F&ma 09

CHAPTER Standard Cost Systems
DISCUSSION POINTS:
Standard Cost Systems – Introduction
NINE Variance Analysis Procedures
Establishing and Revising Standard Costs
Use of Standard Costs in Developing Budgets
Direct Material Standards
Direct Labor Standards
Manufacturing Overhead Standards
A General Model for Variance Analysis
Standard Costs and Variance Analysis: An
Illustration
ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

9.1 Standard Cost Systems
In this chapter we shall consider a financial control
system that enables the deviation from budget to be
analyzed in detail, thus enabling costs to be controlled
more effectively. This system of control is called
Standard Costing.
In particular we shall examine how a standard costing
system operates and how the variances are calculated.

(Standard Cost Systems, Cont’d)
Standard costing systems Standard costs are
are applied in standard predetermined costs;
cost centres. The main they are target costs
features of standard that should be incurred
costing centres are that under efficient
output can be measured operating conditions.
and the input required to
produce each unit of
output can be specified.

We shall see that

established standard
costs for each unit
produced enables a
detailed analysis to be
made of the difference
between the budgeted
cost and the actual cost
so that costs can be
controlled more
effectively.
 Standard costing is most suited to an organization whose
activities consist of a series of common or repetitive
operations and the input required to produce each unit of
output can be specified.
 Standard costing procedures can also be applied in
services industries such as units within banks, where
output can be measured in terms of the number of
cheques or the number of loan applications processed,
and there are also well-defined input-output
relationships.
 Standard costing cannot, however, be applied to activities
of a non-repetitive nature, since there is no basis for
observing repetitive operations and consequently
standards cannot be set.
Based on carefully
predetermined amounts.
Used for planning labor, material

Standard and overhead requirements.
Costs are
The expected level
of performance.
Benchmarks for
measuring performance.

A standard cost variance
is the amount by which
an actual cost differs from
the standard cost.
Standard cost
Amount
Direct
Material
Direct Manufacturing
Labor Overhead
Type of Product Cost

This variance is unfavorable This variance is
because the actual cost favorable because
exceeds the standard cost. the actual cost
is less than the
standard cost.
Standard cost
Amount
Direct
Material
Direct Manufacturing
Labor Overhead
Type of Product Cost

9.2 Variance Analysis Procedures
Take
Identify Receive corrective
questions explanations actions
Conduct next
Analyze period’s
variances operations
Prepare standard
Begin
cost performance
report

9.3 Establishing and Revising
Standard Costs
Normal standards should be
Should we use set at levels that are currently
normal standards attainable with reasonable and
or ideal standards? efficient effort.
Production Managerial
Engineer manager Accountant
(Establishing and Revising
Standard Costs, Cont’d)
I agree. Ideal standards, that are

based on perfection, are
unattainable and therefore
discouraging to most employees.
Human
Resources
Manager
9.4 Use of Standard Costs in Developing
Budgets
They are not the

same as budgeted
costs.
A standard is the
expected cost for one
Are standards the unit.
same as budgets? A budget is the
expected cost for all
units.

9.5 Direct Material Standards
Price Quantity
Standards Standards
Use competitive Use product

bids for the quality design specifications.
and quantity desired.

(Direct Material Standards, Cont’d)
The standard material cost for one unit of product is:
standard quantity
standard price for of material
one unit of material × required for one
unit of product

9.6 Direct Labor Standards
Rate Time
Standards Standards
Use wage Use time and

surveys and motion studies for
labor contracts. each labor operation.

Setting Direct Labor Standards
The standard labor cost for one unit of product is:

standard number
standard wage rate of labor hours
for one hour × for one unit
of product

9.7 Manufacturing Overhead Standards
Rate Activity
Standards Standards
The rate is based The activity is the

on an estimate of total cost driver used to
overhead at the normal calculate the overhead
level of activity. rate.

(Manufacturing Overhead Standards,
Cont’d)
The standard overhead cost for one unit of product is:

standard variable standard number
overhead rate for of activity units
one unit of × for one unit of
activity product
×
9.8 A General Model for
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

(A General Model for
Variance Analysis, Cont’d)
Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price
Standard price is the amount that should

have been paid for the resources acquired.

(A General Model for
Variance Analysis, Cont’d)

× × ×
Standard quantity is the quantity that should

have been used for the actual good output.

9.9 Standard Costs and Variance
Analysis: An Illustration
Let’s use the

concepts of the
general model to
calculate standard
cost variances,
starting with
direct material.
Standard Costs and Variance Analysis:
An Illustration
Chilalo Mfg Co. has the following material

standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Records last week show 1,700 pounds of

material were purchased on May 10 at a
total cost of $6,630. The material was used
to make 1,000 Zippies that were completed
on May 15.

Material Price and Quantity Variances

× × ×
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

Material Variances
Question 1
The actual price per pound paid for

the material was
a. $4.00 per pound.

b. $4.10 per pound.
c. $3.90 per pound.
d. $6.63 per pound.

