"Chapter 9 Standard Costing: A functional-based control approach-"
Chapter 9 Standard Costing: A functional-based control approach- I、Developing Unit Input Standards •Price standards (SP) specify how much should be paid for the quantity of the input to be used. •Quantity standards (SQ) specify how much of the input should be used per unit of output. •Unit standard cost is defined as the product of these two standards: SP* SQ Standard cost facilitate budgeting but the input price and quantity standards will also allow us to obtain a more detailed analysis of the flexible budget variance. Establishing Standards Historical experience, engineering studies, and input from operating personnel are three potential sources of quantitative standards. •Standards are often classified as either (1) Ideal standards: Standards that demand maximum efficiency and can be achieved only if everything operates perfectly. or (2) Current attainable standards: can be achieved under efficient operating conditions. Allowance is made for normal breakdowns, interruptions, less than perfect skills, and so on. •Kaizen Standards: continuous improvement standards. A type of currently attainable standard. •Standards and Activity-Based Costing: to avoid measuring the amount of resource consumption on an ongoing basis for literally hundreds of activities, standard consumption patterns are identified based on historical experience. Usage of Standard costing System •Cost Management •Planning and Control •Decision Making and Product Costing Cost Assignment Approaches Manufacturing Costs DM DL OH Actual costing system Actual Actual Actual Normal costing system Actual Actual Budgeted Standard costing system Standard Standard Standard II、Standard Cost Sheets Standard costs are developed for direct materials, direct labor, and overhead used in producing a product or service. Variable and fixed overhead is tied to the direct labor standards (based on unit direct labor hour if in a functional-based cost accounting system) A manager should be able to compute the total amount of inputs allowed from the standard cost sheet to compute efficiency variances. Standard Quantity of materials allowed (SQ) = Unit quantity standard × Actual output Standard Hours allowed (SH) = Unit quantity standard × Actual output III、Variance Analysis and Accounting: Direct Materials and Direct Labor Favorable (F) variance, if actual < standard Unfavorable (U) variance, if actual > standard Total budget variance＝（AP×AQ）－（SP×SQ） AP = Actual price per unit of an input AQ = Actual quantity of an input used SP = Standard unit price of an input SQ = Standard quantity of inputs allowed for the actual output Calculating Direct Materials Price and Usage Variances •Total variance→ price variance ↘ usage variance •Using Formulas to Compute Direct Materials Price and Usage Variances (1) Direct materials price variance（MPV） ＝（AP×AQ）－（SP×AQ） ＝（AP－SP）AQ (2) Direct materials usage variance（MUV） ＝（SP×AQ）－（SP×SQ） ＝（AQ－SQ）SP •Timing of the Price Variance Computation –MPV can be computed at one of two points： (1) when the direct materials are issued for use in production or (2)when they are purchased –Computing MPV at the point of purchase is preferable –If MPV is computed at the point purchase, AQ need to be defined as the actual quantity of direct materials purchased, rather then actual used. •Timing of the Computation of the Direct Materials Usage Variance –MUV should be computed as direct materials are issued for production –Three forms are used in this process: (1) Standard bill of materials (2) Color-coded excessive usage forms (3) Color-coded returned-materials forms Accounting for Direct Materials Price and Usage Variances •MPV is computed at the point of purchase. •The general form of the journal entry associated with the purchase of direct materials for a standard costing is: Materials （SP×AQ） Direct Materials Price Variance （AP－SP）AQ Accounts Payable AP×AQ •General form for the entry to record the issuance and usage of direct materials, assuming an unfavorable MUV: Work in Process (SQ × SP) Direct Materials Usage Variance (AQ – SQ)SP Materials AQ × SP Calculating Direct Labor Variances •Direct Labor Rate and Efficiency Variance: Formula Approach •Direct labor rate variance（LRV）＝（AR×AH）－（SR×AH） ＝（AR－SR）AH AR：Actual hourly wage rate SR：Standard hourly wage rate AH：Actual direct labor hours used •Direct labor efficiency variance（LEV）＝（AH×SR）－（SH×SR） ＝（AH－SH）SR AH：Actual direct labor hours used SH：Standard direct labor hours that should have been used SR：Standard hourly wage rate Accounting for the Direct Labor Rate and Efficiency Variances •The journal entry to record the direct labor rate and efficiency variance is made simultaneously. General form of the journal entry, assuming favorable LRV and unfavorable LEV: Work in Process SH × SR Direct Labor Efficiency Variance (AH –SH)SR Direct Labor Rate Variance (AR – SR)AH Wages Payable AH × AR Investigating Direct Materials and Labor Variances •Control limits: the top and bottom measures of the allowable range (1) Upper control= standard + allowable deviation (2) Lower control limit= standard-allowable deviation. •Responsibility for the Direct Materials Variances： (1) The responsibility for controlling the direct materials price variance is usually the purchasing agent’s. (2) The production manager is generally responsible for direct materials