Chapter 10 Standard Costing: A Managerial Control Tool COPYRIGHT © 2012 Nelson Education Ltd

Chapter 10Standard Costing:

A Managerial Control Tool

Chapter 10Standard Costing:

A Managerial Control Tool

COPYRIGHT © 2012 Nelson Education Ltd.


Learning ObjectivesLearning Objectives

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

2. Explain the purpose of a standard cost sheet

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

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

5. Compute the labour variances, and explain how they are used for control

6. (Appendix) Prepare journal entries for materials and labour variances

10-2

OBJECTIVE OBJECTIVE 11

Explain how unit standards are set and

why standard cost systems are adopted


Unit StandardsUnit Standards

Developing standards enhances control

Need to determine the unit standard cost for a particular input

Two decisions:

Quantitydecision

Pricingdecision

10-4


Quantity & Price DecisionQuantity & Price Decision

The amount of input that should be used per unit of output

Quantity Standard

The amount that should be paid for the quantity of input to be used

Price Standard

Quantity Standard × Price Standard = Unit Standard10-5


Unit Standard & Development of StandardsUnit Standard & Development of Standards

• Used to enhance cost control• Budgeted ‘unit’ costs

– Unlike budgets which contain aggregate amounts of total revenue and total costs

• Historical experience• Engineering studies• Input from operating personnel

Quantity Standards are developed by:

Unit Standard:

10-6


Development of StandardsDevelopment of Standards

• Operations

• Purchasing

Price Standards are the joint responsibility of:

• Personnel

• Accounting

10-7


Types of StandardsTypes of Standards

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

Ideal standards

can be achieved under efficiency operating conditions

Currently attainable standards

---

---

10-8


Why Standard Cost Systems Are AdoptedWhy Standard Cost Systems Are Adopted

• To improve planning and control

• To facilitate product costing

Two reasons:

10-9


Planning and ControlPlanning and Control

• Enhance planning and control• Improve performance management• Fundamental requirement for a

flexible budgeting system

Standards:

Actual costs are compared to budgeted costs and variances are computed

10-10


Product CostingProduct Costing

• Direct materials quantity

• Direct materials price

Costs are assigned to products using standards for:

• Direct labour quantity

• Direct labour price

• Overhead quantity

• Overhead price

10-11


Standard CostingStandard Costing

• Greater capacity for control• Provides readily available unit cost

information• Simplifies cost assignments in both

process and job costing systems

Advantages:

10-12


Explain the purpose of a standard cost sheet


Example: Cornerstone 10-1Example: Cornerstone 10-1

• Assume that 100,000 packages of corn chips are produced during the first week of March

• Unit quantity standard is 18 grams of yellow corn per package

• Unit quantity standard for machine operators is 0.01 hour per package produced

Information:

HOW TO Compute Standard Quantities Allowed (SQ and SH)

• For the actual output of 100,000 packages:– How much yellow corn should have been used?– How many operator hours should have been used?

Required:

10-14


ExampleExample

Corn allowed:

=SQUnit

Quantity Standard

x Actual Output

18 x 100,000=

=

SQ

SQ 1,800,000 grams

Standard quantity of materials allowed

10-15


ExampleExample

Operator hours allowed:

=SHUnit

Quantity Standard

x Actual Output

0.01 x 100,000=

=

SH

SH 1,000 direct labour hours

Standard hours

allowed

10-16


Describe the basic concepts underlying variance analysis, and explain when variances

