Kinney8e PPT Ch07

Chapter 7:
Standard Costing and

Variance Analysis
Cost Accounting:
Foundations and Evolutions, 8e
Kinney Raiborn
Learning Objectives
How are material, labor, and overhead standards

set?
How are material, labor, and overhead variances
calculated and recorded?
Why are standard cost systems used?
How have the setting and use of standards changed
over time?
How does the use of a single conversion element
(rather than the traditional labor and overhead
elements) affect standard costing?
(Appendix) How are variances affected by multiple
material and labor categories?
Standard Cost Systems
Manufacturing
Service
Not-for-Profit
Record standard and actual costs in the
accounting records
Standards
Standard costs are budgeted costs to
Manufacture a single unit of product or

Perform a single service
To develop standards, identify
Material and labor types, quantities, and prices

Overhead types and behavior
Manufacturing Objective
Minimize unit cost while achieving certain
quality specifications.
Input
Resources
Output
Quality
Material Standards
Materials used
Types
Quantity
Quality
Price
From
Product specifications,
observation, inquiry
Bill of materials
Balance cost, quality, and projected sales price

Standard
Material =
Cost
Unit Purchase Price * quantity
Labor Standards
Labor used
Types
From
Production, setup,
cleanup, and rework
Quantity
Cost
Include wages, payroll

taxes, and fringe
benefits
Standard
Labor
=
Cost
Hours * Wage Rate
Industrial engineering
studies including
methods-time
measurement (MTM),
time and motion studies,
historical data
Operations flow
document
Overhead Standards
Variable and fixed manufacturing
overhead
Estimated level of activity
Estimated costs
Predetermined factory overhead
application rates
Standard Cost Card

For one unit of output (a bike)
Standard Direct Material Components
Standard Direct Labor Components
Manufacturing Overhead
Variable Overhead
Fixed Overhead
Variance
Variance is the difference between
an actual cost and a standard cost.
Total Variance
Total actual cost incurred minus total standard cost
applied to output produced
Actual price of
actual
production input
Standard cost of
actual
production
output
Total Variance*
Favorable or unfavorable
Total Variance
AP x AQ
Inputs
SP x SQ
Total Variance
Outputs
AP = actual cost/price per unit of materials or hours of

labor
AQ = actual quantity of materials or hours of labor
SP = standard cost/price per unit of materials or
hours of labor
SQ = standard quantity of materials or hours of labor
Price Variance
AP x AQ
SP x AQ
SP x SQ
Price/Rate
Variance
Total Variance
What
was
paid
*
(AP SP) x AQ*
What should
have been
paid
Usage Variance
AP x AQ
What
was
used
*
SP x AQ
SP x SQ
Usage
Variance
Total Variance
(AQ SQ) x SP
What should
have been
used for the
level of output
Material Price Variance (MPV)

AP x AQ
SP x AQ
SP x SQ
MPV
Total Variance
What
was
paid
*
(AP SP) x AQ*
What should
have been
paid
MPV Calculations
Calculate MPV at
Point of purchase or
When materials used
Material Quantity Variance (MQV)

AP x AQ
SP x AQ
SP x SQ
MQV
What
was
used
*
Total Variance
(AQ SQ) x SP
What should
have been
used for
level of output
Labor Rate Variance (LRV)

AP x AQ
SP x AQ
SP x SQ
LRV
Total Variance
What
was
paid
*
(AP SP) x AQ*
What should
have been
paid
Labor Efficiency Variance (LEV)

AP x AQ
SP x AQ
SP x SQ
LEV
What
was
used
*
Total Variance
(AQ SQ) x SP
What should
have been
used for
level of output
Overhead Variances
Variable Overhead
Fixed Overhead
Actual variable overhead

is total of various ledger
accounts
Actual fixed overhead is

total of various ledger
accounts
SP = Predetermined
variable overhead rate
SP = Predetermined
fixed overhead rate
Variable Overhead Variances

