Managerial accounting 6e jams jambalvo chapter 11

CHAPTER
CHAPTER 11
11
Standard Costs
and
Variance Analysis

Slide 11-2


Standard
Standard Costs
Costs and
and Budgets
Budgets



Standard cost



Cost that management believes should be incurred to produce a product
or service under anticipated conditions



Standard costs can be used by manufacturing and service companies

 A tool manufacturer may set a standard cost for producing a hammer

 A bank may set a standard cost for processing a check

Learning objective 1: Explain how standard costs are developed, and calculate and interpret
Slide 11-3

variances for direct material and direct labor.


Standard
Standard Costs
Costs and
and Budgets
Budgets




The term standard cost often refers to the cost of a single unit
The term budgeted cost often refers to the cost, at standard, of the total
number of budgeted units



The cost information contained in budgets must be consistent with
standard costs

Learning objective 1: Explain how standard costs are developed, and calculate and interpret
Slide 11-4

variances for direct material and direct labor.

Standard
Standard Costs
Costs and
and Budgets
Budgets



If the materials budget indicates purchases of 5,000 pounds, standard cost is $25,000
(5,000 pounds * $5 standard cost per pound)



If the labor budget is prepared for 1,000 units produced, 3,000 labor hours are needed at a
standard cost of $30,000 (3,000 hours * $10)

Learning objective 1: Explain how standard costs are developed, and calculate and interpret

Slide 11-5

variances for direct material and direct labor.


Starbucks
Starbucks

Learning objective 1: Explain how standard costs are developed, and calculate and interpret
Slide 11-6

variances for direct material and direct labor.


Development
Development of
of Standard
Standard Costs
Costs



Standard costs for material, labor and overhead are developed in a
variety of ways



Standard quantity and price for material may be specified:

 In engineering plans that provide a list of material
 In recipes or formulas
 By time and motion studies
 In price lists provided by suppliers

Learning objective 1: Explain how standard costs are developed, and calculate and interpret
Slide 11-7

variances for direct material and direct labor.

Development
Development of
of Standard
Standard Costs
Costs



Standard quantity and rate for direct labor may be specified:








By time and motion studies
Through analysis of past data
By management expectations of rates to be paid
In contracts that set labor rates

Standard costs for overhead involves procedures similar to those used to
develop predetermined overhead rates

Learning objective 1: Explain how standard costs are developed, and calculate and interpret
Slide 11-8

variances for direct material and direct labor.

Ideal
Ideal versus
versus Attainable
Attainable Standards
Standards



In developing standard costs, some managers emphasize ideal
standards while others use attainable standards



Ideal standards assumes that no obstacles to the production process will
be encountered

 Managers who support ideal standards believe they motivate employees to
strive for the best possible control over production costs

Learning objective 1: Explain how standard costs are developed, and calculate and interpret
Slide 11-9

variances for direct material and direct labor.


Ideal
Ideal versus
versus Attainable
Attainable Standards

Standards



Attainable standards are standard costs that take into account the
possibility that a variety of circumstances may lead to costs that are
greater than ideal



If equipment breakdowns and defects are a fact of life, it makes sense to
plan for their associated costs



Most managers support the use of attainable standards

Learning objective 1: Explain how standard costs are developed, and calculate and interpret
Slide 11-10

variances for direct material and direct labor.


Test Your Knowledge 1
What is the primary benefit of a standard costing system?

a.
b.
c.
d.

It records costs at what should have been incurred
It allows a comparison of differences between actual and standard costs
It is easy to implement
It is inexpensive and easy to use

Answer: b
It allows a comparison of differences between actual and standard costs

Learning objective 1: Explain how standard costs are developed, and calculate and interpret
Slide 11-11

variances for direct material and direct labor.


Standard
Standard Costing
Costing

Learning objective 1: Explain how standard costs are developed, and calculate and interpret

Slide 11-12

variances for direct material and direct labor.


A
A General
General Approach
Approach to

to Variance
Variance Analysis
Analysis



Companies that use standard costing can analyze the difference
between a standard and an actual cost



Called a standard cost variance

 Determines whether operations are being performed efficiently



The analysis is called variance analysis

 It generally involves breaking down the differences between standard and
actual cost into two components

Learning objective 1: Explain how standard costs are developed, and calculate and interpret
Slide 11-13

variances for direct material and direct labor.


