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Predetermined Standard Costs

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Submitted By beelial
Words 2593
Pages 11
Chapter

8
© 2008 McGraw-Hill Ryerson Limited.

Standard Costs
Predetermined.

Standard Costs are

Used for planning labour, material and overhead requirements. Benchmarks for measuring performance. Used to simplify the accounting system.
© 2008 McGraw-Hill Ryerson Limited.

Standard Costs
Managers focus on quantities and costs that exceed standards, a practice known as management by exception.

Amount

Standard
Direct Material

Direct Labour

Manufacturing Overhead

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

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Setting Standard Costs
Should we use practical standards or ideal standards?

Engineer

Managerial Accountant

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

Production manager
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Setting Standard Costs
I agree. Ideal standards, which are based on perfection, are unattainable and discourage most employees.

Human Resources Manager
© 2008 McGraw-Hill Ryerson Limited.

Note
• The argument that ideal standards are discouraging has been persuasive for many years. So “normal” defects and waste were built into the standards. • In recent years, TQM and other initiatives have sought to eliminate all defects and waste.
– Ideal standards, that allow for no waste, have become more popular. – The emphasis is on improvement over time, not attaining the ideal standards right now.
© 2008 McGraw-Hill Ryerson Limited.

Setting Direct Material Standards
Price Standards Quantity Standards

Final, delivered cost of materials, net of discounts.

Use product design specifications.

© 2008 McGraw-Hill Ryerson Limited.

Setting Direct Labour Standards
Rate Standards Time Standards

Use wage surveys and labour contracts.

Use time and motion studies for each labour operation.

© 2008 McGraw-Hill Ryerson Limited.

Setting Variable Overhead 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.

© 2008 McGraw-Hill Ryerson Limited.

Standard Cost Card: Variable Production Cost
A standard cost card for one unit of product might look like this:
A
Standard Quantity or Hours
3.0 kgs. 2.5 hours 2.5 hours

B
Standard Price or Rate

AxB
Standard Cost per Unit
12.00 35.00 7.50 54.50

Inputs
Direct materials Direct labour Variable mfg. overhead Total standard unit cost

$ 4.00 per kg. $ 14.00 per hour 3.00 per hour $

© 2008 McGraw-Hill Ryerson Limited.

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 putting together a budget.

© 2008 McGraw-Hill Ryerson Limited.

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

Standard Cost

This variance is unfavourable because the actual cost exceeds the standard cost.

© 2008 McGraw-Hill Ryerson Limited.

Standard Cost Variances
I see that there is an unfavorable variance.
But why are variances important to me? First, they point to causes of problems and directions for improvement.

Second, they trigger investigations in departments having responsibility for incurring the costs.

© 2008 McGraw-Hill Ryerson Limited.

Variance Analysis Cycle
Identify questions Receive explanations
Take corrective actions

Analyze variances

Conduct next period’s operations Prepare standard cost performance report
© 2008 McGraw-Hill Ryerson Limited.

Begin

Standard Cost Variances
Standard Cost Variances

Price Variance

Quantity Variance

The difference between the actual price and the standard price

The difference between the actual quantity and the standard quantity

© 2008 McGraw-Hill Ryerson Limited.

A General Model for Variance Analysis
Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price

Price Variance

Quantity Variance

Standard price is the amount that should have been paid for the resources acquired.

© 2008 McGraw-Hill Ryerson Limited.

A General Model for Variance Analysis
Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price

Price Variance Quantity Variance Standard quantity is the quantity allowed for the actual good output.

standard input per unit of output X amount of good output.
© 2008 McGraw-Hill Ryerson Limited.

A General Model for Variance Analysis
Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price

Price Variance
AQ(AP - SP)

Quantity Variance
SP(AQ - SQ)

AQ = Actual Quantity AP = Actual Price

SP = Standard Price SQ = Standard Quantity

© 2008 McGraw-Hill Ryerson Limited.

Standard Costs

Let’s use the general model to calculate standard cost variances, starting with direct material.
© 2008 McGraw-Hill Ryerson Limited.

Material Variances Example
Glacier Peak Outfitters has the following direct material standard for the fiberfill in its mountain parka.
0.1kg of fiberfill per parka at $5.00 per kg.

