Chapter 12 RESPONSIBILITY ACCOUNTING, SEGMENT REPORTING by S44y04

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									STANDARD COSTING AND
   VARIANCE ANALYSIS
Acc 2203 workshop
Sindhu bala
Variances
Managers use variance analysis to compare actual results with expected results and to
  investigate why actual results differ from expectations for performance evaluation
  purposes.

A firm sets standards for production costs to articulate its expectations with respect to its
   operational performance and financial results. Setting production cost standards
   requires a collaborative effort by accountants, engineers, personnel administrators, and
   production managers

   Direct Material Standards:
       Price standards – Final cost of materials after delivery and net of discounts
       Quantity standards – Use product design specifications
   Direct Labor Standards:
       Rate standards – Use labor contracts, wage surveys
       Time standards – Use time and motion studies
   Variable Overhead Standards:
       Rate standards – Variable portion of the predetermined overhead rate
       Activity standards – Expected usage of the allocation base
   Fixed Overhead Standards:
       Fixed portion of predetermined overhead rate
 Example – Chocolate Co.
                                Chocolate Co.
                    Standard Cost For One Chocolate In 2010
                     Standard quantity   Standard price of    Standard cost of
                          of input to           input            input per
                          make one                               chocolate
                          chocolate
Direct Materials             1                  $7                    $7

Direct Labor              .5 DLH             $10/DLH                  $5

Variable overhead          .5DLH             $6/DLH                   $3

Fixed overhead             .5DLH             $10/DLH                  $5

  Total standard                                                     $20
   cost per unit
Variance Analysis
 Cost variance – the difference between actual cost
   and expected/budgeted/standard cost
 Favorable cost variance – occurs when actual cost
   is lower than expected cost for a given level of
   output
 Unfavorable cost variance – occurs when actual
   cost is greater than expected cost for a given
   level of output
 Do favorable cost variances always signal that the
   company has performed well in keeping its costs
   down?
A General Framework For Variance Analysis

Actual Quantity (AQ)        Actual Quantity             Standard Quantity
X Actual Price (AP)         (AQ) x Standard             (SQ) x Standard Price
                            Price (SP)                  (SP)




                Price Variance                Quantity Variance
                 AQ (AP-SP)                      SP (AQ-SQ)


     IMPORTANT NOTE: SQ is the standard quantity allowed for the
      ACTUAL units produced
A General Framework For Variance Analysis

Actual Quantity (AQ)        Actual Quantity                 Standard Quantity
X Actual Price (AP)         (AQ) x Standard                 (SQ) x Standard Price
                            Price (SP)                      (SP)




                Price Variance                    Quantity Variance
                 AQ (AP-SP)                          SP (AQ-SQ)
                                 Total Variance

     IMPORTANT NOTE: SQ is the standard quantity allowed for the
      ACTUAL units produced
General Framework for Variance Analysis
Direct Material Variances – Example 3
The Cane Company produced 500 industrial plastic containers. The standard
    cost of making each container is 3lb. of plastic at $1.5/lb. (same as above).
          SQ                         x                   SP
Standard quantity of plastic                       Standard price of plastic
allowed for producing 500 containers

3 lb./container x 500 containers = 1,500 lb. x         $1.5/lb =$2,250

To make 500 containers the company purchased and used 2,000 lb. of plastic
   and incurred $4,000 for the cost of plastic.
Total Variance:



The cause of the variance: Was the plastic quantity different from the
   standard? Was the price paid for plastic different from the standard?
Formulas for computing DM variances
    Materials price variance =
     AQ x AP – SP x AQ = AQ (AP – SP)
    Materials quantity variance =
     AQ x SP – SP x SQ = SP (AQ – SQ)
    Compute the materials price variance and materials quantity variance
     for the Cane Company using the last example

 DM price variance =
 DM quantity variance =

 In the last example, the Cane Company purchased expensive materials
     that cost the company $1,000 more than expected; the materials were
     not used as efficiently as expected costing the company an additional
     $750. How can the company act on this information?
Direct Material Variances When Quantity Of Materials
Purchased Is Not Equal To The Quantity Of Materials Used In
Production
When quantity of materials purchased is not equal to the quantity of materials
   used in production:
-Compute materials price variance using quantity of materials purchased
-Compute materials quantity variance using quantity of materials used in
   production


Example: Mert Company uses a standard cost system. Information for raw materials
   for Product A for the month of October follows:
 Standard price per pound of raw materials:                $1.60
 Actual purchase price per pound of raw materials:         $1.55
 Actual quantity of raw materials purchased:               2,000 pounds
 Actual quantity of raw materials used:                    1,900 pounds
 Standard quantity allowed for actual production:          1,800 pounds

Compute Mert’s materials price variance and materials quantity variance for
  Product A
Direct Material Variances When Quantity Of Materials
Purchased Is Not Equal To The Quantity Of Materials Used In
Production

AQxAP                AQxSP                SQxSP




   Explain why the quantity of materials purchased is
    more appropriate in calculating materials price
    variance than the quantity of materials used in
    production
Concept Check
 1. The standard and actual prices per pound of raw material are $4.00 and
       $4.50, respectively. A total of 10,500 pounds of raw material was
       purchased and then used to produce 5,000 units. The quantity standard
       allows two pounds of the raw material per unit produced. What was the
       materials quantity variance?
      a. $5,000 unfavorable
      b. $5,000 favorable
      c. $2,000 favorable
      d. $2,000 unfavorable

