Hilton 11e Chap010PPT

H1 H2
Chapter 10
Standard Costing and

Analysis of Direct Costs
McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 10-1 – Describe the
elements of a cost control system.
10-2
Managing Costs
Standard Actual
cost cost
Comparison between
standard and actual
performance
level
Cost
variance
10-3
H3
Management by Exception
Managers focus on quantities and costs
that exceed standards, a practice known as
management by exception..
Standard
Amount
Direct
Material
Direct
Labor
Type of Product Cost

10-4
Learning Objective 10-2 – Describe two ways to
set cost standards and distinguish between
perfection and practical standards.
10-5
Setting Standards
Cost
Standards
Analysis of Task
Historical Data Analysis
10-6
Participation in Setting Standards
Accountants, engineers, personnel administrators,
and production managers combine efforts to set
standards based on experience and expectations.
10-7
Perfection versus Practical Standards:
A Behavioral Issue
Practical standards
should be set at levels
that are currently
attainable with
Should we use reasonable and
practical standards efficient effort.
or perfection
standards?
10-8
Perfection versus Practical Standards:
A Behavioral Issue
I agree. Perfection
standards are
unattainable and
therefore discouraging
to most employees.
10-9
Use of Standards by Service Organizations
 Standard cost analysis

may be used in any
organization with
repetitive tasks.
 A relationship between
tasks and output
measures must be
established.
10-10
Learning Objective 10-3 – Compute and interpret
the direct-material price and quantity variances and the
direct-labor rate and efficiency variances.
10-11
Cost Variance Analysis
Standard Cost Variances
Price Variance Quantity Variance
The difference between The difference between

the actual price and the the actual quantity and
standard price. the standard quantity.
10-12
A General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price
AQ(AP
Materials price- SP)
variance SP(AQ
Materials - SQ)
quantity variance
Labor rate variance Labor efficiency variance
AQ =Variable
Actual overhead
Quantity SP = Standard
Variable Price
overhead
AP = spending
Actual Price
variance SQ = Standard
efficiency Quantity
variance
10-13

× × ×
Standard price is the amount that should

have been paid for the resources acquired.
10-14

× × ×
Standard quantity is the quantity that should

have been used.
10-15
Standard Costs
Let’s use the concepts

of the general model to
calculate standard cost
variances, starting with
direct material.
10-16
Zippy
Material Variances
Hanson Inc. has the following direct material

standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week 1,700 pounds of material were
purchased and used to make 1,000 Zippies. The
material cost a total of $6,630.
10-17
Zippy
Material Variances
What is the actual price per pound

paid for the material?
a. $4.00 per pound.

b. $4.10 per pound.
c. $3.90 per pound.
d. $6.63 per pound.
10-18
Zippy
Material Variances
What is the actual price per pound
paid for the material?
a. $4.00 per pound.

b. $4.10 per pound.
AP = $6,630 ÷ 1,700 lbs.
c. $3.90 per pound. AP = $3.90 per lb.
d. $6.63 per pound.
10-19
Zippy
Material Variances
Hanson’s direct-material price variance
(MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
10-20
Zippy
Material Variances
Hanson’s direct-material price variance

(MPV) for the week was:
b. $170 favorable.
MPV = AQ(AP - SP)
d. $800 favorable.MPV = 1,700 lbs. × ($3.90 - 4.00)
MPV = $170 Favorable
10-21
Zippy
Material Variances
The standard quantity of material that

should have been used to produce
1,000 Zippies is:
a. 1,700 pounds.
b. 1,500 pounds.
c. 2,550 pounds.
d. 2,000 pounds.
10-22
H4
Zippy
Material Variances
The standard quantity of material that

should have been used to produce
1,000 Zippies is:
SQ = 1,000 units ×
1.5 lbs. per unit
SQ = 1,500 lbs.
a. 1,700 pounds.
b. 1,500 pounds.
c. 2,550 pounds.
d. 2,000 pounds.
10-23
Zippy
Material Variances
Hanson’s direct-material quantity

variance (MQV) for the week was:
b. $170 favorable.
d. $800 favorable.
10-24
H5
Zippy
Material Variances
Hanson’s direct-material quantity variance

(MQV) for the week was:
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs. - 1,500 lbs.)
b. $170 favorable.
MQV = $800 unfavorable
d. $800 favorable.
10-25
Material Variances Summary

× × ×
1,700 lbs. 1,700 lbs. 1,500 lbs.
× × ×
$3.90 per lb. $4.00 per lb. $4.00 per lb.
$6,630 $ 6,800 $6,000
Price variance Quantity variance

