Lecture Managerial accounting: Creating value in a dynamic business environment (10th edition): Chapter 10 - Ronald W. Hilton, David E. Platt

Chapter 10
Standard Costing and
Analysis of Direct
Costs

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McGraw­Hill/Irwin


Managing Costs
Standard
cost

Actual
cost
Comparison between
standard and actual
performance
level

Cost
variance
10­2


Perfection versus Practical Standards: A
Behavioral Issue

Should we use
practical standards
or perfection

standards?

Practical standards
should be set at levels
that are currently
attainable with
reasonable and
efficient effort.

10­3


Perfection versus Practical Standards: A
Behavioral Issue
I agree. Perfection
standards are
unattainable and
therefore discouraging
to most employees.

10­4


Cost Variance Analysis
Standard Cost Variances

Price Variance

Quantity Variance

The difference between
the actual price and the
standard price.

The difference between
the actual quantity and
the standard quantity.
10­5


A General Model for Variance
Analysis
Actual Quantity
×
Actual Price

Actual Quantity
×
Standard Price

Price Variance
Materials
price- SP)
variance
AQ(AP
Labor rate variance
AQ =Variable
Actual overhead
Quantity
AP =spending

Actual Price
variance

Standard Quantity
×
Standard Price

Quantity Variance
Materials
quantity
variance
SP(AQ
- SQ)
Labor efficiency variance
SP
= Standard
Price
Variable
overhead
SQ
= Standard
Quantity
efficiency
variance
10­6


A General Model for Variance
Analysis
Actual Quantity

×
Actual Price

Actual Quantity
×
Standard Price

Price Variance

Standard Quantity
×
Standard Price

Quantity Variance

Standard price is the amount that should
have been paid for the resources acquired.

10­7


A General Model for Variance
Analysis
Actual Quantity
×
Actual Price

Actual Quantity
×
Standard Price

Price Variance

Standard Quantity
×
Standard Price

Quantity Variance

Standard quantity is the quantity that should
have been used.

10­8


Significance of Cost Variances
1. Size of variance
1. Dollar amount
2. Percentage of standard

What clues help me
to determine the
variances that I should
investigate?

2.
3.
4.
5.
6.

Recurring variances
Trends
Controllability
Favorable variances
Costs and benefits of
investigation
10­9


Behavioral Impact of Standard
Costing
If I buy cheaper materials, my directmaterials expenses will be lower than
what is budgeted. Then I’ll get my bonus.
But we may lose customers because of
lower quality.

10­10


Interaction among Variances
I am not responsible for
the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
time to process it.

You used too much
time because of poorly

trained workers and
poor supervision.

10­11


Standard Costs and Product
Costing
Standard
Standard material
material and
and labor
labor costs
costs
are
are entered
entered into
into Work-in-Process
Work-in-Process
inventory
inventory instead
instead of
of actual
actual costs.
costs.
Standard
Standard cost
cost variances
variances
are

are closed
closed directly
directly to
to
Cost
Cost of
of Goods
Goods Sold.
Sold.
10­12


Advantages of Standard Costing
Sensible Cost
Comparisons

Performance
Evaluation

Management by
Exception

Advantages

Employee
Motivation

Stable Product
Costs
10­13

Criticisms of Standard Costing
Too aggregate,
too late
Too much focus
on direct-labor

Disadvantages

Shorter life
cycles

Not specific

Stable production
required

Narrow
definition
Focus on cost
minimization
10­14


Use of Standard Costs
for Product Costing
Accounts Payable

Raw-material Inventory

Actual quantity at
standard cost

Actual quantity at
actual cost

Direct-Material Price Variance
Unfavorable
variance

Favorable
variance

10­15


Use of Standard Costs
for Product Costing
Raw-material Inventory

Work-in-Process Inventory

Actual quantity at
standard cost

Standard quantity
at standard price

Direct-Material Quantity Variance
Unfavorable

variance

Favorable
variance

10­16


Use of Standard Costs
for Product Costing
Work-in-Process Inventory

Wages Payable

Standard quantity
at standard price

Actual quantity at
actual cost

Direct-Labor Rate Variance
Unfavorable
variance

Favorable
variance

Direct-Labor Efficiency Variance
Unfavorable
variance

Favorable
variance

10­17


Use of Standard Costs
for Product Costing

Cost of Goods Sold
Unfavorable
variance

Favorable
variance

10­18