Last month 210kg of fiberfill were purchased and used to make 2,000 parkas. The material cost a total of $1,029.

© 2008 McGraw-Hill Ryerson Limited.

Material Variances Summary
Actual Quantity × Actual Price 210kg × $4.90 per kg Actual Quantity × Standard Price 210kg × $5.00 per kg Standard Quantity × Standard Price 200kg × $5.00 per kg

= $1,029

= $1,050

= $1,000

Price variance $21 favourable

Quantity variance $50 unfavourable

© 2008 McGraw-Hill Ryerson Limited.

Material Variances Summary
Actual Quantity × Actual Price 210kg × $4.90 per kg Actual Quantity × Standard Price 210kg $1,029 ×210kg $5.00 per kg = $4.90 per kg = $1,050 Standard Quantity × Standard Price 200kg × $5.00 per kg

= $1,029

= $1,000

Price variance $21 favourable

Quantity variance $50 unfavourable

© 2008 McGraw-Hill Ryerson Limited.

Material Variances Summary
Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price

210kg 210kg 200kg × × 0.1kg per parka× 2,000 parkas $4.90 per kg $5.00 per kg $5.00 per kg = 200kg

= $1,029

= $1,050

= $1,000

Price variance $21 favourable

Quantity variance $50 unfavourable

© 2008 McGraw-Hill Ryerson Limited.

Note: Using the formulas
• Materials price variance
MPV = AQ (AP - SP) = 210 kgs ($4.90/kg - $5.00/kg) = 210 kgs (-$0.10/kg) = $21 F

• Materials quantity variance
MQV = SP (AQ - SQ) = $5.00/kg [210kg - (0.1kg/parka 2,000 parkas)] = $5.00/kg (210kg - 200kg) = $5.00/kg (10kg) = $50 U
© 2008 McGraw-Hill Ryerson Limited.

Quick Check 
Suppose only 190kg of fiberfill were used to make 2,000 parkas. What is the materials quantity variance? Remember that the standards call for 0.1kg of fiberfill per parka at a cost of $5 per kg of fiberfill. a. $50 F b. $50 U c. $100 F d. $100 U

© 2008 McGraw-Hill Ryerson Limited.

Quick Check 
If the material standard specifies exactly how much material should be in the final product without any wastage, is a favourable (F) materials quantity variance a good thing? a. Yes b. No

© 2008 McGraw-Hill Ryerson Limited.

Material Variances Example

Zippy

Hanson Inc. has the following direct material standard to manufacture one Zippy:
1.5kg per Zippy at $4.00 per kg

Last week 1,700kg of material were purchased and used to make 1,000 Zippies. The material cost a total of $6,630.

© 2008 McGraw-Hill Ryerson Limited.

Quick Check 
What is the actual price per kg paid for the material? a. $4.00 per kg b. $4.10 per kg c. $3.90 per kg d. $6.63 per kg

Zippy

© 2008 McGraw-Hill Ryerson Limited.

Quick Check 

Zippy

Hanson’s material price variance (MPV) for the week was: a. $170 unfavourable. b. $170 favourable. c. $800 unfavourable. d. $800 favourable.

© 2008 McGraw-Hill Ryerson Limited.

Quick Check 
The standard quantity of material that should have been used to produce 1,000 Zippies is: a. 1,700kg b. 1,500kg c. 2,550kg d. 2,000kg
© 2008 McGraw-Hill Ryerson Limited.

Zippy

Quick Check 

Zippy

Hanson’s material quantity variance (MQV) for the week was: a. $170 unfavourable. b. $170 favourable. c. $800 unfavourable. d. $800 favourable.

© 2008 McGraw-Hill Ryerson Limited.

Material Variances Summary
Actual Quantity × Actual Price
1,700kg × $3.90 per kg = $6,630

Zippy

Actual Quantity × Standard Price
1,700kg × $4.00 per kg = $ 6,800

Standard Quantity × Standard Price
1,500kg × $4.00 per kg = $6,000

Price variance $170 favourable

Quantity variance $800 unfavourable

© 2008 McGraw-Hill Ryerson Limited.

Material Variances

Hanson purchased and used 1,700kg. How are the variances computed if the amount purchased differs from the amount used?

