Chapter 11 Standard Costs and Variance Analysis - PowerPoint PPT Presentation

About This Presentation
Title:

Chapter 11 Standard Costs and Variance Analysis

Description:

Title: Material Price Variance Author: Jeffrey S. Zanzig Last modified by: Jeffrey Zanzig Created Date: 7/11/2000 7:27:18 PM Document presentation format – PowerPoint PPT presentation

Number of Views:142
Avg rating:3.0/5.0
Slides: 21
Provided by: JeffreyS181
Learn more at: https://www.jsu.edu
Category:

less

Transcript and Presenter's Notes

Title: Chapter 11 Standard Costs and Variance Analysis


1
Chapter 11Standard Costs and Variance Analysis
2
Presentation Outline
  1. Types of Standards
  2. Variance Calculations
  3. Investigation of Standard Cost Variances

3
I. Types of Standards
  • Ideal Standards
  • Can only be attained under the best
    circumstances. No allowance for machine
    breakdowns or work interruptions
  • Attainable Standards
  • Tight but attainable standards. Allows for
    machine downtime and employee rest periods.

4
II. Variance Calculations
  1. Material Price Variance
  2. Material Price Variance Journal Entry
  3. Material Quantity Variance
  4. Material Quantity Variance Journal Entry
  5. Labor Rate Variance
  6. Labor Efficiency Variance
  7. Journal Entry for Direct Labor Variances
  8. Controllable Overhead Variance
  9. Overhead Volume Variance

5
A. Material Price Variance
MPV (AP SP) AQ
where
MPV Material price variance
AP Actual unit price of materials
SP Standard unit price of materials
AQ Actual quantity of materials purchased
Decision Rule
AP gt SP Unfavorable
AP lt SP Favorable
6
B. Material Price Variance Journal
Entry(Recorded at Time of Purchase)
Raw Materials (AQ x SP)
XXX Materials Price Variance (AP-SP)AQ XXX
or XXX Accounts Payable (AQ x AP)
XXX
7
C. Material Quantity Variance
MQV (AQ SQ) SP
where
MQV Material quantity variance
AQ Actual quantity of materials put into
production
SQ Standard quantity allowed for the output
produced
SP Standard unit price of materials
Decision Rule
AQ gt SQ Unfavorable
AQ lt SQ Favorable
8
D. Material Quantity Variance Journal
Entry(Recorded when materials are put into
production)
Work in Process (SQ x SP)
XXX Materials Quantity Variance (AQ-SQ)SP
XXX or XXX Raw Materials (AQ x SP)
XXX

9
E. Labor Rate Variance
LRV (AR SR) AH
where
LRV Labor rate variance
AR Actual labor rate
SR Standard labor rate
AH Actual labor hours worked
Decision Rule
AR gt SR Unfavorable
AR lt SR Favorable
10
F. Labor Efficiency Variance
LEV (AH SH) SR
where
LEV Labor efficiency variance
AH Actual labor hours worked
SH Standard hours allowed for the output
produced
SR Standard labor rate
Decision Rule
AH gt SH Unfavorable
AH lt SH Favorable
11
G. Journal Entry for Direct Labor Variances
Work in Process (SH x SR)
XXX Labor Rate Variance (AR-SR)AH
XXX or XXX Labor Efficiency Variance
(AH-SH)SR XXX or XXX Wages Payable
(AH x AR)
XXX
12
H. Controllable Overhead Variance
Flexible budget level of overhead for the actual
level of production
Controllable overhead variance
Actual overhead

-
Decision Rule
Actual gt Flexible budget Unfavorable
Actual lt Flexible budget Favorable
13
I. Overhead Volume Variance
Flexible budget level of overhead for actual
level of production
Overhead applied to production using standard
overhead rate
Overhead volume variance

-
Decision Rule
Flexible budget gt O/H applied Unfavorable
Flexible budget lt O/H applied Favorable
14
III. Investigation of Standard Cost Variances
  1. Management by Exception
  2. Favorable Variances May be Unfavorable
  3. Process Improvements and Unfavorable Variances
  4. Variance Evaluation and Excess Production
  5. Variance Analysis and Performance Evaluation

15
A. Management by Exception
  • Most managers take a management by exception
    approach and investigate only those variances
    that they deem to be exceptional.
  • The absolute dollar value of the variance or the
    variance as a percent of actual or standard cost
    is often used as the criterion.

16
B. Favorable Variances May be Unfavorable
  • The fact that a variance is favorable does not
    mean that it should not be investigated. Indeed,
    a favorable variance may be indicative of poor
    management decisions. For example
  • A favorable material price variance may be arisen
    from purchasing goods of inadequate quality for
    production.
  • A favorable overhead volume variance could mean
    that excessive inventory has been produced beyond
    customer demand.

17
C. Process Improvements and Unfavorable Variances
  • Production workers suggest a change in the
    manufacturing process so that the standard for
    labor time per unit is reduced from 4 to 3 hours.
    If the company does not need to increase
    production and keeps the same number of workers,
    an unfavorable labor efficiency variance will
    arise.
  • (See Illustration on page 397)

18
D. Variance Evaluation and Excess Production
  • The Theory of Constraints tells us that
    production departments in front of bottleneck
    departments should not produce excess
    work-in-process inventory.
  • Evaluation in terms of standard cost variances
    could result in this dysfunctional behavior.
  • For example, rather than lay off workers, a
    department with a temporary demand slump may
    produce excess units simply to avoid an
    unfavorable labor efficiency variance.

19
E. Variance Analysis and Performance Evaluation
  • Responsibility accounting states that managers
    should only be held accountable for variance that
    they can control.
  • Unfavorable variances do not imply poor
    performance. For example, an unfavorable labor
    efficiency variance could result from the
    purchase of inferior goods (which by the way
    resulted in a favorable material price variance).

20
Summary
  • Ideal vs. Attainable Standards
  • Material Variances
  • Labor Variances
  • Overhead Variances
Write a Comment
User Comments (0)
About PowerShow.com