Standard Costing, Variance Analysis, and Kaizen Costing · PDF file · 2004-12-16Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 16-1 Standard Costing, Variance Analysis,

©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson

16-1

Standard Costing,Variance Analysis, and

Kaizen Costing

Student Tutorial

16


16-2

Using Standard-Costing Systemsfor Control

STANDARD COSTa budget for theproduction of

one unit of product or

service

STANDARD COSTa budget for theproduction of

one unit of product or

service

ACTUAL COSTused in the

production of the product or

service

ACTUAL COSTused in the

production of the product or

service

COST VARIANCE the differencebetween the

actual cost andthe standard cost

COST VARIANCE the differencebetween the

actual cost andthe standard cost


16-3

Management by ExceptionTake the time to investigate only significant cost

variances

Take the time to investigate only significant costvariances

What is significant?What is significant?

Depends onthe Size of theOrganization

Depends onthe Size of theOrganization

Depends onthe Type of theOrganization

Depends onthe Type of theOrganization

Depends onthe Production

Process

Depends onthe Production

Process


16-4

Setting StandardsAnalysis ofHistorical

Data

Analysis ofHistorical

Data

TaskAnalysis

TaskAnalysis

Used in a mature production Process

Used in a mature production Process

Analyze the processof manufacturing

the product

Analyze the processof manufacturing

the product

What DIDthe

productcost?

What DIDthe

productcost?

What SHOULD

the productcost?

What SHOULD

the productcost?

A CombinedApproach

A CombinedApproach

Analyze the process for the step thathas changed, but use historical datafor the steps that have not changed

Analyze the process for the step thathas changed, but use historical datafor the steps that have not changed


16-5Perfection Vs. Practical Standards:A Behavioural Issue

One that can only beattained under nearperfect conditions

One that can only beattained under nearperfect conditions

PERFECTIONSTANDARD

PERFECTIONSTANDARD

PRACTICAL ORATTAINABLESTANDARDS

PRACTICAL ORATTAINABLESTANDARDS

Tight as practical,but still are expected

to be attained

Tight as practical,but still are expected

to be attained

•Peak efficiency•Lowest possible

input prices•best-quality material

•no disruption in production

•Peak efficiency•Lowest possible

input prices•best-quality material

•no disruption in production

•Occasional machinebreakdowns

•Normal amountsof raw material

waste

•Occasional machinebreakdowns

•Normal amountsof raw material

waste


16-6

Use Of StandardsStandards can be used by service firms, nonprofit

organizations, and governmental units

Standards can be used by service firms, nonprofit organizations, and governmental units

Implementing and maintaining cost standards canbe time-consuming, labour-intensive, and expensive.

Implementing and maintaining cost standards canbe time-consuming, labour-intensive, and expensive.

COSTBENEFITS

COSTBENEFITS


16-7

The total delivered cost, after subtracting

any purchase discounts

Cost Variance Analysis

Standard quantity:

Fabric in finished product 11 sq. metersAllowance for normal waste 1 sq. meters

Total standard quantity required per tent 12 sq. meters

Purchase price per sq. meter of fabric (net of purchase discounts) $7.75

Transportation cost per sq. meter 0.25

Total standard price per sq. meter of fabric $8.00

Koala CampGear Company


DIRECT MATERIAL STANDARDSDIRECT MATERIAL STANDARDS

The total amount of materialnormally required to producea finished product includingallowances for normal waste

or efficiency


16-8

DIRECT labour STANDARDSDIRECT labour STANDARDS

Standard quantity:Direct labour required per tent 2 hours

Standard rate:

Hourly wage rate $15Fringe benefits (20% of wages) 3

Total standard rate per hour $18

The number oflabour hours

normally neededto manufacture

one unit ofproduct

The total hourly cost of compensation, including

fringe benefits

Cost Variance Analysis




16-9

Direct labour:Direct labour cost per tent (2 hours x $18 per hour) $36Actual output X 3,000Total standard direct-labour cost $108,000

Standard Costs Given ActualOutput

Direct material:

Standard direct-material cost per tent (12 sq. meters x $8 pr sq. meter) $96Actual output x3,000Total standard direct-material cost $288,000

The standard cost forthe direct-material

and direct-labour inputsis based upon Koala’s

actual output of 3,000 tents

They should incura cost of $396,000

($288,000 + $108,000)to make 3,000 tents




16-10

Direct-Material Variances

Direct-material price variance = (PQ X AP) - (PQ X SP) = PQ(AP - SP) where: PQ = Quantity purchased

AP = Actual priceSP = Standard price

Direct-material price variance = (PQ X AP) - (PQ X SP) = PQ(AP - SP) where: PQ = Quantity purchased

