Managerial accounting 5th jiambalvo ch11

Prepared by
Debby Bloom-Hill
CMA, CFM


CHAPTER 11
Standard Costs
and
Variance Analysis

Slide 11-2


Standard Costs and 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
Slide 11-3

Learning objective 1: Explain how standard
costs are developed


Standard Costs and 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

Slide 11-4

Learning objective 1: Explain how standard
costs are developed


If materials budget indicates purchases of 5,000 pounds,
standard cost is $25,000 (5,000 pounds * $5 standard cost
per pound)
If 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)
Slide 11-5

Learning objective 1: Explain how standard
costs are developed


Starbucks

Slide 11-6

Learning objective 1: Explain how standard
costs are developed


Development of Standard 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
Slide 11-7

Learning objective 1: Explain how standard
costs are developed


Development of Standard 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
Slide 11-8

Learning objective 1: Explain how standard
costs are developed


Ideal versus Attainable 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
Slide 11-9

Learning objective 1: Explain how standard
costs are developed


Ideal versus Attainable 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
Slide 11-10

Learning objective 1: Explain how standard
costs are developed


Test Your Knowledge 1
What is the primary benefit of a standard
costing system?
a. It records costs at what should have been
incurred
b. It allows a comparison of differences
between actual and standard costs
c. It is easy to implement
d. It is inexpensive and easy to use
Answer: b
It allows a comparison of differences between
actual and standard costs
Slide 11-11

Learning objective 1: Explain how standard
costs are developed

Standard Costing

Slide 11-12

Learning objective 1: Explain how standard
costs are developed


A General Approach to Variance
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
Slide 11-13

Learning objective 1: Explain how standard
costs are developed


A General Approach to Variance

Analysis
 Direct material variances
 Material price variance
 Material quantity variance

 Direct labor variances
 Labor rate variance
 Labor efficiency variance

 Manufacturing overhead variances
 Overhead volume variance
 Controllable overhead variance

Slide 11-14

Learning objective 1: Explain how standard
costs are developed


Material 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)
Slide 11-15

Learning objective 2: Calculate and interpret
variances for direct material


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

Slide 11-16

Learning objective 2: Calculate and
interpret variances for direct material


You Get What You Measure!

Slide 11-17

Learning objective 2: Calculate and
interpret variances for direct material


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

Slide 11-18

Learning objective 2: Calculate and
interpret variances for direct material


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:

Slide 11-19

Learning objective 2: Calculate and
interpret variances for direct material


Direct Labor 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)

Slide 11-20

Learning objective 3: Calculate and interpret
variances for direct labor


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

Slide 11-21

Learning objective 3: Calculate and
interpret variances for 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:

Slide 11-22

Learning objective 3: Calculate and
interpret variances for 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 :

Slide 11-23

Learning objective 3: Calculate and
interpret variances for direct labor


Overhead 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
Slide 11-24

Learning objective 4: Calculate and interpret variances for
manufacturing overhead


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

Slide 11-25

Learning objective 3: Calculate and
interpret variances for direct labor