7/27/2019 acc112chap22.ppt

1/36

CHAPTER 22Standard Costs and Balanced

Scorecard

After studying this chapter, you should be able to:

Distinguish between a standard and a budget.

Identify the advantages of standard costs.

Describe how standards are set.

Use standards to determine budget amountsand analyze variances.

Discuss the reporting of variances.

7/27/2019 acc112chap22.ppt

2/36

The Need for Standards

Standards Are common in business

Sometimes imposed by government agencies

(regulations)

Standard costs Are predetermined unit costs

Used as measures of performance

7/27/2019 acc112chap22.ppt

3/36

Distinguishing Between Standards and

Budgets

Standards and budgets are both Pre-determined costs

Part of management planning and control

A standard is a unit amountwhereas a

budget is a total amount Standard costs may be incorporated into a cost accounting

system

7/27/2019 acc112chap22.ppt

4/36

The Need for Standards

Lets think about standards..

how much does it cost to make a.?

DM

DL

OH

7/27/2019 acc112chap22.ppt

5/36

In Class Exercise on Standards

StandardDL

Cost

StandardP

StandardCost per unit

=

Lets think about standards..how much does it cost to make a.?

Use your product to create example costs

StandardDM

Cost

Standard P(Pre-determined

OH rate)

Standard Q(Activity)

StandardQ

StandardP

StandardQ

=

= X

X

X

StandardOH

Cost

SP

+

+

=

7/27/2019 acc112chap22.ppt

6/36

Advantages of Standard Costs

7/27/2019 acc112chap22.ppt

7/36

Setting Standard Costs

Setting standard costs Requires input from all personswho have responsibility for

costs and quantities

Standards costs need to be currentand should be undercontinuous review

There are two levels of standard costs Ideal standards represent optimum levelsof performance

under perfect operating conditions

Normal standards represent efficient levelsof performanceattainable under expected operating conditions (rigorous butattainable)

7/27/2019 acc112chap22.ppt

8/36

Setting Standard Costson a per unit level

PRICE

P

x=

QUANTITY

Q

STANDARD

We can do this for DM, DL & OH.

7/27/2019 acc112chap22.ppt

9/36

Direct Materials Price Standard

Direct materials price standard Cost per unitwhich should be incurred

Based on the purchasing departmentsbest estimate of the costof raw materials

Includes related costssuch as receiving, storing, and handling

7/27/2019 acc112chap22.ppt

10/36

Direct Materials Quantity

Standard

Direct materials quantity standard Quantity of direct materials used per unitof finished goods

Based on physical measure such as pounds, barrels, etc.

Considers both the quantity and quality of materials required

Includes allowances for unavoidable wasteand normal storage

Materials

7/27/2019 acc112chap22.ppt

11/36

Total Direct Materials

Cost/Unit

STANDARDDIRECT

MATERIALSPRICE

x =

STANDARDDIRECT

MATERIALSQUANTITY

STANDARDDIRECT

MATERIALS COSTPER UNIT

The standard direct materials cost perunitis calculated as follows:

PRICE

P

x =QUANTITY

Q

STANDARD

7/27/2019 acc112chap22.ppt

12/36

Direct Labor Price Standard

Direct labor price standard Rate per hourincurred for direct labor

Based on current wage ratesadjusted for anticipatedchanges, such as cost of living adjustments

Includes employer payroll taxes, and fringe benefits

7/27/2019 acc112chap22.ppt

13/36

Direct Labor Quantity Standard

Direct labor quantity standard

Time required to make one unitof the product

Critical in labor-intensive companies Allowancesshould be made for rest periods,

cleanup, machine setup and machine downtime

7/27/2019 acc112chap22.ppt

14/36

Direct Labor

The standard direct labor cost per unit iscalculated as follows:

STANDARDDIRECT

LABOR RATE

x =STANDARD

DIRECTLABOR HOURS

STANDARDDIRECT

LABOR COSTPER UNIT

PRICEP x =

QUANTITYQ STANDARD

7/27/2019 acc112chap22.ppt

15/36

Manufacturing Overhead Standard

For manufacturing overhead, a standard

predetermined overhead rate is used. The predetermined rate is computed by dividing budgeted

overhead costs by an expected standard activity index.

The standard manufacturing overhead rate per unit is the

predetermined overhead rate times the activity index quantity

standard(for example, direct labor hours).

7/27/2019 acc112chap22.ppt

16/36

Standard Cost Per Unit

Standard cost per unit Sum of the standard costsfor direct materials, direct labor, and

manufacturing overhead

Is determined for each productand often recorded on astandard cost card which provides the basis for determining

variances from standards

ManufacturingOverhead

FactoryLabor

Materials

7/27/2019 acc112chap22.ppt

17/36

Variances from Standards

Variances from standards Differencesbetween total actual costs and total

standard costs

Unfavorable variancesoccur when too much is paid

for materials and labor or when there are inefficienciesin using materials and labor.

Favorable variancesoccur when there are efficienciesin incurring costs and in using materials and labor. A variance is not favorable if quality control standards are

sacrificed.

7/27/2019 acc112chap22.ppt

18/36

Analyzing variances

Variances must be analyzed todetermine their significance

First, determine the cost elementsthat comprise the

variance. For each manufacturing cost element, a total dollar

variance is computed. Then this variance is analyzed

into aprice variance and a quantity variance.

7/27/2019 acc112chap22.ppt

19/36

Variance Relationships

7/27/2019 acc112chap22.ppt

20/36

DeterminingMaterials Variance

Actual Quantityx Actual Price(AQ) x ($AP)

What did youactual ly pay??