AP = Actual priceSP = Standard price

Direct-material quantity variance = (AQ X SP) - (SQ X SP) = SQ(AQ - SQ)

where: SP = Standard Price AQ = Actual quantity used

SQ = Standard quantity allowed

Direct-material quantity variance = (AQ X SP) - (SQ X SP) = SQ(AQ - SQ)

where: SP = Standard Price AQ = Actual quantity used

SQ = Standard quantity allowed


16-11

40,000 sq.meters

purchased

$8.15 persq. meter

40,000 sq.meters

purchased

$8.00 persq. meter

36,000sq. meters

allowed

$8.00 per sq. meter

xx x

Compute the Materials PriceVariance.

(see textbook for original datarelated to Koala Camp Gear)

Compute the Materials PriceVariance.

(see textbook for original datarelated to Koala Camp Gear)

ActualActualquantityquantity

ActualActualpriceprice


StandardStandardpriceprice

StandardStandardquantityquantity


xxxx xx

Analysis Of Material VariancesKoala Camp Gear


16-12

40,000 sq.meters

purchased

$8.15 persq. meter

40,000 sq.meters

purchased

$8.00 persq. meter

36,000sq. meters

allowed

$8.00 per sq. meter

$326,000 $320,000

$6,000U

xx x

Direct-material price variance

Compute the MaterialsQuantity Variance.

Compute the MaterialsQuantity Variance.







xxxx xx



16-13

40,000 sq.meters

purchased

$8.15 persq. meter

40,000 sq.meters

purchased

$8.00 persq. meter

36,000sq. meters

allowed

$8.00 per sq. meter

xx x

$326,000 $320,000

$6,000UDirect-material price variance

36,400 sq.meters

used

$8.00per sq.meter

$291,200 $3,200U

Direct-materialquantity variance

$288,000







xxxx xx



16-14

What caused Koala to spend more than the anticipated amount on direct material?






16-15





First, the company purchased fabric at a higher price ($8.15 persquare meter) than the standard price ($8.00 per square meter).

First, the company purchased fabric at a higher price ($8.15 persquare meter) than the standard price ($8.00 per square meter).


Second, the company used more fabric than the standard price.(36,400 sq. meters actually used, instead of the standard amount of

36,000 sq. meters)

Second, the company used more fabric than the standard price.(36,400 sq. meters actually used, instead of the standard amount of

36,000 sq. meters)


16-16

The material price variance isA. $24,500 (F)B. $25,000 (F)C. $25,000 (U)D. $25,500 (F)E. $25,500 (U)


Direct-Material Variances - Question #1

Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 ft used, 51,000 ft purchased at $9.50per foot



16-17





The model is:

Actual Material Used × (ActualPrice - Standard Price)

Try again!

The model is:


Try again!



16-18





The model is:


Try again!

The model is:


Try again!



16-19





The model is:

Actual Material Purchased ×(Actual Price - Standard Price)

Try again!

The model is:

Actual Material Purchased ×(Actual Price - Standard Price)

Try again!



16-20





Direct-material price variance = (PQ X AP) - (PQ X SP) =(51,000 X $9.50) - (51,000 X $10.00) =$25,500 F

Direct-material price variance = (PQ X AP) - (PQ X SP) =(51,000 X $9.50) - (51,000 X $10.00) =$25,500 F



16-21





Did they do better than budget(F) or worse than budget (U)?

Try again!

Did they do better than budget(F) or worse than budget (U)?

Try again!



16-22

The material quantity variance isA. $10,000 (F)B. $10,000 (U)C. $20,000 (U)D. $20,000 (F)E. $19,500 (U)


Standards:Material 5.0 feet per unit @ $10.00 per footActual:Production 10,000 unitsMaterial 49,000 feet used, 51,000 feet purchasedat $9.50 per foot




16-23






(AQ X SP) - (SQ X SP) = (49,000 X $10.00) - (50,000 X $10.00) =

$10.00 (49,000 - 50,000) =$10,000 (F)

(AQ X SP) - (SQ X SP) = (49,000 X $10.00) - (50,000 X $10.00) =

$10.00 (49,000 - 50,000) =$10,000 (F)


16-24






The model is:

Actual Price × (Actual QtyUsed - Standard Qty Required)

Try again!

The model is:


Try again!


16-25






The model is:


Try again!

The model is:


Try again!


16-26






The model is:


Try again!

The model is:


Try again!


16-27






The model is:


Try again!

The model is:


Try again!