The price variance is computed on the entire quantity purchased. The quantity variance is computed only on the quantity used.

© 2008 McGraw-Hill Ryerson Limited.

Material Variances Continued

Zippy

Hanson Inc. has the following material standard to manufacture one Zippy:
1.5kg per Zippy at $4.00 per kg

Last week 2,800kg of material were purchased at a total cost of $10,920, and 1,700kg were used to make 1,000 Zippies.

© 2008 McGraw-Hill Ryerson Limited.

Material Variances Continued
Actual Quantity Purchased × Actual Price 2,800kg × $3.90 per kg = $10,920 Actual Quantity Purchased × Standard Price 2,800kg × $4.00 per kg = $11,200

Zippy

Price variance $280 favourable

Price variance increases because quantity purchased increases.

© 2008 McGraw-Hill Ryerson Limited.

Material Variances Continued
Actual Quantity Used × Standard Price 1,700kg × $4.00 per kg = $6,800 Quantity variance is unchanged because actual and standard quantities are unchanged.

Zippy

Standard Quantity × Standard Price 1,500kg × $4.00 per kg = $6,000

Quantity variance $800 unfavourable

© 2008 McGraw-Hill Ryerson Limited.

Isolation of Material Variances
I need the price variance sooner so that I can better identify purchasing problems. You accountants just don’t understand the problems that purchasing managers have. I’ll start computing the price variance when material is purchased rather than when it’s used.

© 2008 McGraw-Hill Ryerson Limited.

Responsibility for Material You used too much material Variances of poorly trained because
I am not responsible for this unfavourable material quantity variance. workers and poorly maintained equipment. Also, your poor scheduling sometimes requires me to rush order material at a higher price, causing unfavourable price variances.

You purchased cheap material, so my people had to use more of it.

© 2008 McGraw-Hill Ryerson Limited.

Standard Costs

Now let’s calculate standard cost variances for direct labour.

© 2008 McGraw-Hill Ryerson Limited.

Note
• Materials variances:
– Material price variance • MPV = AQ (AP - SP) – Material quantity variance • MQV = SP (AQ - SQ) Actual hours

• Labour variances:
– Labour rate variance • LRV = AH (AR - SR) • LEV = SR (AH - SH)

Actual rate
Standard rate

Standard hours allowed – Labour efficiency variance

for the actual good output

© 2008 McGraw-Hill Ryerson Limited.

Labour Variances Example

Zippy

Hanson Inc. has the following direct labour standard to manufacture one Zippy:
1.5 standard hours per Zippy at $6.00 per direct labour hour

Last week 1,550 direct labour hours were worked at a total labour cost of $9,610 to make 1,000 Zippies.
© 2008 McGraw-Hill Ryerson Limited.

Quick Check 
What was Hanson’s actual rate (AR) for labour for the week? a. $6.20 per hour. b. $6.00 per hour. c. $5.80 per hour. d. $5.60 per hour.

Zippy

© 2008 McGraw-Hill Ryerson Limited.

Quick Check 

Zippy

Hanson’s labour rate variance (LRV) for the week was: a. $310 unfavourable. b. $310 favourable. c. $300 unfavourable. d. $300 favourable.

© 2008 McGraw-Hill Ryerson Limited.

Quick Check 

Zippy

The standard hours (SH) of labour that should 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.
© 2008 McGraw-Hill Ryerson Limited.

Quick Check 

Zippy

Hanson’s labour efficiency variance (LEV) for the week was: a. $290 unfavourable. b. $290 favourable. c. $300 unfavourable. d. $300 favourable.

© 2008 McGraw-Hill Ryerson Limited.

Labour Variances Summary
Actual Hours × Actual Rate
1,550 hours × $6.20 per hour = $9,610

Zippy

Actual Hours × Standard Rate
1,550 hours × $6.00 per hour = $9,300

Standard Hours × Standard Rate
1,500 hours × $6.00 per hour = $9,000

Rate variance $310 unfavourable

Efficiency variance $300 unfavourable

© 2008 McGraw-Hill Ryerson Limited.

Labour Rate Variance: A Closer Look
Using highly paid skilled workers to perform unskilled tasks results in an unfavourable rate variance.

