Standard Costs and Variances

Chapter 10

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 10-2

Standard Costs
Standards are benchmarks or “norms” for
measuring performance. In managerial accounting,
two types of standards are commonly used.

Price standards Quantity standards

specify how much specify how much of an
should be paid for input should be used to
each unit of the make a product or
input. provide a service.

Examples: Firestone, Sears, McDonald’s, hospitals,

construction, and manufacturing companies.
 10-3

Setting Direct Materials Standards

Standard Price Standard Quantity
per Unit per Unit

Final, delivered Summarized in

cost of materials, a Bill of Materials.
net of discounts.
 10-4

Setting Direct Labor Standards

Standard Rate Standard Hours
per Hour per Unit

Often a single Use time and

rate is used that reflects motion studies for
the mix of wages earned. each labor operation.
 10-5

Setting Variable Manufacturing

Overhead Standards
Price Quantity
Standard Standard

The rate is the The quantity is

variable portion of the the activity in the
predetermined overhead allocation base for
rate. predetermined overhead.
 10-6

A General Model for Variance Analysis

Variance Analysis

Price Variance Quantity Variance

Difference between Difference between

actual quantity and
actual price and standard quantity
standard price
 10-7

Price and Quantity Standards

Price and quantity standards are
determined separately for two reasons:

 The purchasing manager is responsible for raw

material purchase prices and the production manager
is responsible for the quantity of raw material used.

 The buying and using activities occur at different times.

Raw material purchases may be held in inventory for a
period of time before being used in production.
 10-8

A General Model for Variance Analysis

Variance Analysis

Price Variance Quantity Variance

Materials price variance Materials quantity variance

Labor rate variance Labor efficiency variance
VOH rate variance VOH efficiency variance
 10-9

A General Model for Variance Analysis

(1) (2) (3)

Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, Allowed for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)

Price Variance Quantity Variance

(2) – (1) (3) – (2)

Spending Variance
(3) – (1)
 10-10

A General Model for Variance Analysis

Actual quantity is the amount of direct materials, direct
labor, and variable manufacturing overhead actually used.

(1) (2) (3)

Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, Allowed for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)

Price Variance Quantity Variance

(2) – (1) (3) – (2)

Spending Variance
(3) – (1)
 10-11

A General Model for Variance Analysis

Standard quantity is the standard quantity allowed
for the actual output of the period.

(1) (2) (3)

Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, Allowed for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)

Price Variance Quantity Variance

(2) – (1) (3) – (2)

Spending Variance
(3) – (1)
 10-12

A General Model for Variance Analysis

Actual price is the amount actually
paid for the input used.

(1) (2) (3)

Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, Allowed for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)

Price Variance Quantity Variance

(2) – (1) (3) – (2)

Spending Variance
(3) – (1)
 10-13

A General Model for Variance Analysis

Standard price is the amount that should
have been paid for the input used.

(1) (2) (3)

Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, Allowed for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)

Price Variance Quantity Variance

(2) – (1) (3) – (2)

Spending Variance
(3) – (1)
 10-14

Responsibility for Materials

Variances
Materials Price Variance Materials Quantity Variance

Purchasing Manager Production Manager

The standard price is used to compute the quantity variance

so that the production manager is not held responsible for
the purchasing manager’s performance.
 10-15

Responsibility for Labor Variances

Production managers are Mix of skill levels
usually held accountable assigned to work tasks.
for labor variances
because they can
Level of employee
influence the:
motivation.

Quality of production
supervision.

Quality of training
provided to employees.
Production Manager
 10-16

Advantages of Standard Costs

Standard costs are Standards can
a key element of provide benchmarks
the management by that promote economy
exception approach. and efficiency.

Advantages
Standards can Standards can
greatly simplify support responsibility
bookkeeping. accounting systems.
 10-17

Potential Problems with Standard

Costs
Standard cost variance If variances are misused
reports are usually as a club to negatively
prepared on a monthly Potential reinforce employees,
basis and may contain Problems morale may suffer and
information that is employees may make
outdated. dysfunctional decisions.

Labor variances assume that the production process is labor-paced

and that labor is a variable cost. These assumptions are often invalid
in today’s automated manufacturing environment where employees
are essentially a fixed cost.
 10-18

Potential Problems with Standard

Costs
Just meeting standards
may not be sufficient; In some cases, a
continuous improvement Potential “favorable” variance
may be necessary to Problems can be as bad or
survive in a competitive worse than an
environment. unfavorable variance.

Excessive emphasis on meeting the standards may overshadow other

important objectives such as maintaining and improving quality,
on-time delivery, and customer satisfaction.
 10-19

End of Chapter 10