Professional Documents
Culture Documents
Chapter
ACCOUNTING
11-1 TOOLS FOR BUSINESS DECISION MAKING
CHAPTER 11
Analyzing and
The Need for Setting Reporting Balanced
Standards Standard Costs Variances from Scorecard
Standards
There is a difference:
Chapter
11-5 LO 1 Distinguish between a standard and a budget.
The
The Need
Need for
for Standards
Standards
Advantages of Standard Costs Illustration 11-1
Chapter
11-7 LO 3 Describe how companies set standards.
Setting
Setting Standard
Standard Costs—a
Costs—a Difficult
Difficult Task
Task
Review Question
Most companies that use standards set them at a(n):
a. optimum level.
b. ideal level.
c. normal level.
d. practical level.
Chapter
11-9 LO 3 Describe how companies set standards.
Setting
Setting Standard
Standard Costs—a
Costs—a Difficult
Difficult Task
Task
A Case Study
To establish the standard cost of producing a product,
it is necessary to establish standards for each
manufacturing cost element—
direct materials,
direct labor, and
manufacturing overhead.
The standard for each element is derived from the
standard price to be paid and the standard quantity to
be used.
Chapter
11-10 LO 3 Describe how companies set standards.
Setting
Setting Standard
Standard Costs—a
Costs—a Difficult
Difficult Task
Task
Direct Materials
The direct materials price standard is the cost per
unit of direct materials that should be incurred.
Illustration 11-2
Chapter
11-11 LO 3 Describe how companies set standards.
Setting
Setting Standard
Standard Costs—a
Costs—a Difficult
Difficult Task
Task
Direct Materials
The direct materials quantity standard is the
quantity of direct materials that should be used per
unit of finished goods.
Illustration 11-3
Review Question
The direct materials price standard should include an
amount for all of the following except:
a. receiving costs.
b. storing costs.
c. handling costs.
d. normal spoilage costs.
Chapter
11-13 LO 3 Describe how companies set standards.
Setting
Setting Standard
Standard Costs—a
Costs—a Difficult
Difficult Task
Task
Direct Labor
The direct labor price standard is the rate per hour
that should be incurred for direct labor.
Illustration 11-4
Chapter
11-14 LO 3 Describe how companies set standards.
Setting
Setting Standard
Standard Costs—a
Costs—a Difficult
Difficult Task
Task
Direct Labor
The direct labor quantity standard is the time that
should be required to make one unit of the product.
Illustration 11-5
Manufacturing Overhead
For manufacturing overhead, companies use a
standard predetermined overhead rate in setting
the standard.
This overhead rate is determined by dividing
budgeted overhead costs by an expected standard
activity index, such as standard direct labor hours or
standard machine hours.
Chapter
11-16 LO 3 Describe how companies set standards.
Setting
Setting Standard
Standard Costs—a
Costs—a Difficult
Difficult Task
Task
Manufacturing Overhead
The company expects to produce 13,200 gallons during the
year at normal capacity. It takes 2 direct labor hours
for each gallon. Illustration 11-6
Chapter
11-19 LO 3 Describe how companies set standards.
Analyzing
Analyzing and
and Reporting
Reporting Variances
Variances
Review Question
A variance is favorable if actual costs are:
a. less than budgeted costs.
b. less than standard costs.
c. greater than budgeted costs.
d. greater than standard costs
Chapter
11-20 LO 3 Describe how companies set standards.
Analyzing
Analyzing and
and Reporting
Reporting Variances
Variances
Chapter
11-21 LO 3 Describe how companies set standards.
Analyzing
Analyzing and
and Reporting
Reporting Variances
Variances
Chapter
11-22 LO 3 Describe how companies set standards.
Analyzing
Analyzing and
and Reporting
Reporting Variances
Variances
Illustration: Inman Corporation manufactures a single product.
The standard cost per unit of product is shown below.