 2. Referring to the facts in question 1 above, what was the material price
       variance?
      a. $5,250 favorable
      b. $5,250 unfavorable
      c. $5,000 unfavorable
      d. $5,000 favorable
Concept Check
 3. The actual direct labor wage rate is $8.50 and 4,500 direct labor hours
       were actually worked during the month. The standard direct labor wage
       rate is $8.00 and the standard quantity of hours allowed for the actual
       level of output was 5,000 direct labor hours. What was the direct labor
       efficiency variance?
      a. $4,000 favorable
      b. $4,000 unfavorable
      c. $4,500 unfavorable
      d. $4,500 favorable

 4. Referring to the facts in question 3 above, what is the variable overhead
       efficiency variance if the standard variable overhead per direct labor
       hour is $5.00?
      a. $5,000 favorable
      b. $5,000 unfavorable
      c. $2,500 unfavorable
      d. $2,500 favorable
Variable Overhead Variances
 Actual         Flexible Budget      Flexible Budget
Variable          for Variable         for Variable
Overhead          Overhead at          Overhead at
Incurred         Actual Hours        Standard Hours
AH × AR            AH ×                SH ×
                  SR                  SR


         Rate                Efficiency
       Variance              Variance
       Rate variance = AH(AR - SR)
       Efficiency variance = SR(AH - SH)
Variable Overhead Variances –
Example
ColaCo’s actual production for the period required 3,200 standard machine
  hours. Actual variable overhead incurred for the period was $6,740.
  Actual machine hours worked were 3,300. The standard variable
  overhead cost per machine hour is $2.00.

Compute the variable overhead rate variance and variable overhead
  efficiency variance.

.
Quick Check 
  Yoder Enterprises’ actual production for the period
 required 2,100 standard direct labor hours. Actual
 variable overhead for the period was $10,950.
 Actual direct labor hours worked were 2,050. The
 predetermined variable overhead rate is $5 per
 direct labor hour. What was the variable overhead
 rate variance?
  a. $450 U
  b. $450 F
  c. $700 F
  d. $700 U
Quick Check 

    Yoder Enterprises’ actual production for the period
   required 2,100 standard direct labor hours. Actual
   variable overhead for the period was $10,950.
   Actual direct labor hours worked were 2,050. The
   predetermined variable overhead rate is $5 per
   direct labor hour. What was the VOH efficiency
   variance?
   a. $450 U
   b. $450 F
   c. $250 F
   d. $250 U
Overhead Rates and Overhead
Analysis

     Recall that overhead costs are assigned to
    products and services using a predetermined
               overhead rate (POHR):
 Assigned Overhead = POHR × Standard Activity

                       Overhead from the
                     flexible budget for the
                  denominator level of activity
   POHR    =
                  Denominator level of activity
Overhead Rates and Overhead
Analysis
The predetermined overhead rate can also be broken
down into fixed and variable components:

The variable component is useful for preparing and
analyzing variable overhead variances.

The fixed component is useful for preparing and
analyzing fixed overhead variances.
Normal versus Standard Cost Systems

In a normal cost system, overhead is applied to work
in process based on the actual number of hours
worked in the period.

In a standard cost system, overhead is applied to
work in process based on the standard hours
allowed for the output of the period.
       Fixed Overhead Variances

Actual Fixed         Fixed                 Fixed
 Overhead           Overhead              Overhead
 Incurred            Budget               Applied
                     DH × FR              SH × FR




          Budget               Volume
         Variance              Variance
      FR = Standard Fixed Overhead Rate
      SH = Standard Hours Allowed
      DH = Denominator Hours
 Overhead Rates and Overhead
 Analysis – Example
     ColaCo prepared this flexible budget for overhead:

               Total      Variable      Total        Fixed
Machine      Variable     Overhead      Fixed      Overhead
 Hours       Overhead       Rate      Overhead        Rate
  3,000       $   6,000       ?       $    9,000          ?
  4,000           8,000       ?            9,000          ?

            Let’s calculate overhead rates.

           ColaCo applies overhead based
              on machine-hour activity.
Fixed Overhead Variances – Example


   ColaCo’s actual production required 3,200
   standard machine hours. Actual fixed overhead was
   $8,450. The predetermined overhead rate is based on
   3,000 machine hours.
 What is the budget variance?
 The volume variance?
Volume Variance – A Closer Look

                      Volume
                      Variance


          Results when standard hours
         allowed for actual output differs
          from the denominator activity.

    Unfavorable                       Favorable
when standard hours              when standard hours
< denominator hours              > denominator hours
Volume Variance – A Closer Look

                  Volume
                 Variance
           Does not measure over-
             or under spending
           Results when standard hours
           results from treating fixed
        Itallowed for actual output differs
           from the denominator activity.
            overhead as if it were a
                 variable cost.
    Unfavorable                     Favorable
when standard hours            when standard hours
< denominator hours            > denominator hours
Quick Check 

    Yoder Enterprises’ actual production for the
   period required 2,100 standard direct labor
   hours. Actual fixed overhead for the period was
   $14,800. The budgeted fixed overhead was
   $14,450. The predetermined fixed overhead
   rate was $7 per direct labor hour. What was
   the budget variance?
   a. $350 U
   b. $350 F
   c. $100 F
   d. $100 U

								
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