Financial Accounting_ A Business Perspective_ 8e - Salstrom_1_ by pptfiles

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									Managerial Accounting:
A Decision Focus, 8e




                Chapter 8: Control
                Through Standard
                Costs
                                                                Chapter 8




Standard Costs
l   Standard Costs are:
    –   Based on carefully predetermined amounts
    –   Used for planning labor, material, and overhead requirements
    –   The expected level of performance
    –   Benchmarks for measuring performance
l   A Standard Cost Variance is:
    –   The amount by which an actual cost differs from the standard
        cost
    –   Is Unfavorable if the actual cost exceeds the standard cost
    –   Is Favorable if the actual cost is less than the standard cost
                                                      Chapter 8




Standard Cost Variances

l   Standard Cost Variances are important
    because:
    –   They point to causes of problems and directions for
        improvement
    –   They trigger investigations in the departments
        having the responsibility for incurring the costs.
l   Management by Exception is a practice where
    managers focus on quantities and costs that
    differ from standards.
                          Chapter 8




Setting Standard Costs

l   Practical standards
l   Ideal standards
                                                Chapter 8




Setting Direct Materials Standards
l   Price – generally based on competitive bids for
    the quality and quantity desired.
l   Usage(Quantity) – based on the product design
    specifications.
The standard material cost for one unit of product is:
                                 standard quantity
    standard price for     ×         of material
    one unit of material          required for one
                                   unit of product
                                                   Chapter 8




Setting Direct Labor Standards
l   Rate – typically based on wage surveys and
    labor contracts
l   Efficiency – generally based on time and
    motion studies for each labor operation
    The standard labor cost for one unit of product is:
                                    standard number
      standard wage rate              of labor hours
         for one hour         ×        for one unit
                                        of product
                                               Chapter 8




The Use of Standard Costs in
Developing Budgets

l   A standard is the expected cost for one unit.
l   A budget is the expected cost for all units.
                                                                 Chapter 8




Advantages and Disadvantages of
Standard Costs
l   Advantages of Standard Costs:
    –   Improved cost control and performance evaluation
    –   Better information for planning and decision-making
    –   Possible reductions in production costs
    –   More reasonable and easier inventory measurements
    –   Cost savings in record keeping
l   Disadvantages of Standard Costs:
    –   Emphasis on negative exceptions may impact morale
    –   It may be difficult to determine which variances are significant
    –   Emphasis on negative exceptions may lead to under-reporting
                                           Chapter 8




 A General Model for
 Variance Analysis

           Standard Cost Variances


   Price Variance            Quantity Variance



The difference between     The difference between
the actual price and the   the actual quantity and
     standard price         the standard quantity
                                                   Chapter 8




A General Model for
Variance Analysis

Actual Quantity   Actual Quantity     Standard Quantity
       ×                ×                     ×
 Actual Price     Standard Price        Standard Price



      Price Variance           Quantity Variance
                                                Chapter 8




Computing Variances
Direct Material Example

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

   Records last week show 1,700 pounds of
  material were purchased on May 10 at a total
 cost of $6,630. The material was used to make
 1,000 Zippies that were completed on May 15.
                                                     Chapter 8




 Material Variance Analysis
Actual Quantity   Actual Quantity      Standard Quantity
       ×                ×                     ×
 Actual Price     Standard Price         Standard Price




     Price Variance                 Usage Variance
           AQ(AP - SP)                SP(AQ - SQ)
  AQ = Actual Quantity          SP = Standard Price
  AP = Actual Price             SQ = Standard Quantity
                                                        Chapter 8




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

 1,700 lbs.         1,700 lbs.           1,500 lbs.
    ×                  ×                    ×
$3.90 per lb.      $4.00 per lb.        $4.00 per lb.
  $6,630            $ 6,800               $6,000



        Price variance        Quantity variance
        $170 favorable        $800 unfavorable
                                          Chapter 8



        Computing Variances
        Direct Labor Example
   Hanson Inc. has the following labor
   standard to manufacture one Zippy:
1.5 standard hours per Zippy at $6.00 per hour