Standard Quantityx Standard Price

(SQ) x ($SP)

What should youhave paid based on the

Standard (consider

how much is produced)?

Total MaterialsVariance

(TMV) U or F=_

The total materials varianceis computedfrom the following formula:

7/27/2019 acc112chap22.ppt

21/36

Analyzing Materials VarianceIsolate Price Component

Actual Unit PriceStandard Price($AP- $SP)U or F

Actual Quantity Materials PriceVariance

(MPV)U or F=x

Break thematerials variancedowninto price and quantity.

Compute P variance as follows:

7/27/2019 acc112chap22.ppt

22/36

Analyzing Materials VarianceIsolate Quantity Component

Actual TotalQuantity Used- Standard Total

Quantity(AQ) - (SQ)U or F

$ Standard Price MaterialsQuantityVariance

(MQV)U or F

=x

Break thematerials variancedown intoprice and quantity.

Compute Q variance as follows:

For SQ : consider how muchQ should have been purchased forhow much is produced(SQ per unit x units produced).

7/27/2019 acc112chap22.ppt

23/36

Check your answer:Cross Foot Materials Variances

Materials PriceVariance

U or F

Materials QuantityVarianceU or F

Total MaterialsVariance

(TMV)U or F=+

Qvariance + P variance = total variance

Is your answer correct???

7/27/2019 acc112chap22.ppt

24/36

Causes of Materials Variances

Materials variances may be caused by avariety of factors, including bothinternal and external factors.

Investigating materials price variancesbegins in thepurchasing department, but the variance may be beyondthe control of purchasing (for ex., prices rise faster thanexpected).

Investigating materials quantity variancebegins in theproduction department, but the variance may be beyondthe control of production (for ex., faulty machinery).

7/27/2019 acc112chap22.ppt

25/36

DeterminingLaborVariance

Actual (Q) Hoursx Actual (P) Rate

(AQ) x ($AP)

What did youactual ly payFor Labor??

Standard Hours (Q)x Standard Rate (P)

(SQ) x ($SP)

What should youhave paid based on the

Standard (consider

how much is produced)?

Total LaborVariance

(TLV) U or F=_

The total Labor varianceis computed fromthe following formula:

7/27/2019 acc112chap22.ppt

26/36

Analyzing Labor VarianceIsolate Price Component

Actual Rate/hrStandard Rate/hr($AP- $SP)U or F

Actual hours(AQ)

Labor PriceVariance

(LPV)U or F=x

Break theLabor variancedown intoprice and quantity.

Compute Labor Price variance as follows:

7/27/2019 acc112chap22.ppt

27/36

Analyzing Labor VarianceIsolate Quantity Component

Actual Total Hoursused (AQ) -Standard Total

Hours (SQ)(AQ) - (SQ)U or F

$ Standard Rate(P)

LaborQuantityVariance

(LQV)U or F

=x

Break thelabor variancedown into priceand quantity.

Compute Labor Quantity variance as follows:

For SQ : consider how many hoursshould have been worked forhow much is produced(SQ or hours per unit x units produced).

Ch k

7/27/2019 acc112chap22.ppt

28/36

Check your answer:Cross Foot Labor Variances

Labor PriceVariance

U or F

Labor QuantityVarianceU or F

Total LaborVariance

(TLV)U or F=+

Qvariance + P variance = total variance

Is your answer correct???

7/27/2019 acc112chap22.ppt

29/36

Causes of Labor Variances

Labor variances may be caused by avariety of factors.

Labor price variances usually result from eitherpaying

workers higher wagesthan expected or misallocatingworkers (for ex., using skilled workers in place ofunskilled workers).

Labor quantity variances relate to the efficiency ofworkers and are usually related to the production

department.

7/27/2019 acc112chap22.ppt

30/36

Actual Overhead Costs

Thetotal overhead variance is thedifference between actual overhead costs

and overhead costs applied to work done.

7/27/2019 acc112chap22.ppt

31/36

Reporting Variances

Reporting variances All variances should be reportedto appropriate levels of

management as soon as possible so that corrective action

can be taken. The form, content, and frequency of variance reports

vary considerably among companies.

Variance reports facilitate the principle of management

by exception. In using variance reports, top management normally

looks for significant variances.

7/27/2019 acc112chap22.ppt

32/36

Formula for TotalOverhead Variance

ActualOverhead

OverheadApplied basedon Standard

Hours Allowed

TotalOverheadVariance

=_

With standard costs, manufacturingoverhead costs are applied to work inprocess on the basis of the standard hoursallowed for the work done. Standard hoursallowedare the hours that should have beenworked for the units produced. The formulafor the total overhead variance is:

7/27/2019 acc112chap22.ppt

33/36

Lets Review

The setting of standards is:

a. A managerial accounting decision.

d.Preferably set at the ideal level of

performance.

c.A worker decision.

b.A management decision

7/27/2019 acc112chap22.ppt

34/36

Lets Review

The setting of standards is:

a. A managerial accounting decision.

d.Preferably set at the ideal level of

performance.

c.A worker decision.

b.A management decision

7/27/2019 acc112chap22.ppt

35/36

The Need for Standards

Lets think about standards..

how much does it cost to make a.?

DM

DL

OH

7/27/2019 acc112chap22.ppt

36/36

In Class Exercise on Standards

StandardDL

Cost

StandardP

StandardCost per unit

=

Lets think about standards..how much does it cost to make a.?

Use your product to create example costs

StandardDM

Cost

Standard P(Pre-determined

OH rate)

Standard Q(Activity)

StandardQ

StandardP

StandardQ

=

= X

X

X

StandardOH

Cost

SP

+

+

=