High skill, high rate

Low skill, low rate

Production managers who make work assignments are generally responsible for rate variances.
© 2008 McGraw-Hill Ryerson Limited.

Labour Efficiency Variance: A Closer Look
Poorly trained workers Poor quality materials

Unfavourable Efficiency Variance
Poor supervision of workers
© 2008 McGraw-Hill Ryerson Limited.

Insufficient Demand or Bottlenecks

Responsibility for Labour Variances
I am not responsible for the unfavorable labour efficiency variance! You used too much time because of poorly trained workers and poor supervision.

You purchased cheap material, so it took more time to process it.

© 2008 McGraw-Hill Ryerson Limited.

Responsibility for Labour Variances
Maybe I can attribute the labour and material variances to personnel for hiring the wrong people and training them poorly.

© 2008 McGraw-Hill Ryerson Limited.

Standard Costs

Now let’s calculate standard cost variances for the last of the variable production costs – variable manufacturing overhead.
© 2008 McGraw-Hill Ryerson Limited.

• Labour variances:

NoteActual hours of the allocation base Actual variable overhead rate Standard variable overhead rate

– Labour rate variance • LRV = AH (AR - SR) • LEV = SR (AH - SH)

– Labour efficiency variance • Variable overhead variances:

– Variable overhead spending variance • VOSV = AH (AR - SR)

– Variable overhead efficiency variance
• VOEV = SR (AH - SH) Standard hours allowed • for the actual good output
© 2008 McGraw-Hill Ryerson Limited.

Variable Manufacturing Overhead Variances Example

Zippy

Hanson Inc. has the following variable manufacturing overhead standard to manufacture one Zippy:
1.5 standard hours per Zippy at $3.00 per direct labour hour

Last week 1,550 hours were worked to make 1,000 Zippies, and $5,115 was spent for variable manufacturing overhead.
© 2008 McGraw-Hill Ryerson Limited.

Quick Check 

Zippy

What was Hanson’s actual rate (AR) for variable manufacturing overhead rate for the week? a. $3.00 per hour. b. $3.19 per hour. c. $3.30 per hour. d. $4.50 per hour.
© 2008 McGraw-Hill Ryerson Limited.

Quick Check 

Zippy

Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was: a. $465 unfavourable. b. $400 favourable. c. $335 unfavourable. d. $300 favourable.
© 2008 McGraw-Hill Ryerson Limited.

Quick Check 

Zippy

Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was: a. $435 unfavourable. b. $435 favourable. c. $150 unfavourable. d. $150 favourable.
© 2008 McGraw-Hill Ryerson Limited.

Variable Manufacturing Overhead Variances
Actual Hours × Actual Rate
1,550 hours × $3.30 per hour = $5,115

Zippy

Actual Hours × Standard Rate
1,550 hours × $3.00 per hour = $4,650

Standard Hours × Standard Rate
1,500 hours × $3.00 per hour = $4,500

Spending variance $465 unfavourable

Efficiency variance $150 unfavourable

© 2008 McGraw-Hill Ryerson Limited.

Variable Manufacturing Overhead Variances: A Closer Look
If variable overhead is applied on the basis of direct labour hours, the labour efficiency and variable overhead efficiency variances will move in tandem.

© 2008 McGraw-Hill Ryerson Limited.

Variance Analysis and Management by Exception

How do I know which variances to investigate?

Larger variances, in dollar amount or as a percentage of the standard, are investigated first.

© 2008 McGraw-Hill Ryerson Limited.

Advantages of Standard Costs
Possible reductions in production costs Management by exception

Advantages
Improved cost control and performance evaluation Better Information for planning and decision making

© 2008 McGraw-Hill Ryerson Limited.

Emphasis on negative may impact morale.

Favorable variances may be misinterpreted.

Standard cost reports may not be timely.

Potential Problems

Continuous improvement may be more important than meeting standards.

Labour quantity standards and efficiency variances may not be appropriate.

Emphasizing standards may exclude other important objectives.

© 2008 McGraw-Hill Ryerson Limited.

