Topic 4 Std Costing comprehensive guidelines
- 1. 24-1 Copyright © 2012 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Topic 4: Responsibility Accounting, Topic 4: Responsibility Accounting, Standard Costing andVariance Standard Costing andVariance Analysis Analysis Chapter 22 & 24
- 2. 24-2 Responsibility Accounting Responsibility Accounting a system that measures the results of each responsibility center and compares those results with some measure of expected or budgeted outcome. used to measure the performance of people and departments to foster goal congruence. There are four major types of responsibility centers: Cost center Revenue center Profit center Investment center
- 3. 24-3 • Cost Centers are a firm’s production or support departments that are charged with the responsibility of providing the best quality product or service at the lowest cost • Revenue Centers focus on the selling function and are defined either by product line or by geographic area • Profit Centers: when an SBU both generates revenues and incurs the major portion of the cost for producing these revenues, it is considered a profit center • Investment Centers include assets employed by the SBU as well as profits in the performance evaluation Types of SBUs
- 4. 24-4 Cost Center Amount of Cost Profit Center Investment Center Return on assets (ROA) Residual income (RI) Economic Value Added (EVA) Financial Performance Measures Profitability Revenue Center Amount of revenue SBUs Responsibility Accounting (cont)
- 5. 24-5 Cost Center Cost control Quantity and quality of services Profit Center Investment Center Return on assets (ROA) Residual income (RI) Evaluation Measures Profitability Responsibility Accounting (cont)
- 6. 2-6 Successful implementation of responsibility accounting may use organization charts with clear lines of authority and clearly defined levels of responsibility.
- 7. 24-7 Common costs arise because of overall Common costs arise because of overall operating activities and are not due to the operating activities and are not due to the existence of a particular division. existence of a particular division. Contribution Margin Responsibility Contribution Margin Responsibility Reports Reports
- 8. 24-8 Copyright © 2012 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Standard Cost Systems Standard Cost Systems Chapter 24
- 9. 24-9 Benchmarks for measuring performance. The expected level of performance. Based on carefully predetermined amounts. Used for planning labor, material and overhead requirements. Standard Costs are Standard Cost Systems Standard Cost Systems
- 10. 24-10 Budgeting Vs Standard Costing - How It All Fits Together Sales forecast Production budget SG&A budget Required direct materials, labor and mfg. overhead budgets Budgeted cost of goods mfg. and sold Budgeted income statement Cash budget Budgeted balance sheet Standard vs Budget: Standard Costs per unit = a budget for the production of one unit of product or service These standard costs can be used to establish a budget based on a given level of activity.
- 11. 24-11 Engineer Managerial Accountant Establishing and Revising Standard Establishing and Revising Standard Costs Costs Production manager
- 12. 24-12 Quantity Variance Price Variance The difference between the actual price and the standard price The difference between the actual quantity and the standard quantity Standard Cost Variances Cost Variance Analysis Cost Variance Analysis • Direct Material Price Variance • Direct Labor Rate Variance • Variable overhead spending variance • Direct Material Quantity Variance • Direct Labor Efficiency Variance • Variable overhead Efficiency variance
- 13. 24-13 Prepare standard cost performance report Conduct next period’s operations Analyze variances Identify questions Receive explanations Take corrective actions Begin Variance Analysis Cycle
- 14. 24-14 Use product design specifications. Use competitive bids for the quality and quantity desired. Quantity Standards Direct Materials Standards Direct Materials Standards Price Standards
- 15. 24-15 Time Standards Rate Standards Direct Labor Standards Direct Labor Standards Use time and motion studies for each labor operation. Use wage surveys and labor contracts.
- 16. 24-16 Activity Standards Rate Standards Manufacturing Overhead Standards Manufacturing Overhead Standards The activity is the cost driver used to calculate the overhead rate. The rate is based on an estimate of total overhead at the normal level of activity.
- 17. 24-17 A General Model for Variance Analysis Actual Quantity Actual Quantity **Standard Quantity × × × Actual Price *Standard Price Standard Price AQAP - AQSP SPAQ - SPSQ AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity Price or Rate Variance Quantity or Efficiency Variance **Standard quantity is the quantity allowed for the actual good output. *Standard price is the amount that should have been paid for the resources acquired.