$170 favorable $800 unfavorable
10-26
Zippy
Material Variances
The price variance is

Hanson purchased and
computed on the entire
used 1,700 pounds.
quantity purchased.
How are the variances
computed if the amount The quantity variance is
purchased differs from computed only on the
the amount used? quantity used.
10-27
Zippy
Material Variances
Hanson Inc. has the following material standard to

manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week 2,800 pounds of material were
purchased at a total cost of $10,920, and 1,700
pounds were used to make 1,000 Zippies.
10-28
Zippy
Material Variances
Actual Quantity Actual Quantity
Purchased Purchased
× × MPV = AQ(AP - SP)
Actual Price Standard Price
MPV = 2,800 lbs.
2,800 lbs. 2,800 lbs. × ($3.90 - 4.00)
× × MPV = $280
$3.90 per lb. $4.00 per lb. Favorable
$10,920 $11,200
Price variance increases

Price variance because quantity
$280 favorable purchased increases.
10-29
H6
Zippy
Material Variances
Actual Quantity
Used Standard Quantity
× ×
MQV = SP(AQ - SQ) Standard Price Standard Price
MQV = $4.00(1,700 lbs.
- 1,500 lbs.) 1,700 lbs. 1,500 lbs.
MQV = $800 unfavor. × ×
$4.00 per lb. $4.00 per lb.
$6,800 $6,000
Quantity variance is
unchanged because
actual and standard Quantity variance
quantities are unchanged. $800 unfavorable
10-30
Isolation of Material Variances
I need the variances as soon
as possible so that I can
better identify problems Okay. I’ll start computing
and control costs. the price variance when
You accountants just don’t material is purchased and
understand the problems the quantity variance as
we production managers have. soon as material is used.
10-31
Standard Costs
Now let’s
calculate
standard cost
variances for
direct labor.
10-32
Zippy
Labor Variances
Hanson Inc. has the following direct labor

standard to manufacture one Zippy:
1.5 standard hours per Zippy at $10.00 per
direct labor hour
Last week 1,550 direct labor hours were
worked at a total labor cost of $15,810 to
make 1,000 Zippies.
10-33
Zippy
Labor Variances
What was Hanson’s actual rate (AR)

for labor for the week?
a. $10.20 per hour.

b. $10.10 per hour.
c. $9.90 per hour.
d. $9.80 per hour.
10-34
Zippy
Labor Variances
What was Hanson’s actual rate (AR)

for labor for the week?
a. $10.20 per hour.

b. $10.10 per hour.
AR = $15,810 ÷ 1,550
c. $9.90 per hour. hours
d. $9.80 per hour. AR = $10.20 per hour
10-35
Zippy
Labor Variances
Hanson’s labor rate variance (LRV)

for the week was:
b. $310 favorable.
d. $300 favorable.
10-36
H7
Zippy
Labor Variances
Hanson’s labor rate variance (LRV)

for the week was:
b. $310 favorable.
LRV = AH(AR - SR)
LRV = 1,550 hrs. ($10.20 -
d. $300 favorable. $10.00)
LRV = $310 unfavorable
10-37
Zippy
Labor Variances
The standard hours (SH) of labor that

should have been worked to produce
1,000 Zippies is:
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.
10-38
Zippy
Labor Variances
The standard hours (SH) of labor that

should have been worked to produce
1,000 Zippies is:
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours. SH = 1,000 units × 1.5
d. 1,800 hours. hours per unit
SH = 1,500 hours
10-39
Zippy
Labor Variances
Hanson’s labor efficiency variance (LEV)

for the week was:
b. $510 favorable.
d. $500 favorable.
10-40
H8
Labor Variances Zippy
Hanson’s labor efficiency variance (LEV)

for the week was:
LEV = SR(AH - SH)
LEV = $10.00(1,550 hrs. - 1,500
hrs.)
LEV = $500 unfavorable
b. $510 favorable.
d. $500 favorable.
10-41
Labor Variances Summary
Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
1,550 hours 1,550 hours 1,500 hours
× × ×
$10.20 per hour $10.00 per hour $10.00 per hour
$15,810 $15,500 $15,000
Rate variance Efficiency variance