16-28

Direct-labour rate variance = (AH X AR) - (AH X SR) = AH(AR - SR) where:

AH = Actual hours used AR = Actual rate per hour

SR = Standard rate per hour

Direct-labour rate variance = (AH X AR) - (AH X SR) = AH(AR - SR) where:

AH = Actual hours used AR = Actual rate per hour

SR = Standard rate per hour

Direct-labour Variances

Direct-labour efficiency variance = (AH X SR) - (SH X SR) = SR(AH - SH)

where: SR = Standard rate per hour AH = Actual hours used

SH = Standard hours allowed

Direct-labour efficiency variance = (AH X SR) - (SH X SR) = SR(AH - SH)

where: SR = Standard rate per hour AH = Actual hours used

SH = Standard hours allowed


16-29

X X X5,900 hoursused

$19per

hour

5,900hoursused

$18per

hour

6,000 hours

allowed

$18 per

hour

Actual labour Cost Standard labour CostActualhours

Standardprice

Actualrate

Actualhours

Standardrate

Standardrate

XXX

Analysis Of Direct-labourVariances

Koala Camp Gear


16-30

X X X5,900 hoursused

$19per

hour

5,900hoursused

$18per

hour

6,000 hours

allowed

$18 per

hour

$112,100 $106,200 $108,000

$5,900 Unfavourable $1,800 favourableDirect-labourrate variance

Direct-labourefficiency variance

$4,100 Unfavourable

Direct-labour variance

Actual labour Cost Standard labour CostActualhours

Standardprice

Actualrate

Actualhours

Standardrate

Standardrate

XXX


Koala Camp Gear


16-31

What caused Koala to spend more than the anticipated amount on direct labour?





Koala Camp Gear


16-32



First, the company incurred a cost of $19 per hour for directlabour instead of the standard amount of $18 per hour

First, the company incurred a cost of $19 per hour for directlabour instead of the standard amount of $18 per hour



On the other hand, Koala used only 5,900 hours of direct labour,which is less than the standard quantity of 6,000 hours, given

actual output of 3,000 tents. This increased efficiency does notfully offset the unexpectedly high wage rate.

On the other hand, Koala used only 5,900 hours of direct labour,which is less than the standard quantity of 6,000 hours, given

actual output of 3,000 tents. This increased efficiency does notfully offset the unexpectedly high wage rate.


Koala Camp Gear


16-33

The labour rate variance isA. $25,000 (U)B. $25,000 (F)C. $10,500 (U)D. $10,500 (F)E. $4,400 (F)


Direct-labour Variances - Question #3

Standards:labour 2 hours per unit @ $15.00 per hourActual:Production 10,000 unitslabour 21,000 hours @ $14.50 per hour



16-34






Remember, the labourRate Variance iscomputed as:(AH X AR) - (AH X SR)TRY AGAIN!



16-35









16-36









16-37






(AH X AR) - (AH X SR) =(21,000 X $14.50) - (21,000 X $15.00) =21,000($14.50 - $15.00) =$10,500 (F)

(AH X AR) - (AH X SR) =(21,000 X $14.50) - (21,000 X $15.00) =21,000($14.50 - $15.00) =$10,500 (F)


16-38









16-39

The labour efficiency variance isA. $25,000 (U)B. $14,500 (F)C. $14,500 (U)D. $15,000 (F)E. $15,000 (U)






16-40






Remember, the labourEfficiency Variance iscomputed as:(AH X SR) - (SH X SR)TRY AGAIN!



16-41









16-42









16-43









16-44






(AH × SR) - (SH × SR) =(21,000 × $15.00) - (20,000 × $15.00) =(21,000 - 20,000) × $15.00 =$15,000 (U)

(AH × SR) - (SH × SR) =(21,000 × $15.00) - (20,000 × $15.00) =(21,000 - 20,000) × $15.00 =$15,000 (U)


16-45

Price QuantityDirect material X $1,500 F $1,900 UDirect material Y 2,400 U 300 UDirect material Z 900 U 400 FTotal variance $1,800 U $1800 U

When there are several types of direct material ordirect labour, price and quantity variances are computed for

each type, and then added to obtain a total price variance and a total quality variance

When there are several types of direct material ordirect labour, price and quantity variances are computed for

each type, and then added to obtain a total price variance and a total quality variance

Multiple Types Of Direct MaterialOr Direct labour


16-46

Allowance For Defects Of SpoilageIn some manufacturing processes, a certain amount of

defective production or spoilage is normal.

1,000 liters of chemicals are normally required in a chemicalprocess in order to obtain 800 liters of good output.

If total good output in February is 5,000 liters, what is thestandard allowed quantity of input?