Material Variances
Question 1
The actual price per pound paid for

the material was
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.

Material Variances
Question 2
Chilalo’s material price variance (MPV)

for the week was
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.

Material Variances
Question 2
Chilalo’s material price variance (MPV)

for the week was
b. $170 favorable.
c. MPV = AQ(AP - SP)
$800 unfavorable.
MPV = 1,700 lbs. × ($3.90 - 4.00)
d. $800 favorable.
MPV = $170 favorable

Material Variances
Question 3
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.

Material Variances
Question 3
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
a. 1,700 SQ = 1,500 lbs
pounds.
b. 1,500 pounds.
c. 2,550 pounds.
d. 2,000 pounds.

Material Variances
Question 4
Chilalo’s material quantity variance (MQV)

for the week was
b. $170 favorable.
d. $800 favorable.

Material Variances
Question 4
Chilalo’s material quantity variance (MQV)

for the week was
MQV = SP(AQ - SQ)
a. $170 MQV = $4.00(1,700 lbs - 1,500 lbs)
unfavorable.
MQV = $800 unfavorable
b. $170 favorable.
d. $800 favorable.

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
Responsibility for
Material Variances
You used too much material
because of poorly trained
I am not responsible for workers and poorly
this unfavorable material maintained equipment.
quantity variance. Also, your poor scheduling
sometimes requires me to
You purchased cheap rush order material at a
material, so my people higher price, causing
had to use more of it. unfavorable price variances.

Labor Rate and Efficiency
Variances
Let’s turn
our
attention
to labor
variances.
Standard Costs and Variance Zippy
Analysis: An Illustration
Hanson Inc. has the following labor
standard to manufacture one Zippy:
1.5 standard hours per Zippy at $8.00 per hour
Payroll records last week show 1,450

hours were worked at a total labor cost
of $11,890 to make 1,000 Zippies that
were completed on May 15.

Labor Rate and Efficiency
Variances
Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
Rate Variance Efficiency Variance
AH(AR
Materials price- SR)
variance SR(AH
Materials - SH)
quantity variance
Labor rate variance Labor efficiency variance
AH = Actual
Variable Hours
overhead SRVariable
= Standard Rate
overhead
AR = Actual
spending Rate
variance SHefficiency
= Standard Hours
variance

Labor Variances Zippy
Question 1
Hanson’s actual rate (AR) for labor

for the week was
a. $8.20 per hour.

b. $8.00 per hour.
c. $7.80 per hour.
d. $7.60 per hour.

Question 1
Hanson’s actual rate (AR) for labor

for the week was
a. $8.20 per hour.

AR = $11,890 ÷ 1,450 hours
b. $8.00 per hour.AR = $8.20 per hour
c. $7.80 per hour.
d. $7.60 per hour.

Question 2
Hanson’s labor rate variance (LRV) for

the week was
b. $290 favorable.
d. $400 favorable.

Question 2
Hanson’s labor rate variance (LRV) for

the week was
b. $290 favorable.
LRV = AH(AR - SR)
c. LRV = 1,450 hrs($8.20 - $8.00)
$400 unfavorable.
LRV = $290 unfavorable
d. $400 favorable.

Question 3
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.

Question 3
The standard hours (SH) of labor that

should have been worked to produce
1,000 Zippies is
SH = 1,000 units × 1.5 hours per unit
a. 1,550 SH = 1,500 hours
hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.

Question 4
Hanson’s labor efficiency variance (LEV)

for the week was
b. $290 favorable.
d. $400 favorable.

Question 4
Hanson’s labor efficiency variance (LEV)

for the week was
LEV = SR(AH - SH)

LEV = $8.00(1,450 hrs - 1,500 hrs)
b. $290 favorable.
LEV = $400 favorable
d. $400 favorable.

Summary
Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
1,450 hours 1,450 hours 1,500 hours
× × ×
$8.20 per hour $8.00 per hour $8.00 per hour
$11,890 $11,600 $12,000
Rate variance Efficiency variance

$290 unfavorable $400 favorable
Labor Rate Variance
Using highly paid skilled workers to
perform unskilled tasks results in an
unfavorable rate variance.
High skill, Low skill,

high rate low rate
Production managers who make work assignments

are generally responsible for rate variances.

Labor Efficiency Variance
Poorly Poor
trained quality
workers materials
Unfavorable
Efficiency
Variance
Poor Poorly
supervision maintained
of workers equipment
Responsibility for Labor 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.

Responsibility for Labor Variances
Maybe I can attribute the labor

and material variances to personnel
for hiring the wrong people
and training them poorly.

