Libby, Libby and Short

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Standard Costing A Managerial Control Tool
CHAPTER
2
Objectives
1. Tell how unit standards are set and why
standard costing systems are adapted. 2. State
the purpose of a standard cost sheet. 3. Describe
the basic concepts underlying variance analysis,
and explain when variances should be
investigated. 4. Compute the material and labor
variances, and explain how they are used for
control.
After studying this chapter, you should be able
to
Continued
3
Objectives
5. Calculate the variable and fixed overhead
variances, and give their definitions. 6. Appendix
Prepare journal entries for materials and
labor variances, and show how to account for
overhead variances.
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Cost control often means the difference between
success and failure.
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Why Standard Cost Systems Are Adopted

• Standard costing systems enhance planning and
  control and improve performance measurement.
• Standard costing systems facilitate product
  costing.

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Cost Assignment Approaches
Manufacturing Costs

• Direct Direct
• Materials Labor Overhead
• Actual costing system Actual Actual Actual
• Normal costing system Actual Actual Budgeted
• Standard costing system Standard Standard Standard
  

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Standard Cost Sheet for Corn Chips
Standard Standard Standard Price Usage Cost Sub
total
Description
Direct materials Yellow corn 0.006 18
oz. 0.108 Cooking oil 0.031 2
oz. 0.062 Salt 0.005 1 oz. 0.005 Lime 0.400 0.01
oz. 0.004 Bags 0.044 1 bag. 0.044 Total
direct materials 0.223
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Standard Cost Sheet for Corn Chips
Standard Standard Standard Price Usage Cost Sub
total
Description
Direct materials 0.223 Direct
labor Inspectors 7.000 0.0070
hr. 0.049 Machine operators 10.000 0.0008 hr.
0.008 Total direct labor 0.057 Overhead Varia
ble overhead 3.850 0.078 hr. 0.030 Fixed
overhead 32.050 0.0078 hr. 0.250 Total
overhead 0.280 Total standard unit
cost 0.560
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During the first week of March, 100,000 packages
of corn chips are produced.
The standard quantity of yellow corn meal per
package is 18 ounces.
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Standard Quantity of Materials Allowed
SQ Unit quantity standard x Actual output 18
x 100,000 1,800,000 ounces
Standard Hours Allowed
SH Unit labor standard x Actual
output 0.0008 x 100,000 80 direct labor
hours
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Total variance Price variance Usage variance
(AP SP)AQ (AQ SQ)SP
(AP x AQ) (SP x AQ) (SP x AQ) (SP
x SQ)
(AP x AQ) (SP x AQ) (SP x AQ) (SP x
SQ)
(AP x AQ) (SP x SQ)
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Variance Analysis General Description
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Unfavorable variances occur whenever actual
prices or usage of inputs are greater than
standard prices or usage.
Favorable variances occur whenever the opposite
occurs.
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Control Chart
Cost
110,000
100,000
90,000
Time
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Variance Analysis Materials and Labor
Actual production 48,500 bags of corn
chips Actual cost of corn 780,000 ounces of
0.0069 5,382 Actual cost of
inspection labor 360 hours at 7.35
2,646
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Variance Analysis Columnar Approach
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Material Price Variance
MPV (AP SP)AQ
The actual price per unit
The standard price per unit
The actual quantity of material used
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Material Price Variance
MPV (AP SP)AQ
(0.0069 0.0060)780,000 0.0009 x
780,000 702 U
Percent of SP x SQ 702/4,680 15
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Direct Materials Usage Variance
MUV (AQ SQ)SP
The actual quantity of materials used
The standard quantity of materials allowed for
the actual output
The standard price per unit
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Direct Materials Usage Variance
MUV (AQ SQ)SP
(780,000 873,000)(0.006) 93,000 x
0.006 558 F
Percent of SQ x SP 558/5,238 10.7
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Labor Rate Variances
LRV (AR SR)AH
The actual hourly wage rate
The standard hourly wage rate
The actual direct labor hours used
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Labor Rate Variances
LRV (AR SR)AH
(7.35 7.00)360 0.35 x 360 126 U
Percent of SR x SH 126/2,520 5
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Labor Variances Columnar Approach
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Labor Efficiency Variances
LEV (AH SH) SR
The actual direct labor hours used
The standard direct labor hours that should have
been used
The standard hourly wage rate
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Labor Efficiency Variances
LEV (AH SH)SR
(360 339.5)7 20.5 x 7 143.50 U
Percent of SH x SR 143.50/2,376.50 6
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Variable Overhead Variances
Variable overhead rate (standard) 3.85/DLH Actual
variable overhead costs
1,600 Actual hours worked 400 Bags of chips
produced 48,500 Hours allowed for
production 373.3 Applied variable overhead 1,456
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Variable Overhead Variances Columnar Approach
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Variable Overhead Spending Variances
VOSV (AVOR x AH) (SVOR x AH)
(AVOR SVOR)AH (4.00 3.85)400 60 U
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Crunch Chips, Inc. Flexible Budget Performance
Report For the Week Ended March 8, 2004
Cost Formula
Actual Costs
Spending Variance
Budget
Gas 3.00 1,190 1,200 10 F Electricity 0.78 38
5 312 73 U Water 0.07 25 28
3 F Total cost 3.85 1,600 1,540
60 U
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Crunch Chips, Inc. Performance Report For the
Week Ended March 8, 2004
Budget for Standard Hours
Actual Costs
Spending Variance
Cost Formula
EfficiencyVariance
Budget
Gas 3.00 1,190 1,200 10 F Electricity 0.78 385
312 73 U Water 0.07 25 28
3 F Total cost 3.85 1,600 1,540 60
U
1,135 65 U 295 17 U 26 2
U 1,456 84 U
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Fixed Overhead Variances
Budgeted or Planned Items
Budgeted fixed overhead 749,970 Practical
activity 23,400 direct labor hours Standard fixed
overhead rate 32.05
Actual Results
Actual production 2,750,000 bags of chips Actual
fixed overhead cost 749,000 Standard hours
allowed for actual production 21,450
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Total Fixed Overhead Variances
Applied fixed overhead
Standard fixed overhead rate x Standard hours

