Week 9 - Standard Costing: A Managerial Control Tool Chapter 14

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Week 9 - Standard Costing A Managerial Control
ToolChapter 14
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Learning Objectives

• 1. Explain how unit standards are set and why
  standard cost systems are adopted.
• 2. Explain 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 materials and labour variances
  and explain how they are used for control.

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Learning Objectives (continued)

• 5. Compute the variable and fixed overhead
  variances and explain their meaning.
• 6. Prepare journal entries for materials and
  labour variances and describe the accounting for
  overhead variances. (Appendix A)
• 7. Use variance analysis as an analytical tool
  for profitability analysis. (Appendix B)

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Components of a Standard Cost

• A quantity standard
• A price standard

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Developing Standards

• Experience
• Engineering studies
• Experts
• Studies of competitors
• Targets

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Purposes of Standards

• 1. Planning and Control
• 2. Product Costing

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Cost Assignment Approaches
Manufacturing Costs
Direct Direct
Materials Labour
Overhead
Actual cost system Actual
Actual Actual Normal cost
system Actual Actual
Budgeted Standard cost system
Standard Standard
Standard
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Types of Standards

• Ideal Standards
• Currently Attainable

How are Standards Developed?
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Development of Standards

• I. Types of Standards
• Ideal standards standards that demand maximum
  efficiency and can be achieved only if everything
  operates perfectly.
• Currently attainable standards standards that
  can be achieved under efficient operating
  conditions (demanding but achievable).
• II. Sources for Quantitative Standards
• 1. Historical experience
• 2. Engineering studies
• 3. Input from operating personnel

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Development of Standards (continued)

• III. Factors for Price Standards
• Materials
• 1. Market forces
• 2. Discounts
• 3. Freight
• 4. Quality
• Labour
• 1. Market forces
• 2. Trade unions
• 3. Payroll taxes
• 4. Qualifications

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A Standard Cost Sheet
Standard
Standard Standard Description
Price Usage Cost/unit
Direct materials 1.50/kg. 10 kg.
15.00 Direct labour
6.00/hr. 2 hours
12.00 Variable overhead 10.00/hr. 2
hours 20.00 Fixed Overhead1
8.00/hr. 2 hours 16.00

63.00
Other Operating Data for Period Units produced
20,000 units 210,000 pounds purchased _at_ 1.55
per kilogram 205,000 kg. used Direct labour
costs 39,000 hours _at_ 6.10 per hour Variable
overhead 410,000 1Fixed overhead 300,000
Rate (310,000/38,750 hrs)
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Variance Analysis General Description

• 1. AQxAP 2. AQxSP
  3. SQxSP
• Price Variance
  Usage Variance
• (1 - 2)
  (2 - 3)
• Budget
  Variance
• (1 -
  3)

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Variance Investigation

• I. The Decision to Investigate
• Variances are investigated if two conditions are
  met
• 1.The variance is material
• 2. The benefits of investigating and taking
  corrective action are greater than its costs.
• II. Control Limits Standard /- Allowable
  Deviation
• Investigation occurs for values outside the
  allowable range.

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Materials Variances
Formula Approach MPV (AP - SP)AQ
MQV (AQ - SQ)SP
(1.55-1.50)210,000
(205,000 - 200,000)1.50 10,500 U
7,500U
SQ 20,000 units x 10 kg per unit
Diagram Approach
AQ x AP AQ x SP AQ
x SP SQ x SP
210,000 x 1.55 210,000 x 1.50 205,000 x
1.50 200,000 x 1.50
MPV 10,500U MQV 7,500U