should be investigated


Variance Analysis ComponentsVariance Analysis Components

SP = Standard unit price of an input

SQ = Standard quantity of input for the actual output

AP = Actual price per unit of the input

AQ = Actual quantity of the input used

10-18


Total Budget VarianceTotal Budget Variance

Total Variance

= Actual Cost

– Planned Cost

(AP x AQ) (SP x SQ)–

10-19


Price (Rate) VariancePrice (Rate) Variance

Favourable variance = Actual price is less than standard price

-Actual Price

Standard Price

x Number of inputs used

Unfavourable variance = Actual price is greater than standard price

10-20


Usage (Efficiency) VarianceUsage (Efficiency) Variance

Favourable variance = Actual quantity is less than standard quantity

-Actual Quantity

Standard Quantity

x Standard Unit Price

Unfavourable variance = Actual quantity is greater than standard quantity

10-21


The Decision to InvestigateThe Decision to Investigate

• Performance rarely meets established standards exactly

• Random variations around the standard are expected

• Management should determine an acceptable range of performance

10-22



Information: Standard cost: $100,000; allowable deviation: $10,000; actual costs for six months:

JuneJulyAugust

$97,500105,00095,000

$102,500SeptemberOctober 107,500November 112,500

Required: Plot the actual costs over time against the upper and lower control limits. Determine when a variance should be investigated

HOW TO Control Limits to Trigger a Variance Investigation

10-23


ExampleExample

June July August

90,000

100,000

110,000

September October November

$120,000

Standard

Acceptable Range (Don’t

Investigate)


ExampleExample

June July August

90,000

100,000

110,000

September October November

$120,000 Investigate


Compute the materials variances, and explain how

they are used for control



Unit standards:Standard price: $0.01 per gramStandard usage: 18 grams

Actual results for the first week in March:Actual production: 48,500 bags of corn chips Actual cost of corn: 780,000 grams at $0.015

Information:

HOW TO Calculate the Total Variance for Materials

Required:Calculates the total variance for corn for the first week in March

10-27


ExampleExample

Total variance for corn:

Corn

Budgeted Costs

Actual Costs

Total Variance

AQ x AP

$11,700

– =

780,000 grams x $0.015

10-28


ExampleExample


Budgeted Costs

Actual Costs

Total Variance

– =

Corn

SQ x SP

$11,700

(18 grams x 48,500 bags)

$8,730–

x $0.01

10-29


ExampleExample


Budgeted Costs

Actual Costs

Total Variance

– =

Corn $11,700 $8,730 $2,970 U- =

10-30


Direct Materials VariancesDirect Materials Variances

MPV = (AP AQ – SP) x

Materials Price Variance

Measures the difference between what should have been paid for raw materials

and what was actually paid

10-31


Direct Materials VariancesDirect Materials Variances

MUV = (AQ SP – SQ)

Materials Usage Variance

Measures the difference between the direct materials actually used and the direct materials that should have been

used for the actual output

10-32


HOW TO Calculate Materials Variances: Formula and Columnar Approaches


Unit standards:Standard price: $0.01 per gramStandard usage: 18 grams

Actual results for the first week in March:Actual production: 48,500 bags of corn chips Actual cost of corn: 780,000 grams at $0.015

Information:

Required:Calculates the materials price and usage variance using the 3-pronged (columnar) and formula approaches

10-33


ExampleExample

MPV

($0.015

$3,900 U

= (AP AQ – SP)

= – $0.01) 780,000MPV

=MPV

Materials Price Variance

Formula Approach

10-34


ExampleExample

MUV

[780,000

$930 F

= (AQ SP – SQ)

= – (18 x 48,500)] ($0.01)MUV

=MUV

Materials Usage Variance

Formula Approach

10-35


ExampleExample

Columnar Approach

780,000 x $0.015

1. AQ x AP $11,700

10-36

780,000 x $0.01

2. AQ x SP $7,800

(18 x 48,500) x $0.01

3. SQ x SP $8,730


ExampleExample

Columnar Approach

1. AQ x AP $11,700

2. AQ x SP $7,800

3. SQ x SP $8,730

Price Variance(1 – 2)

$3,900 U

10-37

Usage Variance(2 – 3)$930 F


ExampleExample

Columnar Approach

1. AQ x AP $11,700

2. AQ x SP $7,800

3. SQ x SP $8,730

Price Variance(1 – 2)

$3,900 U

Usage Variance(2 – 3)$930 F

Total Variance(1 – 3)