$310 unfavorable $500 unfavorable
10-42
Learning Objective 10-4 – Explain several
methods for determining the significance of cost
variances.
10-43
Significance of Cost Variances
1. Size of variance
1. Dollar amount
2. Percentage of
standard
2. Recurring variances
3. Trends
What clues help me 4. Controllability
to determine the
variances that I should
5. Favorable variances
investigate? 6. Costs and benefits of
investigation 10-44
Statistical Control Chart
Warning signals for investigation
Favorable Limit
• •
• • •
Desired Value
• •
Unfavorable Limit •
•
1 2 3 4 5 6 7 8 9
Variance Measurements
10-45
H9
Learning Objective 10-5 – Describe some

behavioral effects of standard costing.
10-46
Behavioral Impact of Standard
Costing
If I buy cheaper materials, my direct-
materials expenses will be lower than
what is budgeted. Then I’ll get my bonus.
But we may lose customers because of
lower quality.
10-47
Controllability of Variances
Direct-Material Direct-Material
Direct-Labor Direct-Labor
Rate Variance Efficiency Variance
10-48
Interaction among Variances
I am not responsible for

the unfavorable labor You used too much
efficiency variance! time because of poorly
trained workers and
You purchased cheap poor supervision.
material, so it took more
time to process it.
10-49
Learning Objective 10-6 – Explain how
standard costs are used in product costing.
10-50
Standard Costs and Product Costing
Standard material and labor costs

are entered into Work-in-Process
inventory instead of actual costs.
Standard cost variances

are closed directly to
Cost of Goods Sold.
10-51
Learning Objective 10-7 – Summarize some
advantages of standard costing.
10-52
H10
Advantages of Standard Costing

Sensible Cost Management by
Comparisons Exception
Performance Employee
Evaluation Motivation
Advantages
Stable Product
Costs
10-53
Learning Objective 10-8 – Explain several
common criticisms of standard costing.
10-54
H11
Criticisms of Standard Costing

Too aggregate, Not specific
too late
Too much focus Disadvantages Stable production

on direct-labor required
Shorter life Narrow

cycles definition
Focus on cost
minimization
10-55
Learning Objective 10-9 – Prepare journal entries
to record and close out cost variances (appendix).
10-56
Use of Standard Costs
for Product Costing
Raw-material Inventory Accounts Payable
Actual quantity at Actual quantity at

standard cost actual cost
Direct-Material Price Variance
Unfavorable Favorable
variance variance
10-57
for Product Costing
Work-in-Process Inventory Raw-material Inventory
Standard quantity Actual quantity at

at standard price standard cost
Direct-Material Quantity Variance
variance variance
10-58
for Product Costing
Work-in-Process Inventory Wages Payable
Standard quantity Actual quantity at

at standard price actual cost
Direct-Labor Rate Variance Direct-Labor Efficiency Variance
Unfavorable Favorable Unfavorable Favorable

variance variance variance variance
10-59
for Product Costing
Cost of Goods Sold
variance variance
10-60

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H1 H2

Standard Costing and

Type of Product Cost

 Standard cost analysis

Standard Cost Variances

Price Variance Quantity Variance

The difference between The difference between

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Standard price is the amount that should

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Standard quantity is the quantity that should

Let’s use the concepts

Hanson Inc. has the following direct material

What is the actual price per pound

a. $4.00 per pound.

a. $4.00 per pound.

Hanson’s direct-material price variance

The standard quantity of material that

The standard quantity of material that

Hanson’s direct-material quantity

Hanson’s direct-material quantity variance

Actual Quantity Actual Quantity Standard Quantity

Price variance Quantity variance

The price variance is

Hanson Inc. has the following material standard to

Price variance increases

Hanson Inc. has the following direct labor

What was Hanson’s actual rate (AR)

a. $10.20 per hour.

What was Hanson’s actual rate (AR)

a. $10.20 per hour.

Hanson’s labor rate variance (LRV)

Hanson’s labor rate variance (LRV)

The standard hours (SH) of labor that

The standard hours (SH) of labor that

Hanson’s labor efficiency variance (LEV)

Labor Variances Zippy

Hanson’s labor efficiency variance (LEV)

Actual Hours Actual Hours Standard Hours

Rate variance Efficiency variance

Learning Objective 10-5 – Describe some

I am not responsible for

Standard material and labor costs

Standard cost variances

Advantages of Standard Costing

Criticisms of Standard Costing

Too much focus Disadvantages Stable production

Shorter life Narrow

Raw-material Inventory Accounts Payable

Actual quantity at Actual quantity at

Direct-Material Price Variance

Work-in-Process Inventory Raw-material Inventory

Standard quantity Actual quantity at

Direct-Material Quantity Variance

Work-in-Process Inventory Wages Payable

Standard quantity Actual quantity at

Direct-Labor Rate Variance Direct-Labor Efficiency Variance

Unfavorable Favorable Unfavorable Favorable

Cost of Goods Sold