Dividing bothsides of the

equation by 80%

Using the numbers in

the illustration

Good output quantity = 80% X Input quantity

Good output quantity/80% = Input quantity allowed

5,000 liters of good output/80%

= 6,250 liters of input allowed


16-47

How does a manager know when to follow up on a cost variance and when to ignore it?

How does a manager know when to follow up on a cost variance and when to ignore it?

What constitutes an exception?What constitutes an exception?

Significance Of Cost Variances:When To Follow Up

Management by ExceptionManagement by Exception

Size of VarianceSize of VarianceAbsolute AmountAbsolute Amount Relative AmountRelative Amount

RULE OF THUMB:Investigate variances that are either greater than $10,000 or

greater than 10 percent of standard cost

RULE OF THUMB:Investigate variances that are either greater than $10,000 or

greater than 10 percent of standard cost


16-48

None of the variances are greater than$10,000 or 10%, but this variance

should be investigated because it hasconsistently occurred at a reasonably

high amount for four months

None of the variances are greater than$10,000 or 10%, but this variance

should be investigated because it hasconsistently occurred at a reasonably

high amount for four months

Significance Of Cost Variances:When To Follow Up

MONTH VARIANCE % OF STANDARD COSTSeptember $6,000 F 6.0%October 6,400 F 6.4%November 3,200 F 3.6%December 6,200 F 6.2%

Recurring VariancesRecurring Variances

Standarddirect

labour costis $100,000


16-49Significance Of Cost Variances:When To Follow Up

TrendsTrends

None of the variances are greaterthan $10,000 or 10%, but this

variance should be investigatedbecause it has an increasingly

unfavourable trend.

None of the variances are greaterthan $10,000 or 10%, but this

variance should be investigatedbecause it has an increasingly

unfavourable trend.

Standarddirect labour

is $100,000

MONTH VARIANCE % OF STANDARD COSTSeptember $250 U 0.25%October 840 U 0.84%November 4,000 U 4.0%December 9,300 U 9.3%



ControllabilityControllability

favourable Variancesfavourable Variances

Cost and Benefits of Investigation Cost and Benefits of Investigation

A manager is more likely to investigate a variance that iscontrollable by someone in the organization than one that is not

A manager is more likely to investigate a variance that iscontrollable by someone in the organization than one that is not

It is as important to investigate significant favourable variances as significant unfavourable variances

It is as important to investigate significant favourable variances as significant unfavourable variances

The decision whether to investigate a variance is a cost - benefit decision

The decision whether to investigate a variance is a cost - benefit decision



Statistical AnalysisStatistical Analysis

1 standarddeviation

1 standarddeviation

X

XX

XX

X

Time

Jan. Feb. March April May June

favourablevariances

Unfavourablevariances

Criticalvalue

Investigate

A STATISTICAL CONTROL CHART plots cost variancesacross time and compares them with a statistically

determined critical value that triggers an investigation

A STATISTICAL CONTROL CHART plots cost variancesacross time and compares them with a statistically

determined critical value that triggers an investigation


16-52

Behavioural Effects Of StandardCosting

Standard costs, budgets, and variances are used to evaluate the performance of individuals and departments

Standard costs, budgets, and variances are used to evaluate the performance of individuals and departments

They can profoundly influence behaviour when they are used to determine salary increases, bonuses, and promotions

They can profoundly influence behaviour when they are used to determine salary increases, bonuses, and promotions


16-53

Controllability Of VariancesWhich Managers Generally Influence Cost Variances?Which Managers Generally Influence Cost Variances?

Direct-material price varianceDirect-material price variance The purchasing manager The purchasing manager

Get the best prices available for purchased goodsand services through skillful purchasing practices

Direct-material quantity varianceDirect-material quantity variance The production supervisorThe production supervisor

Skillful supervision and motivation of productionemployees, coupled with the careful use and handling

of materials, contribute to minimal waste.


16-54

Controllability Of Variances

Direct-labour rate varianceDirect-labour rate variance The production supervisorThe production supervisor

Direct- labour efficiency varianceDirect- labour efficiency variance The production supervisorThe production supervisor

Generally results from using a different mix ofemployees than that anticipated when the standard

were set

Motivating employees toward production goalsand effective work schedules improves

efficiency

Which Managers Generally Influence Cost Variances?Which Managers Generally Influence Cost Variances?