$2,970 U10-38


Responsibility for the Materials Price VarianceResponsibility for the Materials Price Variance

• Belongs to the purchasing agent• Price can be influenced by:

• Quality• Quantity discounts• Distance of the source from the plant

10-39


Responsibility for the Materials Usage VarianceResponsibility for the Materials Usage Variance

• Belongs to the production manager• Variance can be influenced by minimizing:

• Scrap• Waste• Rework

10-40


First step:

Decide whether the variance is significant

Analysis of the VariancesAnalysis of the Variances

Second step:

Find out why it occurred

10-41


Materials variances are ADDED to cost of goods sold if they are

UNFAVOURABLE

Accounting and Disposition of Materials VariancesAccounting and Disposition of Materials Variances

Materials variances are SUBTRACTED from cost of goods

sold if FAVOURABLE

10-42


Direct Labour VariancesDirect Labour Variances

LRV = (AR AH – SR) x

Labour Rate Variance

Computes the difference between what was paid to direct labourers and what

should have been paid

10-43


Direct Labour VariancesDirect Labour Variances

LEV = (AH SR – SH)

Labour Efficiency Variance

Measures the difference between the labour hours that were actually used and the

labour hours that should have been used.

10-44


Compute the labour variances and explain how they are used for control



Unit standards:Standard price: $8.00 per hourStandard usage: 0.01 hours

Actual results for the first week in March:Actual production: 48,500 bags of corn chips Actual cost of corn: 360 hours @ $8.35

Information:

HOW TO Calculate the Total Variance for Labour

Required:Calculate the total variance for inspection labour for the first week in March

10-46


ExampleExample

Total variance for inspection labour:

-Actual Costs

Budgeted Costs =

Total Variance

$3,006 - $3,880 = $874F

AQ x AP

Inspection labour

SQ x SP

10-47


How to Calculate Labour Variances: Formula and Columnar Approaches


Unit standards:Standard price: $8.00 per hourStandard usage: 0.01 hours

Actual results for the first week in March:Actual production: 48,500 bags of corn chips Actual cost of corn: 360 hours @ $8.35

Information:

Required:Calculate the labour rate and efficiency variances using the 3-pronged (columnar) and formula approaches

10-48


ExampleExample

LRV

($8.35

$126 U

= (AR AH

– SR)

= – $8.00) 360LRV

=LRV

Labour Rate Variance

Formula Approach

10-49


ExampleExample

LEV

(360

= (AH SR – SH)

= – 485) $8.00LEV

Labour Efficiency Variance

Formula Approach

0.01 x 48,500$1,000 F=LEV

10-50


ExampleExample

Columnar Approach

360 x $8.35

1. AH x AR $3,006

10-51

360 x $8.00

2. AH x SR $2,880

(0.01 x 48,500) x $8.00

3. SH x SR $3,880


ExampleExample

Columnar Approach

1. AH x AR $3,006

2. AH x SR $2,880

3. SH x SR $3,880

Price Variance(1 – 2)$126 U

Usage Variance(2 – 3)

$1,000 F

10-52


ExampleExample

Columnar Approach

1. AH x AR $3,006

2. AH x SR $2,880

3. SH x SR $3,880

Price Variance(1 – 2)$126 U

Usage Variance(2 – 3)

$1,000 F

Total Variance(1 – 3)$874 F

10-53


Causes of Labour Rate VarianceCauses of Labour Rate Variance

• Labour rates are determined by external forces as labour markets and union contracts

• Labour rates can vary when:– more skilled and more highly paid

labourers are used for less skilled tasks– unexpected overtime occurs

10-54


Responsibility for the Labour Efficiency VarianceResponsibility for the Labour Efficiency Variance

• Production managers are responsible for the use of direct labour

• But once the cause is discovered, responsibility may be assigned elsewhere

10-55

Documents

Chapter 10 Standard Costing: A Managerial Control Tool COPYRIGHT © 2012 Nelson Education Ltd