Manufacturing Overhead Variances
Let’s turn our

attention to
manufacturing
overhead

Recall that overhead costs are applied to
products and services using a
predetermined overhead rate (POHR):
Applied Overhead = POHR × Standard Activity
Estimated total overhead costs

POHR =
Estimated activity

Contains fixed Contains variable

overhead that overhead that
remains constant as increases as
activity changes. activity increases.
Overhead Rate
Function of activity level

chosen to determine rate.

Manufacturing Overhead Zippy
Variances Example
Hanson, Inc. has the following manufacturing
overhead at three different levels of activity:
Machine Hours 2,000 3,000 4,000
Zippies 1,000 1,500 2,000
Variable Overhead $ 4,000 $ 6,000 $ 8,000
Fixed Overhead 9,000 9,000 9,000
Total Overhead $ 13,000 $ 15,000 $ 17,000
Hanson applies overhead based on machine hour activity.

Overhead Variances Zippy
Question 1
The total overhead rate for an estimated

activity of 3,000 machine hours (MH) is:
a. $5.00 per machine hour.

b. $4.00 per machine hour.
c. $3.00 per machine hour.
d. $2.00 per machine hour.

Question 1

$15,000 ÷ 3,000 machine hours
a. $5.00 per machine hour.
b. $4.00 per machine hour.
c. $3.00 per machine hour.

Question 1

$15,000 ÷ 3,000 machine hours
a. $5.00 per machine hour. rate contains
The $5.00 overhead
a variable portion:
b. $4.00 per$6,000
machine hour.
÷ 3,000 MH = $2.00 per MH
c. $3.00 per machine
and ahour.
fixed portion:
$9,000 ÷ 3,000 MH = $3.00 per MH

Budgeted Applied
Actual Overhead at Overhead at
Overhead Actual Activity Standard Hours
Spending Volume
Variance Variance

Budgeted Applied
Shows how economically
overhead services were
Spending Volume
purchased and how
Variance efficiently overhead
Variance
services were used.
Contains both fixed
and variable costs.
A controllable variance.
Budgeted Applied
CausedSpending
by producing at Volume
a levelVariance
other than that Variance
used for computing the
standard overhead rate.
Contains only fixed costs.

Variances Example
Hanson’s actual production for the

period was 1,600 Zippies resulting in
3,200 standard machine hours. Actual
total overhead cost for the period was
$15,450.
Compute the overhead spending and
volume variances.

Variances Example
Budgeted Applied
Overhead Standard Hours Standard Hours
$15,450 $9,000 fixed 3,200 hrs.
+ ×
$6,400 variable $5.00 per hr.
$2.00 per hr. × 3,200 hrs.

Variances Example
Budgeted Applied
Overhead Standard Hours Standard Hours
$15,450 $9,000 fixed 3,200 hrs.
+ ×
$6,400 variable $5.00 per hr.
$15,450 $15,400 $16,000
Spending variance Volume variance

$50 unfavorable $600 favorable
Disposing of Variances
Standard Cost Variances
Immaterial Amounts Material Amounts
Close to Close by
Cost of Goods Sold apportioning to:
Work in Process
Finished Goods
Cost of Goods Sold.

Advantages of Standard Costs
Possible reductions
in production costs.
Improved cost control Better information

and performance for planning and
evaluation. Advantages decision making.

Disadvantages of Standard Costs
Emphasis on It may be difficult

Disadvantages
negative to determine
exceptions may which variances
impact morale. are significant.
Emphasis on negative
exceptions may
lead to under-reporting.
JIT Systems and Variance Analysis
JIT systems may reduce unfavorable variances.
Long-term agreements Well-trained flexible

with suppliers eliminate work force reduces labor
price variances. efficiency variance.
Emphasis on quality
reduces material
quantity variances.

End of Chapter 23

F&ma 09

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

F&ma 09

Uploaded by

Copyright:

Available Formats

CHAPTER Standard Cost Systems

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

We shall see that

Used for planning labor, material

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

Type of Product Cost

Type of Product Cost

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

I agree. Ideal standards, that are

They are not the

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

Use competitive Use product

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

Use wage Use time and

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

The standard labor cost for one unit of product is:

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

The rate is based The activity is the

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

The standard overhead cost for one unit of product is:

Standard Cost Variances

Price Variance Quantity Variance

The difference between The difference between

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Standard price is the amount that should

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Standard quantity is the quantity that should

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

Let’s use the

Chilalo Mfg Co. has the following material

Records last week show 1,700 pounds of

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

The actual price per pound paid for

a. $4.00 per pound.

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

The actual price per pound paid for

a. $4.00 per pound.

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

Chilalo’s material price variance (MPV)

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

Chilalo’s material price variance (MPV)

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

The standard quantity of material that

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

The standard quantity of material that

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

Chilalo’s material quantity variance (MQV)

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

Chilalo’s material quantity variance (MQV)

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013

Actual Quantity Actual Quantity Standard Quantity

Price variance Quantity variance

ABH Consultancy & Training Services © ASA/JU/CoBE/Accounting & Finance/2013