32.05 x 21,450 687,473 (rounded)
61,527 underapplied
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Fixed Overhead Variances Columnar Approach
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Crunch Chips, Inc. Performance Report For the
Year Ended 2004
Actual Costs
Budgeted Cost
Fixed Overhead Items
Variance
Depreciation 530,000 530,000 ----
Salaries 159,370 159,970 600
F Taxes 50,500 50,000 500 U Insurance
9,130 10,000 870 F Total fixed
overhead 749,000 749,970 970 F
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Volume Variance
Volume variance
32.05(23,400 21,450) (32.05 x 23,400)
(32.05 x 21,450) 749,970 687,473
Budgeted fixed overhead Applied fixed overhead
62,497 U
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Appendix Accounting for Variances
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The actual price is 0.0069 per ounce of corn and
standard price is 0.0060, and 780,000 ounces of
corn are purchased.
Materials Inventory 4 680 00 Materials
Price Variance 702 00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
Accounts Payable 5 382 00
Material Price Variance
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During the period 780,000 ounces of corn is
placed into production. The standard quantity is
873,000 ounces, and standard price is 0.006.
Work in Process 5 238 00
Materials Usage Variance 558 00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
Materials Inventory
4 680 00
Material Usage Variance
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During the period the firm has 360 actual
inspection hours, while the standard hours for
the units produced is 339.5 hours. The actual
rate is 7.35 per hour while the standard rate is
7.00 per hour.
Work in Process 2 376 00 Labor Efficiency
Variance 143 50 Labor Rate Variance 126 00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
Accrued Payroll 2 646 00
Labor Variances
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At the end of the year, the variances for
materials and labor are usually closed to Cost of
Goods Sold.
Cost of Goods Sold 971 50 Material
Price Variance 702 00 Labor Efficiency
Variance 143 50 Labor Rate Variance 126
00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
Closing Variances
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At the end of the year, the variances for
materials and labor are usually closed to Cost of
Goods Sold.
Material Usage Variance 558 00 Cost
of Goods Sold 558 00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
Closing Variances
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Chapter Nine
The End
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