usage. •Responsibility for the Direct Labor Variances： (1) Responsibility for the direct labor rate variance is generally assigned to the individuals who decide how direct labor will be used. (2) The same is true of the direct labor efficiency variance. Disposition of Direct Materials and Direct Labor Variances •Disposition of the variances is usually made at the end of the year by either closing them to Cost of Goods Sold or prorating them among WIP, COGS, and Finished Goods. Assuming the variances are immaterial, the following entry would be made to dispose of them. Cost of Goods Sold xxxx Direct Materials Price Variance xxxx Direct Materials Usage Variance xxxx Direct Labor Rate Variance xxxx Direct Labor Efficiency Variance xxxx IV、Variance Analysis: Overhead Costs Four-Variance Method: The Two Variable Overhead Variances •Variable Overhead Spending Variance ＝（AVOR×AH）－（SVOR×AH） ＝（AVOR－SVOR）AH AVOR：Actual variable overhead rate SVOR：Standard variable overhead rate •Variable Overhead Efficiency Variance＝（AH－SH）SVOR Four-Variance Method: The Two Fixed Overhead Variances •The Fixed Overhead Spending Variance＝AFOH－BFOH AFOH：Actual fixed overhead BFOH：Budgeted fixed overhead •Fixed Overhead Volume Variance ＝Budgeted fixed overhead－Applied fixed overhead ＝【Standard fixed overhead rate×SH(D)】－（Standard fixed overhead rate×SH） SH(D)：standard hours allowed for the denominator volume •Graphical Representation of Fixed Overhead Variances Accounting for Overhead Variances (1) Overhead is applied to production by debiting Work in Process and crediting variable and fixed control accounts. Work in Process xxxx Variable Overhead Control xxxx Fixed Overhead Control xxxx (2) The actual overhead is accumulated on the debit side of the overhead control accounts. Variable Overhead Control xxxx Fixed Overhead Control xxxx Miscellaneous Accounts xxxx (3) Periodically (e.g., monthly), overhead variance reports are prepared. At the end of the year, the applied variable and fixed overhead costs and the actual fixed overhead costs are closed out and the variances isolated. Fixed Overhead Control xxxx Variable Overhead Efficiency Variance xxxx Fixed Overhead Spending Variance xxxx Variable Overhead Control xxxx Variable Overhead Spending Variance xxxx Fixed Overhead Volume Variance xxxx (4) At the end of the year, the applied variable and fixed overhead costs and the actual fixed overhead costs are closed out and the variances isolated. The overhead variances are then disposed of by closing them to Cost of Good Sold if they are not material or by prorating them among Work in Process, Finished Goods, and Cost of Goods Sold if they are material. (Entries assume that variances are immaterial) Variable Overhead Spending Variance xxxx Fixed Overhead Volume Variance xxxx Cost of Good Sold xxxx Cost of Goods Sold xxxx Variable Overhead Efficiency Variance xxxx Fixed Overhead Spending Variance xxxx Two-and Three-Variance Analyses •Two and three variance analyses don’t require knowledge of actual variable and actual fixed overhead. (1) Two-Variance Analysis Total variance= total fixed and variable overhead variance Volume variance is the same as that of the four-variance method. Budget variance= SVOR*SH + Actual overhead (2) Three-Variance Analysis Total variance= total variable and fixed overhead variance Spending Variance= the sum of variable and fixed overhead spending variances The variable overhead efficiency and the fixed overhead volume variance is the same as that of the four-variance method. V、Mix and Yield Variances: Materials and Labor A standard mix specification identifies the proportion of each DM and the proportion of each type of DL that should be used for producing the product. Mix variance is created whenever the actual mix of inputs differs from the standard mix Yield variance occurs whenever the actual yield (output) differs from the standard yield. DM Mix and Yield Variance (1) DM Mix Variance Mix variance is the difference in the standard cost of the actual mix of input used and the standard cost of the mix of inputs that should have been used. The quantity of each input that should have been used given the total actual input quantity (SM) = stand mix proportion * total actual input quantity Mix Variance=Σ (AQi-SMi)SPi (2) DM Yield Variance Yield variance=–( standard yield-actual yield) SPy Standard yield= yield ratio* total actual inputs Supplement - The relationship between Four-Variances, Three-Variances and Two-Variances ˙The total overhead variance is broken down into component variances：the number of component variances computed depends on the method of variances analysis used. Four-Variance Three-variance Two-variance 1. Variable overhead spending 5. Spending Variance 8. Budget Variance variance = (1)+(3) =(1)+(2)+(3) Variances 2. Variable overhead efficiency 6. Efficiency Variance= (2) 9. Volume Variance variance 7. Volume Variance = (4)=(9) = (4) =(7) 3. Fix overhead spending variance 4. Fix overhead volume variance ˙Similarity among these methods： …Total variance is the sum of the total fixed and variable overhead variances. ˙Differences among these methods： （1） Two- and three-variance analyses do not require knowledge of actual variable and actual fixed overhead. （2） Four-variance method provides the most detail and, thus more information than other two methods. （3） Four-variance method is recommended over these two approaches.