A
A General

General Approach
Approach to
to Variance
Variance Analysis
Analysis



Direct material variances






Material quantity variance

Direct labor variances






Material price variance

Labor rate variance
Labor efficiency variance

Manufacturing overhead variances




Overhead volume variance
Controllable overhead variance

Learning objective 1: Explain how standard costs are developed, and calculate and interpret
Slide 11-14

variances for direct material and direct labor.


Material
Material Variances
Variances



Material price variance



Difference between the actual price per unit of material (AP) and the standard
price per unit of material (SP) times the actual quantity of material purchased
(AQ)



Material quantity variance



Difference between the actual quantity of material used (AQ) and the standard
quantity of material allowed for the number of units produced (SQ) times the
standard price of material (SP)

Learning objective 1: Explain how standard costs are developed, and calculate and interpret
Slide 11-15

variances for direct material and direct labor.


Material
Material Variances
Variances





Standard for 1 unit: 400 lbs @ $10 per lb
Materials purchased: 200,000 lbs @ $9.90 per lb
Materials used: 181,000 lbs to produce 450 units

Learning objective 1: Explain how standard costs are developed, and calculate and interpret

Slide 11-16

variances for direct material and direct labor.

You
You Get
Get What
What You
You Measure!
Measure!

Learning objective 1: Explain how standard costs are developed, and calculate and interpret
Slide 11-17

variances for direct material and direct labor.


Test Your Knowledge 2
Data for chips used in the production of computers
Standard: 3 chips per computer @ $6.50 per chip
Quantity purchased: 200 chips for total of $1,350
Quantity used: 123 chips for production of 40 units
Calculate the material price variance

Learning objective 1: Explain how standard costs are developed, and calculate and interpret

Slide 11-18

variances for direct material and direct labor.


Test Your Knowledge 3

Data for chips used in the production of computers
Standard: 3 chips per computer @ $6.50 per chip
Quantity purchased: 200 chips for $1,350 total
Quantity used: 123 chips for production of 40 units

Calculate the material quantity variance:

Learning objective 1: Explain how standard costs are developed, and calculate and interpret

Slide 11-19

variances for direct material and direct labor.


Direct
Direct Labor
Labor Variances
Variances



Labor Rate Variance



Difference between actual wage rate (AR) and standard wage rate (SR)
times the actual number of labor hours worked (AH)



Labor Efficiency Variance



Difference between actual number of hours worked (AH) and the standard
labor hours allowed for the number of units produced (SH) times the
standard labor wage rate (SR)

Learning objective 1: Explain how standard costs are developed, and calculate and interpret
Slide 11-20

variances for direct material and direct labor.


Direct
Direct Labor
Labor Variances
Variances




Standard for 1 unit: 4 hours @ $15 per hour
Actual labor: 1,700 hours @ $15.50 per hour to produce 450 units

Learning objective 1: Explain how standard costs are developed, and calculate and interpret

Slide 11-21

variances for direct material and direct labor.

Test Your Knowledge 4
Data for labor used in the production of sneakers
Standard: .25 hours per sneaker at $12.00 per hour
Actual quantity produced: 24,500 sneakers
Quantity used: 6,000 hours, total cost $69,000

Calculate the labor rate variance:

Learning objective 1: Explain how standard costs are developed, and calculate and interpret

Slide 11-22

variances for direct material and direct labor.


Test Your Knowledge 5
Data for labor used in the production of sneakers
Standard: .25 hours per sneaker at $12.00 per hour
Actual quantity produced: 24,500 sneakers
Quantity used: 6,000 hours, total cost $69,000

Calculate the labor efficiency variance:

Learning objective 1: Explain how standard costs are developed, and calculate and interpret

Slide 11-23

variances for direct material and direct labor.

Overhead
Overhead Variances
Variances



Controllable overhead variance



Difference between the actual amount of overhead and amount of overhead that
would be included in a flexible budget for the actual level of production



Overhead volume variance



Difference between the amount of overhead included in the flexible budget and
the amount of overhead applied to production using the standard overhead rate

Learning objective 2: Calculate and interpret variances for manufacturing overhead, and calculate
Slide 11-24

the financial impact of operating at more or less than planned capacity.

Overhead
Overhead Variances
Variances





Standard for 1 unit: $50 overhead applied
Actual overhead: $23,000 to produce 450 units
Flexible budget overhead: $15,000 fixed + $20 per unit produced

Learning objective 2: Calculate and interpret variances for manufacturing overhead, and calculate

Slide 11-25

the financial impact of operating at more or less than planned capacity.