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...Ratio  Formula    Current Assets   Current Liabilities Short term Investments Current Receivables   Current Liabilities Net sales   Average accounts receivable Cost of goods sold   Average inventory 365  365  Net Sales   Average total assets   Total liabilities   Total assets Total equity   Total assets Total liabilities   Total equity Income before interest expense and income taxes   Interest Expense   Net Income   Net Sales Cost of goods sold   Net Sales Net Income   Average total assets Net income Preferred dividents   Average common stockholders equity Net Sales   Measure of  Short‐term debt‐paying ability (2:1  guideline)  Immediate short‐term debt‐paying  ability (1:1 guideline)   Efficiency of collection (bigger is better)  Efficiency of inventory management  (higher is better)  Liquidity of receivables (not exceeding 1  1/3 times the days  Liquidity of inventory  Efficiency of assets in producing sales    Creditor financing and leverage (1 is all  debt, .50 means half of the assets are  through debt)  Owner financing  Debt versus equity financing  Protection in meeting interest payments  (large ratio means less risky to creditors)    Net income in each sales dollar (10‐15%  for appliance and 1% or 2% for  supermarket)  Gross margin in each sales dollar  Overall profitability of assets  Profitability of owner investment  Liquidity and Efficiency  Current Ratio  Acid‐test ratio  Accounts receivable turnover  Inventory turnover  Days’ sales uncollected  Days’ sales in inventory ...

Words: 982 - Pages: 4

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Ac505 Homework

...Managerial Accounting – Exam 4 Summer 2006 Student Number: __________________________ Pledge: On my honor I have neither given or received help on this exam. I understand that any violation of the University Honor Policy will result in an automatic zero on this exam, and that I will be subject to all sanctions available under the University's Honor Policy. Part I - Multiple Guess (135 points) 1. A segment of a business responsible for both revenues and expenses would be called: A) a cost center. B) an investment center. C) a profit center. D) residual income. 2. Lanta Restaurant compares monthly operating results with a static budget prepared at the beginning of the year. When actual sales are less than budget, would the restaurant usually report favorable variances on variable food costs and fixed supervisory salaries? | |Food Costs |Supervisory Salaries | |A) |No |No | |B) |No |Yes | |C) |Yes |No | |D) |Yes |Yes | 3. All other things equal, a company's return on investment (ROI) would generally increase when: A) average operating assets increase. B) sales decrease. C) operating expenses decrease...

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Managerial Accounting

...controlling, | | |and decision making info) Internal accounting | | |Financial accounting – producing info for external users, including investors, creditors, customers, suppliers,| | |government agencies, and labor unions. External accounting | | |Identify cost classifications—Direct Materials, Direct Labor, Manufacturing Overhead, Nonmanufacturing costs. | | |Direct materials – materials that are part of the final product and can be directly traced to the goods being | | |produced. (tires on cars, wood in dining room table, alcohol in cologne, denim in jeans) | | |Direct labor – labor that can be directly traced to the goods being produced. (workers on an assembly line) | | |Manufacturing overhead – factory burden or indirect manufacturing costs. (depreciation on plant buildings and | | |equipment, janitorial and maintenance labor, plant supervision, materials handling, power for plant utilities, | | |plant property taxes.)...

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Case 19-1: Bennett Body Company

...This case contrasts a standard cost system with an actual job cost system, and thereby brings out several points about cost accounting, including: the purposes for which cost accounting data are used; the paperwork involved in cost accounting; the use of costs for pricing; the problem of controlling costs under the two types of systems; and the problem of the normal overhead rate. Students may have difficulty in seeing that: (1) in the Conley standard cost system, costs are not traceable to individual bodies or models, and therefore no comparison of actual and standard costs by models is possible; (2) the Conley system easily could be changed to permit comparison of actual and standard labor and material costs by models, but it is doubtful that such information would be useful for control; 
(3) the variances have no meaning unless the standard costs for each model are reasonable; (4) the overhead variance in Exhibit 1 is meaningless; and (5) the paperwork involved in the Conley system is less than that in the Bennett system. Comments on Questions (Numbered as in Mr. Bennett’s memorandum) It may be well to discuss the Bennett system first. The subject may be broken down into records of material, labor, and overhead cost, and the job-cost sheet. Enough hints are given in the case so that students should be able to visualize the contents of the documents needed to record the incurrence of each type of cost and how information is recorded on the job-cost sheet. They should also...

Words: 1142 - Pages: 5

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