- 18. 24-18 Standard Costs and Variance Standard Costs and Variance Analysis: An Illustration Analysis: An Illustration Hanson Inc. 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. Zippy
- 19. 24-19 Material Variances Material Variances 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. Zippy AP = $6,630 ÷ 1,700 lbs. AP = $3.90 per lb.
- 20. 24-20 Material Variances Material Variances Hanson’s material price variance (MPV) for the week was a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. Zippy MPV = AQ(AP - SP) MPV = 1,700 lbs. × ($3.90 - 4.00) MPV = $170 favorable
- 21. 24-21 Material Variances 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. Zippy SQ = 1,000 units × 1.5 lbs per unit SQ = 1,500 lbs
- 22. 24-22 Hanson’s material quantity variance (MQV) for the week was a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. Material Variances Material Variances Zippy MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable
- 23. 24-23 Causes of DM Variances Causes of DM Variances • Price Variances: – Purchase of materials of different grade – Quantity discounts – Freight/delivery expediting cost (“rush orders”) • Quantity Variances: – Purchase of non-standard quality materials – Poorly trained or poorly supervised workers –Poorly maintained machinery (not
- 24. 24-24 Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate Labor Rate Variance Labor Efficiency Variance LRV = AH(AR - SR) LEV = SR(AH - SH) LRV = Labor Rate Variance LEV = Labor Efficiency Variance AH = Actual Hours SR = Standard Rate AR = Actual Rate AH = Actual Hours SR = Standard Rate SH = Standard Hours Labor Rate and Efficiency Variances Labor Rate and Efficiency Variances
- 25. 24-25 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. Standard Costs and Variance Standard Costs and Variance Analysis: An Illustration Analysis: An Illustration Zippy
- 26. 24-26 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. Labor Variances Labor Variances Zippy AR = $11,890 ÷ 1,450 hours AR = $8.20 per hour
- 27. 24-27 Hanson’s labor rate variance (LRV) for the week was a. $290 unfavorable. b. $290 favorable. c. $400 unfavorable. d. $400 favorable. Labor Variances Labor Variances Zippy LRV = AH(AR - SR) LRV = 1,450 hrs($8.20 - $8.00) LRV = $290 unfavorable
- 28. 24-28 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. Labor Variances Labor Variances Zippy SH = 1,000 units × 1.5 hours per unit SH = 1,500 hours
- 29. 24-29 Hanson’s labor efficiency variance (LEV) for the week was a. $290 unfavorable. b. $290 favorable. c. $400 unfavorable. d. $400 favorable. Labor Variances Labor Variances Zippy LEV = SR(AH - SH) LEV = $8.00(1,450 hrs - 1,500 hrs) LEV = $400 favorable
- 30. 24-30 Causes of DL Variances Causes of DL Variances • Price (Rate) Variances: – Labor substitution – Out-of-date standards (e.g., new labor contract) • Quantity (Efficiency) Variances: – Poorly trained workers – Poor quality raw materials used in production – Poorly maintained equipment – Poor supervision of workers –Out-of-date standards
- 31. 24-31 Manufacturing Manufacturing Overhead Variances Overhead Variances Recall that overhead costs are applied to products and services using a predetermined overhead rate (POHR): POHR = Applied Overhead = POHR × Standard Activity Estimated total overhead costs Estimated activity
- 32. 24-32 17-32 Variable-overhead spending variance Variable-overhead efficiency variance Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate Variable Overhead Cost Variances AH × AR AH × SR SH × SR
- 33. 24-33 Matrix Inc. has the following variable manufacturing overhead standard to manufacture one tent: 1.5 standard hours per tent at $13.00 per direct labor hour Last week 1,550 hours were worked to make 1,000 tents, and $20,460 was spent for variable manufacturing overhead. Variable Overhead Cost Variances (cont)
- 34. 24-34 17-34 Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate AH AH × AR × AR AH AH × SR × SR SH SH × SR × SR 1,550 1,550 × × $13.20 $13.20 1,550 1,550 × × $13.00 $13.00 1,500 1,500 × × $13.00 $13.00 Variable-overhead Variable-overhead spending variance spending variance $20,460 $20,460 $20,150 $20,150 $310 $310 Unfavorable Unfavorable Variable-overhead Variable-overhead efficiency variance efficiency variance $19,500 $19,500 $650 $650 Unfavorable Unfavorable Variable Overhead Cost Variances (cont)
- 35. 24-35 Interpretation ofVariable Overhead Interpretation ofVariable Overhead CostVariances CostVariances Results from spending more or less than expected for overhead items such as supplies and utilities. Reflects efficiency or inefficiency in the use of the selected activity measure; does not reflect overhead control. Spending Variance Efficiency Variance
