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CHAPTER

Standard Costing: A Managerial Control Tool

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Objectives
1. Tell how unit standards arethis and why After studying set standard costing systemsshould are adapted. chapter, you 2. State the purpose of a standard cost sheet. be able to: 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. Continued

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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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Manufacturing Costs Direct Materials Actual costing system Normal costing system Standard costing system Actual Actual Standard Direct Labor Actual Actual Standard Overhead Actual Budgeted Standard

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Standard Cost Sheet for Corn Chips
Description Direct materials: Yellow corn Cooking oil Salt Lime Bags Total direct materials Standard Standard Standard Price Usage Cost Subtotal \$0.006 0.031 0.005 0.400 0.044 18 oz. 2 oz. 1 oz. 0.01 oz. 1 bag. \$0.108 0.062 0.005 0.004 0.044 \$0.223

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Standard Cost Sheet for Corn Chips
Description Direct materials Direct labor: Inspectors \$7.000 Machine operators 10.000 Total direct labor Overhead: Variable overhead 3.850 Fixed overhead 32.050 Total overhead Total standard unit cost Standard Standard Standard Price Usage Cost Subtotal \$0.223 0.0070 hr. 0.0008 hr. 0.078 hr. 0.0078 hr. \$0.049 0.008 0.057 \$0.030 0.250 0.280 \$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)

Variance Analysis: General Description
1. AP x AQ (Actual Quantity of Input at Actual Price) 2. SP x AQ (Actual Quantity of Input at Standard Price)

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3. SP x SQ (Standard Quantity of Input at Standard Price)

Price Variance (1-2)

Usage Variance (2-3)

Budget Variance (1-3)

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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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Cost x x x x x \$ 90,000 x \$110,000 \$100,000

Time

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Variance Analysis: Materials and Labor
Actual production Actual cost of inspection labor 48,500 bags of corn chips Actual cost of corn 780,000 ounces of \$0.0069 = \$5,382 360 hours at \$7.35 = \$2,646
Actual Costs Budgeted Costs Total Variance \$5,382.00 \$5,238.00 \$144.00 U 2,646.00 2,376.50 269.50 U

Corn Inspection labor

Variance Analysis: Columnar Approach
AQ x AP 780,000 x 0.0069 \$5,382 AQ x SP 780,000 x \$.0.0060 \$4,680

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SQ x SP 873,000 x \$0.0060 \$5,238

\$702 U Price Variance

\$558 F Usage Variance

\$144 U Total Variance

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Material Price Variance

MPV = (AP – SP)AQ
The actual The actual standard The quantity of price per price per unit unit 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 The actual standard The standard quantity of quantity of price per unit materials materials used allowed for the actual output

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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 standard actual The The hourly wage direct hourly wage labor rate rate 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%

Labor Variances: Columnar Approach
AH x AR 360 x \$735 \$2,646 AH x SR 360 x \$7.00 \$2,520 SH x SR 339.5 x \$7.00 \$2,376.50

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\$126 U Rate Variance

\$143.50 U Efficiency Variance

\$269.50 U Total Variance

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Labor Efficiency Variances

LEV = (AH – SH) SR
The actual standardstandard The The direct labor hourly direct labor wage hours used hours that rate should have been used

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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 rate (standard) Actual variable overhead costs Actual hours worked Bags of chips produced Hours allowed for production Applied variable overhead \$3.85/DLH \$1,600 400 48,500 373.3 \$1,456

Actual VO \$1,600 VO Rate x Actual Hours \$1,540

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VO Rate x Standard Hours \$1,456

\$60 U Spending Variance

\$84 U Efficiency Variance

\$144 U Total Variance

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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 Gas Electricity Water Total cost \$3.00 0.78 0.07 \$3.85 Actual Costs \$1,190 385 25 \$1,600 Spending Budget Variance \$1,200 312 28 \$1,540 \$10 F 73 U 3 F \$60 U

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Crunch Chips, Inc. Performance Report For the Week Ended March 8, 2004 Budget for Spending Standard Efficiency Budget Variance Hours Variance \$1,200 312 28 \$1,540 \$10 F \$1,135 73 U 3 F \$60 U 295 26 \$1,456 \$65 U 17 U 2U \$84 U

Actual Cost Formula Costs Gas Electricity Water Total cost \$3.00 0.78 0.07 \$3.85 \$1,190 385 25 \$1,600

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Budgeted or Planned Items Budgeted fixed overhead \$749,970 Practical activity 23,400 direct labor hours Standard fixed overhead rate \$32.05 Hours allowed toActual Results produce 3,000,000 bags of chips: 0.078 x 3,000,000 = \$23,400 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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Applied fixed = Standard fixed overhead rate overhead x Standard hours = \$32.05 x 21,450 = \$687,473 (rounded) Total fixed = \$749,000 – \$687,473 overhead variance = \$61,527 underapplied

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Actual FO \$749,000

Budgeted FO \$749,970

Applied FO \$687,473

\$970 F Spending Variance

\$62,497 U Volume Variance

\$61,527 U Total Variance

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Crunch Chips, Inc. Performance Report For the Year Ended 2004 Fixed Overhead Items Depreciation Salaries Taxes Insurance Total fixed overhead Actual Costs \$530,000 159,370 50,500 9,130 \$749,000 Budgeted Cost Variance \$530,000 \$ ---159,970 50,000 10,000 \$749,970 600 F 500 U 870 F \$970 F

Volume Variance
Volume variance = \$32.05(23,400 – 21,450)

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= (\$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

The receiving report and the invoice are Materials Price Variance 702 used to record the receipt of the 00 Accounts Payable merchandise and to control the payment. Material Price Variance

4 680 00

5 382 00

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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

The receiving report and the invoice are Materials Usage Variance used to record the receipt of the Materials Inventory to control the payment. merchandise and

5 238 00

558 00 4 680 00

Material Usage Variance

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

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The receiving report and the invoice are Labor Efficiency Variance 143 used to record the receipt of the 50 Labormerchandise and to control the payment. Rate Variance 126 00
Accrued Payroll

2 376 00

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

The receiving report and the invoice are Material Price Variance used to record the receipt of the Labor Efficiency Variance control the payment. merchandise and to
Labor Rate Variance

971 50

702 00 143 50 126 00

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

The receiving report and the invoice are Cost of Goods Sold used to record the receipt of the merchandise and to control the payment. Closing Variances

558 00

558 00

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Chapter Nine

The End

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