16-55

Interaction Among Variances

Researchand

develop-ment

Design Supply Produc-

tion Marketing

Distri- bution

Customer service

HumanresourcesHuman

resources

PhysicalresourcesPhysical

resources

Variances in one part of the value chain can be due to root causes in another part of the chain

Variances in one part of the value chain can be due to root causes in another part of the chain

Interaction among variances often occur making it difficult to determine the responsibility for a particular variance

Interaction among variances often occur making it difficult to determine the responsibility for a particular variance


16-56Using Standard Costs ForProduct Costing

Flow of Product Costs Through Manufacturing Accounts(All Costs are Standard Costs)

Flow of Product Costs Through Manufacturing Accounts(All Costs are Standard Costs)

Work-in-Process Inventory

Direct-material cost

Direct-labour cost

Manufacturing Overhead

Finished-Goods Inventory

Cost of Goods Sold Income Summary

Product cost transferredwhen product is finished

Product cost transferred when product is sold

Expense closed into

Income Summary at endof accounting period


16-57

Disposition Of Variances

Variances aretemporary

accounts, likerevenue and

expenseaccounts, and

they are closedout at the end ofthe accounting

period.

Variances aretemporary

accounts, likerevenue and

expenseaccounts, and

they are closedout at the end ofthe accounting

period.

Cost of Goods Sold

Unfavourablevariancesrepresentcosts of

operatinginefficiently,

relative to thestandards, and

thus cause the Cost ofGoods Sold

to be higher

favourablevariancesrepresentcosts of

operatingefficiently,

relative to thestandards, and

thus cause the Cost ofGoods Sold

to be lower


16-58

How Information TechnologyImpacts Standard Costs

Use of Bar CodesUse of Bar Codes

Computer-Aided DesignComputer-Aided Design

In real-time shop floor data-collection systems, production can record the time they begin working on a particular job order

by scanning the bar code on their employee ID badge

In real-time shop floor data-collection systems, production can record the time they begin working on a particular job order

by scanning the bar code on their employee ID badge

When raw materials arrive at the production facility, their bar code is scanned and the event is recorded, automatically updating

inventory records

When raw materials arrive at the production facility, their bar code is scanned and the event is recorded, automatically updating

inventory records

Standard cost of material and labour are stored in the computer data base where

they can be easily accessed to assist engineers in the product design process

Standard cost of material and labour are stored in the computer data base where

they can be easily accessed to assist engineers in the product design process


16-59

Standard Costing: Advantages

! Allows managers to usemanagement by exception

! Provides a basis for sensiblecost comparisons

! Provides a means ofperformance evaluation andrewards for employees

! Allows managers to usemanagement by exception

! Provides a basis for sensiblecost comparisons

! Provides a means ofperformance evaluation andrewards for employees

! Provides motivation foremployees to adhere to

standards

! Results in more stableproduct costs

! Is less expensive thanactual- or normal- costing

systems

! Provides motivation foremployees to adhere to

standards

! Results in more stableproduct costs

! Is less expensive thanactual- or normal- costing

systems


16-60Criticisms Of Standard Costing InToday’s Environment

! Shorter product life cyclesmean that standards are onlyrelevant for a short time

! Too much focus on costminimization rather thanincreasing product quality orcustomer service

! Automated manufacturingprocesses tend to be moreconsistent in meetingproduction specificationsminimizing variances

! Not defined broadly enoughto capture important aspectof ownership

! Shorter product life cyclesmean that standards are onlyrelevant for a short time

! Too much focus on costminimization rather thanincreasing product quality orcustomer service

! Automated manufacturingprocesses tend to be moreconsistent in meetingproduction specificationsminimizing variances

! Not defined broadly enoughto capture important aspectof ownership

! Variances too aggregated inthat they are not tied tospecific product lines,production batches, orflexible management systemcells

! Variances too late to beuseful

! Standard costing out of stepwith the philosophy of costmanagement systems andactivity-based management

! Too much focus on the costand efficiency of direct labour

! Variances too aggregated inthat they are not tied tospecific product lines,production batches, orflexible management systemcells

! Variances too late to beuseful

! Standard costing out of stepwith the philosophy of costmanagement systems andactivity-based management

! Too much focus on the costand efficiency of direct labour


16-61

Kaizen Costing

KAIZEN COSTING is the process of cost reduction during the manufacturing phase of a product

KAIZEN COSTING is the process of cost reduction during the manufacturing phase of a product

Improvement is the goal and responsibility of each workerImprovement is the goal and responsibility of each worker

Cost per product unit

12/31/x0 12/31/x1

Time

Cost basefor next

year

Actual costreductionachieved

Current yearcost base

Kaizen goal:cost reduction

rate

Actual costperformance

of the current year


16-62

END OF CHAPTER

16

Documents

Standard Costing, Variance Analysis, and Kaizen Costing · PDF file · 2004-12-16Irwin/McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited, 2001 16-1 Standard Costing, Variance Analysis,