- 36. 24-36 16-36 Take the time to investigate only significant cost variances. What is significant? Depends on the size of the organization Depends on the type of the organization Depends on the production process Management by Exception
- 37. 24-37 Which Managers Influence Cost Variances? (cont) 16- 37 Direct-materials price variance Direct-materials quantity variance Direct-labor rate variance Direct-labor efficiency variance Purchasing manager Production supervisor Production supervisor Production supervisor Get the best prices available for purchased goods and services through skillful purchasing practices Skillful supervision and motivation of production employees, coupled with the careful use and handling of materials, contribute to minimal waste Generally results from using a different mix of employees than that anticipated when the standard were set Motivating employees toward production goals and effective work schedules improves efficiency
- 38. 24-38 Standard Cost Variances Close to: Cost of Goods Sold Work in Process Finished Goods Cost of Goods Sold Close by apportioning to: Disposing of Variances Disposing of Variances
- 39. 24-39 End of Chapter 24 End of Chapter 24
Editor's Notes
- #1: Chapter 22: Responsibility Accounting and Transfer Pricing
- #4: We evaluate cost centers based on cost control and quantity and quality of services. We evaluate profit centers based on the level of profitability. Finally, we evaluate investment centers by measuring return on assets and residual income.
- #5: We evaluate cost centers based on cost control and quantity and quality of services. We evaluate profit centers based on the level of profitability. Finally, we evaluate investment centers by measuring return on assets and residual income.
- #6: A responsibility accounting system makes use of organization charts to determine lines of authority and levels of responsibility.
- #7: Here we see the responsibility reports for the Retail Division and the Mail-Order Division as parts of the overall company’s operating results. Note that the company’s common costs are deducted from the total responsibility margin. The common costs are incurred for the benefit of both divisions, but cannot be traced to either division.
- #8: Chapter 24: Standard Cost Systems
- #9: Standard costs are preset costs for making a product or delivering a service. We expect to operate within the standard cost allowances under normal conditions. Standard costs are used for both planning and performance evaluation.
- #11: When the standard cost team gets together, perhaps the first question they have to answer is, do they want to develop a normal standard or an ideal standard. Most members of the team would agree that the standards should be normal; they should be attainable with a reasonable amount of efficient effort.
- #12: Price variances result when we pay an actual price for a resource that differs from the standard price that should have been paid. Quantity variances are caused by using an actual amount of a resource that differs from the standard amount that should have been used.
- #13: Variance analysis involves comparing actual costs with standard costs. If variances exists, we investigate by asking appropriate managers for explanations and possible causes for the variances. Our objective is to correct problems that caused unfavorable variances and to possibly adopt and reward the practices that resulted in favorable variances.
- #14: When we think of direct materials standards, we think of price standards that represent the final delivered cost, net of any applicable discounts. Standard quantities are amounts needed to meet the production designs.
- #15: Instead of the terms price and quantity used for material, we use the terms rate and time when we apply standard cost concepts to direct labor. Labor rates can be determined by wage surveys of rates paid in comparable companies or by labor contracts. We can use time and motion studies to determine how to best manufacture the product using our direct labor.
- #16: For variable manufacturing overhead, we use a rate standard which is the variable portion of the predetermined overhead rate. The activity standard is the units of activity in the base used to apply our predetermined overhead. Examples of the activity base might be direct labor hours or machine hours.
- #17: We can reduce these relationships to mathematical equations. For example, we can determine the price or rate variance by multiplying the actual quantity times the difference between the actual price and the standard price, and we can determine the quantity variance by multiplying the standard price times the difference between the actual quantity and the standard quantity.