  Payroll records last week show 1,450
 hours were worked at a total labor cost
  of $8,990 to make 1,000 Zippies that
      were completed on May 15.
                                                Chapter 8




Labor Variance Analysis

Actual Hours     Actual Hours          Standard Hours
      ×               ×                       ×
Actual Rate      Standard Rate          Standard Rate




     Rate Variance          Efficiency Variance
         AH(AR - SR)                SR(AH - SH)
      AH = Actual Hours          SR = Standard Rate
      AR = Actual Rate           SH = Standard Hours
                                                       Chapter 8




   Labor Variances Summary
  Actual Hours      Actual Hours       Standard Hours
       ×                 ×                    ×
  Actual Rate      Standard Rate        Standard Rate

 1,450 hours       1,450 hours         1,500 hours
      ×                 ×                    ×
$6.20 per hour   $6.00 per hour       $6.00 per hour
  $8,990            $8,700               $9,000



       Rate variance         Efficiency variance
      $290 unfavorable         $300 favorable
                                              Chapter 8




Overhead Variances

Overhead is applied to goods produced using a
           standard overhead rate.
The overhead rate is set prior to the start of the
                    period.


   Standard          Total budgeted overhead cost
                 =
 overhead rate             Estimated activity
                                               Chapter 8




Standard Overhead Rate

  Contains a fixed             Contains a variable
overhead rate which           unit rate which stays
declines as activity          constant at all levels
  level increases.                  of activity.

                  Standard
                Overhead Rate

           Function of standard activity
          level chosen to determine rate.
                                                     Chapter 8




Overhead Variances
Example

Hanson, Inc. has the following flexible budget for
                    overhead:




  Hanson applies overhead based on machine hour activity.
                                           Chapter 8




      Overhead Variances

                  Budgeted            Applied
  Actual         Overhead at        Overhead at
 Overhead       Actual Activity   Standard Hours


      Budget                  Volume
     Variance                 Variance
    AOH - BOH              FOHR(BH - SH)
AOH = Actual Overhead      BH = Budgeted Hours
BOH = Budgeted Overhead    SH = Standard Hours
           FOHR = Fixed Overhead Rate
                                                 Chapter 8




Meaning of Overhead Variances

l   Budget Variance
    –   Shows how economically overhead services
        were purchased and how efficiently overhead
        services were used.
    –   Contains both fixed and variable costs.
l   Volume Variance
    –   Caused by producing at a level other than that
        used for computing the standard overhead rate.
    –   Contains only fixed costs.
                                           Chapter 8

                                             Zippy
Overhead Variances
Example
Hanson’s actual production for the period was
  1,600 Zippies resulting in 3,200 standard
machine hours. Actual total overhead cost for
          the period was $15,450.
Compute the overhead budget and volume
                 variances.
                                                      Chapter 8




Overhead Variances Example

                    Budgeted              Applied
   Actual          Overhead at          Overhead at
  Overhead        Standard Hours       Standard
Hours
    $15,450         $9,000 fixed        3,200 hrs.
                        +                  ×
                  $6,400 variable     $5.00 per hr.
   $15,450           $15,400            $16,000



        Budget variance     Volume variance
        $50 unfavorable      $600 favorable
                                                      Chapter 8




Management By Exception

l   In deciding which variances to investigate,
    possible guidelines include:
    –   Dollar amount or percentage of the standard
    –   Controllability of the cost variance
                                           Chapter 8




Disposing of Variances

         Standard Cost Variances

 Attainable Standard      Unattainable Standard


®Variance  is due to      ®Charge to cost of
 inefficient operation.   goods sold or prorate
®Treat as a loss and      to cost of goods sold,
 close to income          work in process, and
 summary.                 finished goods.
                                         Chapter 8




Nonfinancial Performance
Measures

  Ê   Quality control
  Ë   Material control
  Ì   Inventory control
  Í   Customer complaints
  Î   Delivery performance
  The focus is on customer service rather than
         meeting a particular standard.

								
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