $6. 00 per yard = $21. 00

Standard Rate For DL Hour l The standard rate per hour for DL should include all costs associated with DL workers: l Hourly wage rates l Expected labor mix l Fringe benefits l Employment taxes

Standard DL Rate Per Hour l The standard rate per hour for the expected mix is determined by using average wage rates, fringe benefits, and employment taxes for the labor mix. Average wage rate per hour Average fringe benefits Average employment taxes Standard rate per DL hour $13 4 1 $18.

Standard Hours Per Unit l Engineered labor time per unit. l Allowance for breaks, personal needs, and cleanup. l Allowance for setup and other machine downtime. l Allowance for rejects.

Standard DL Hours Per Unit l The standard hours determined to produce a jogging suit is determined as follows: Basic labor time per unit Allowance for breaks & cleanup Allowance for setup and downtime Allowance for rejects Standard Hours Per Jogging Suit 1. 4 Hrs 0. 1 Hrs 0. 3 Hrs 0. 2 Hrs 2. 0 Hrs

Standard DL Costs l Once the time and rate standards have been set, the standard cost of labor for one unit of product can be computed. 2. 0 Hrs per Jogging Suit x $18 per Hour = $36 per Suit

Variable OH Standards l Standards exist for VOH and are typically expressed in terms of “rate” and “hours. ” l The rate is the variable portion of the POR l The hours represent the base used to apply overhead to products.

Variable OH Standards l HOTS, Inc. applies MOH costs to products on the basis of DL hours. l The variable portion of the POR is $4 per DL hour. l Using this rate, the standard cost of variable overhead for one unit of product is (2 DL Hours x $4 per Hour = $8 per suit).

Standard Cost Card l After standards have been set for DM, DL and MOH, a standard cost card can be prepared. l The cost card indicates what the final, manufactured cost should be for a unit of product.

HOTS, Inc. Standard Cost Card For Jogging Suits Quantity Price Direct Materials 3. 5 Yds. $6/Yd. $21 Direct Labor 2. 0 Hrs. 18/Hr. 36 Variable Overhead 2. 0 Hrs. 4/Hr. 8 Standard Cost Per Unit Cost $65

A General Model For Variance Analysis Variable Production Costs AQ x AP AQ x SP SQ x SP DM Price Variance DL Rate Variance VOH Spending Var. DM Quantity Var. DL Efficiency Var. VOH Efficiency Variance Total Variance

DM Price Variances. . .

DM Quantity Variances. . .