- #18: In this example the company produces a Zippy. The direct materials standard calls for 1.5 pounds per Zippy at $4.00 per pound. Last week, Hanson purchased and used 1,700 pounds of material to produce 1,000 Zippies. The 1,700 pounds of material cost a total of $6,630. Now, we will see several questions based on the information on this screen. You may wish to take some notes to use as you answer the questions. Try to answer each question before advancing to the solution.
- #19: Based on the given information about the manufacture of Zippies, calculate the actual price per pound paid for the raw materials. We find the actual price per pound by dividing the $6,630 total actual price paid for the material by the 1,700 pounds purchased. This is the price that Hanson actual paid for the materials.
- #20: Now that we know the actual price per pound, calculate the material price variance. We find the material price variance by multiplying the actual quantity of material purchased times the difference between the actual price per pound and the standard price per pound. The $170 favorable material price variance results because Hanson paid ten cents per pound less than standard for 1,700 pounds of material.
- #21: Now, let’s move on and calculate the standard quantity of material that should have been used to produce 1,000 Zippies. The standard quantity is the amount of material that Hanson should have used to make 1,000 Zippies. We find the standard quantity by multiplying the 1.5 pounds per unit standard for one Zippy times the 1,000 Zippies actually produced.
- #22: Now that we know the standard quantity, let’s calculate the material quantity variance. We find the material quantity variance by multiplying the standard price for one pound of material times the difference between the actual quantity of material and the standard quantity of material. The $800 unfavorable material quantity variance results because Hanson used 200 pounds more than standard to make the 1,000 Zippies, and each pound of material has a standard price of $4.00 dollars.
- #24: Instead of price and quantity, for direct labor we use the terms rate and hours. Also, instead of price and quantity variances, for labor we use the terms rate and efficiency variances. The underlying concepts are the same as we saw for material. The standard rate is the amount we should pay per hour for the work performed. Standard hours are the hours that should have been worked for the actual good output achieved. Just as with material, we can reduce these relationships to mathematical equations. For example, we can determine the labor rate variance by multiplying actual hours times the difference between the actual rate and the standard rate, and we can determine the labor efficiency variance by multiplying the standard rate times the difference between actual hours and standard hours.
- #25: The direct labor standard to produce each Zippy is 1.5 standard hours at $8.00 per hour. Last week, it took 1,450 direct labor hours to produce 1,000 Zippies, and the total labor cost was $11,890. Now, we will see several questions based on the information on this screen. Again, you may wish to take some notes to use as you answer the questions.
- #26: Based on the given information calculate the actual wage rate paid by Hanson to its workers during the week. We find the actual labor rate by dividing the $11,890 total labor cost by 1,450 hours worked.
- #27: Now that we know the actual labor rate, let’s calculate the labor rate variance. We find the labor rate variance by multiplying the actual hours worked times the difference between the actual rate per labor hour and the standard rate per labor hour. The $290 unfavorable labor rate variance results because Hanson paid 20 cents per labor hour more than standard for 1,450 hours worked.
- #28: Now calculate the standard hours (SH) of labor that should have been worked to produce 1,000 Zippies. The standard hours for labor is the amount of time Hanson’s employees should have worked to make 1,000 Zippies. We find the standard hours by multiplying the 1.5 hours per unit standard for one Zippy times the 1,000 Zippies.
- #29: Now that we know the standard hours, let’s calculate the labor efficiency variance. We find the labor efficiency variance by multiplying the standard rate for one hour of labor times the difference between the actual hours of labor and the standard hours of labor. The $400 favorable labor efficiency variance results because Hanson’s employees worked 50 hours less than standard to make 1,000 Zippies, and each hour of labor has a standard rate of $8.00.
- #31: Recall from our work in previous chapters that the predetermined overhead rate is calculated by dividing estimated overhead costs for the operating period by the estimated activity for the operating period. We then use the predetermined overhead rate to assign overhead costs to products are they are manufactured.
- #38: Standard cost variances are temporary accounts that are closed at the end of the year. If the variance amounts are immaterial, they are closed to cost of goods sold. But if the variance amounts are material, they should be apportioned to three accounts: work in process, finished goods, and cost of goods sold.
- #39: End of Chapter 24.