Responsibility Purchasing
Responsibility Manufacturing
Flexible Budget Variance 18,000U
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Labour Variances
Formula Approach LPV (AP - SP)AQ
LQV (AQ - SQ)SP
(6.10-6.00)39,000 hrs
(39,000 -40,000)6 3,900 U
6,000F
SQ 20,000 units x 2 hrs. per unit
Diagram Approach
AQ x AP AQ x SP
SQ x SP
39,000 hrs x 6.10 39,000hrs. x 6.00
40,000hrs. x 6.00
LPV 3,900U LQV
6,000F
Responsibility Human Res. Responsibility
Manufacturing
Flexible Budget Variance 2,100F
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Variable Overhead Variances
Formula Approach OSV (AP - SP)AQ
OEV (AQ - SQ)SP
410,000 - (10 x 39,000 hrs) (39,000
- 40,000)10 20,000U
10,000F
SQ 20,000 units x 2 hrs. per unit
Diagram Approach
AQ x AP AQ x SP
SQ x SP
410,000 39,000 hrs x 10
40,000hrs. x 10
OSV 20,000U OEV
10,000F
Responsibility Mfg.
Responsibility Mfg.
Flexible Budget Variance 10,000U
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Fixed Overhead Variances
Actual Overhead Budgeted Overhead
Applied Overhead
300,000
310,000 SQ x SP(40,000 x 8)
OSV 10,000F PVV 10,000F

Responsibility Mfg.
Responsibility Difficult to Assess
Alternative Approach for Computing Denominator
Variance
Planned level 38,750
hrs. Applied level (SQ)
40,000 hrs. Over
1,250 hrs.
x 8 Denominator
Variance 10,000F
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Accounting for Variances
Journal Entry for Purchase of Direct
Materials Raw Materials Inventory 315,000
(AQ x SP) MPV
10,500 Accounts Payable
325,500
(AQ x AP) Rule Unfavourable variances are
debited and favourable variances are
credited.
DR. CR.
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Accounting
for Variances (Continued)
Recording the Issuance of Materials to Production
DR. CR.
Work in Process 300,000 (SQ x
SP) MQV 7,500
Raw Materials Inventory 307,500
(AQ x SP) AQ Actual quantity used in
production
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Accounting for Variances (Continued)
Recording the Direct Labour Costs
DR. CR.
Work in Process 240,000 (SQ x SP) LPV
3,900 Accrued
Payroll 237,900
(Actual Cost) LQV
6,000
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Entries for Var. Manu. Overhead

• 1. Var. manu. overhead control
  120,000
• Accts payable control, etc.
  120,000
• 2. Work-in-process control
  110,000
• Vari. manu. overhead cost alloca
  110,000
• 3. Var. manu. overhead alloc.
  110,000
• Var. manu. overhead eff. var.
  12,000
• Var. manu. overhead control
  120,000
• Var. manu. overhead spending var.
  2,000

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Entries for Fixed Manu. Overhead

• 1. Fix. manu. overhead control
  265,000
• Wages payable, acc. amort., etc
  265,000
• 2. Work-in-process control
  235,000
• Fix. manu. overhead control
  235,000
• 3. Fix. manu. overhead control
  235,000
• Fix. manu. overhead spend. var..
  10,000
• Fix. manu. prod. overhead vol. Var.
  20,000
• Fix. manu. overhead control
  265,000

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End-of-Period Adjustments

• Var. manu. overhead eff. var.
  12,000
• Var. manu. overhead spending var. 2,000
• Fix. manu. overhead spend. var..
  10,000
• Fix. manu. prod. overhead control
  20,000
• Inventories, WIP, FG
  10,000
• Cost of goods sold
  30,000

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Profitability Analysis with Variance Analysis

• Variances suggest underlying problems or
  shortcomings
• Profit variances can be divided into fixed
  overhead spending variances, variable overhead
  spending and efficiency variances, etc.

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In-Class Assignment

• Required Explain how you would develop a sales
  forecast for a McDonalds outlet.

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A Forecast for a McDonalds Outlet

• Obtain economic forecasts
• Analyze sales trends
• Analyze competitors
• Analyze customer patterns
• Develop a tentative forecast for review by
  superiors, etc.
• Final forecast

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Numerical Questions from the Back of Chapter 14

• E14-3, E14-7, E14-9, P14-3.

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Question E14-7

• Please go to your textbook to read the question

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Question E14-9

• Please go to your textbook to read the question

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Question P14-3

• Please go to your textbook to read the question