Direct materials—2 pounds of plastic at $5.00 per pound $ 10.00
Direct labor—2 hours at $12.00 per hour 24.00
Variable manufacturing overhead 12.00
$18.00
Fixed manufacturing overhead 6.00
Total standard cost per unit $ 52.00
$73,500 - $76,000
(15,000 x $4.90) (15,200 x $5.00)
= $2,500 F
$73,500 - $75,000
(15,000 x $4.90) (15,000 X $5.00)
= $1,500 F
$75,000 - $76,000
(15,000 X $5.00) (15,200 x $5.00)
= $1,000 F
Total Variance
1 - 3
$181,780 - $182,400
(14,900 X $12.20) (15,200 X $12.00)
= $620 F
$181,780 - $178,800
(14,900 X $12.20) (14,900 X $12.00)
= $2,980 U
Labor
Actual Hours Standard Hours
- Quantity
x Standard Rate x Standard Rate =
Variance
(AH) x (SR) (SH) x (SR)
(LQV)
$178,800 - $182,400
(14,900 X $12.00) (15,200 X $12.00)
= $3,600 F
Total Variance
1 - 3
Chapter
11-35 LO 5 State the formulas for determining manufacturing overhead variances.
Analyzing
Analyzing and
and Reporting
Reporting Variances
Variances
Overhead Applied:
Standard hours allowed 15,200
Rate per direct labor hour $ 9* $ 136,800
Total Overhead Variance $ 3,810 F
* Standard per unit overhead cost ($18) ÷ 2 direct labor hours per unit.
Chapter
11-36 LO 5 State the formulas for determining manufacturing overhead variances.
Analyzing
Analyzing and
and Reporting
Reporting Variances
Variances
Chapter
11-37 LO 5 State the formulas for determining manufacturing overhead variances.
Analyzing
Analyzing and
and Reporting
Reporting Variances
Variances
Overhead Controllable Variance
Compare actual overhead costs incurred with budgeted costs
for the standard hours allowed.
$136,200
Budgeted Overhead:
Monthly budgeted fixed overhead
($540,000/12 months) $ 45,000
Standard hours allowed 15,200
Variable overhead rate ($12/2) $ 6 91,200
Actual Overhead Costs:
Variable overhead $ 88,990
Fixed overhead 44,000 132,990
Overhead Controllable Variance $ 3,210 F
Chapter
11-38 LO 5 State the formulas for determining manufacturing overhead variances.
Analyzing
Analyzing and
and Reporting
Reporting Variances
Variances
Overhead Volume Variance
Difference between normal capacity hours and standard hours
allowed times the fixed overhead rate.
Budgeted Overhead:
Normal capacity (in hours) 15,000
Less: Standard hours allowed 15,200
200
Fixed overhead rate ($6/2) $ 3
Overhead volume variance 600 F
Chapter
11-39 LO 5 State the formulas for determining manufacturing overhead variances.
Analyzing
Analyzing and
and Reporting
Reporting Variances
Variances
In computing the overhead variances, it is important to
remember the following.
Chapter
11-40 LO 5 State the formulas for determining manufacturing overhead variances.
Analyzing
Analyzing and
and Reporting
Reporting Variances
Variances
Reporting Variances
All variances should be reported to appropriate levels
of management as soon as possible.
Presentation
of Variances
In income statements
prepared for
management under a
standard cost
accounting system,
cost of goods sold is
stated at standard
cost and the
variances are
disclosed separately.
Chapter LO 7 Prepare an income statement for management
11-43
under a standard costing system.
Analyzing
Analyzing and
and Reporting
Reporting Variances
Variances
Review Question
Which of the following is incorrect about variance
reports?
a. They facilitate “management by exception”.
b. They should only be sent to the top level of
management.
c. They should be prepared as soon as possible.
d. They may vary in form, content, and frequency
among companies.
Chapter
11-45 LO 8 Describe the balanced scorecard approach to performance evaluation.
Balanced
Balanced Scorecard
Scorecard
Review Question
Which of the following would not be an objective
used in the customer perspective of the balanced
scorecard approach?
a. Percentage of customers who would recommend
product to a friend.
b. Customer retention.
c. Brand recognition.
d. Earning per share.
Chapter
11-46 LO 8 Describe the balanced scorecard approach to performance evaluation.
Balanced
Balanced Scorecard
Scorecard
Think About It
•Doctors and medical staff are under pressure to see
more patients each day.
•With insurance companies pushing for reduced medical
costs, every facet of medicine has been standardized and
analyzed.
•What are the potential implications of the quality of
health care?
•Medical costs for a family of four hit $13,383 in 2006.
•The United States spends more on a per person basis,
and as a percentage of GDP than most other countries.
•Yet more than 40 million Americans have no health
Chapter coverage.
11-48
Copyright
Copyright
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caused by the use of these programs or from the use of the
information contained herein.”
Chapter
11-49