Actual
VOH
Actual
For
actual
hours
used
Budgeted
VOH
Applied
VOH
SP x AQ
SP x SQ
VOH
Spending
Variance
VOH
Efficiency
Variance
Total VOH Variance
What should
have been
used for level
of output
VOH Spending Variance
Caused by price differences
Managers have little control over prices
Caused by shrinkage or waste
Managers should be held accountable
Fixed Overhead Variances

Actual
FOH
Budgeted
FOH
Applied
FOH
SP x SQ
Constant
Amount
FOH
Spending
Variance
FOH
Volume
Variance
Total FOH Variance
What should
have been
used for level
of output
FOH Spending and Volume Variance
FOH Spending
Variance
Calculate variance for

each component
Caused by price
differences
May reflect
mismanagement of
resources
FOH Volume Variance
Measures capacity
utilization
Caused by producing at a
level that differs from the
capacity level used to
compute the
predetermined overhead
rate
Also called the
noncontrollable variance
Alternative Overhead Variance

Approaches
One variance
Two variance
Three variance
Four variance
One Variance Approach

Standard
Cost of
OH
SP x SQ
Actual
OH
Total OH Variance
Applied
Overhead
Two Variance Approach

Actual Budgeted OH Standard
OH
based on SQ Cost of
OH
SP x SQ
Budget
Variance
Volume
Variance
Total OH Variance
Applied
Overhead
Three Variance Approach

Actual
OH
Budgeted OH
based on
based on
Actual Inputs Actual Output
Standard
OH
SP x SQ
OH
Spending
Variance
OH
Efficiency
Variance
Total OH Variance
Volume
Variance
Applied
Overhead
Standard Cost Journal Entries
Variances recorded in accounting system

Favorable variances
Unfavorable variances
Credits
Represent savings in production costs
Debits
Represent excess production costs
Inventories are recorded at standard cost

during the period
Purchase of Materials
(Point of Purchase Method)
At
Standard
Cost
Materials
SP x AQ
purchased
Materials
Price
Variance
U
Accts Pay
DebitUnfavorable
CreditFavorable
AP x AQ
purchased
Use of Materials
At
Standard
Cost
WIP
SP x SQ
allowed
Materials
Quantity
Variance
U
Materials
DebitUnfavorable
CreditFavorable
SP x AQ
used
Record Labor
At
Standard
Cost
LRV
WIP
LEV
Wages Pay
AP x AQ
SP x SQ
allowed
DebitUnfavorable
CreditFavorable
Apply Overhead
WIP
SP x SQ
Allowed
VOH
SP x SQ
Allowed
FOH
SP x SQ
Allowed
Year-End Treatment for VOH

VOH
Efficiency
Variance
VOH
Spending
Variance
VOH
Actual Applied
---------------
DebitUnfavorable
CreditFavorable
Enter a debit or
credit to bring
balance to zero
Year-End Treatment for FOH

FOH
Spending
Variance
Volume
Variance
FOH
Actual Applied
-------------
DebitUnfavorable
CreditFavorable
Enter a debit or
credit to bring
balance to zero
Year-End Treatment of Variances

ImmaterialAdjust Cost of Goods Sold
MaterialProrate variances to:
Material Price
Variances
Raw Materials
WIP
Finished Goods
Cost of Goods Sold
All other variances
WIP
Finished Goods
Cost of Goods Sold
Why Use Standard Cost Systems

Motivation
Planning
Controllingvariance analysis
Decision making
Performance evaluation
Setting Standards and Trends
Setting Standards
Appropriateness
Attainability
Expected standards
Practical standards
Ideal standards
Trends in Standards
Ideal Standards and
Theoretical Capacity
Adjusting standards
Price variance on
purchase versus
usage
Decline in direct labor
content
Conversion Costs
Combine direct labor and manufacturing

overhead
Variances
Spending variance for overhead

Efficiency variances for machinery and production
costs
Volume variances for production
Material Price, Mix, and Yield Variances

AM x
AQ x
AP
Material
Price
Variance
AMActual Mix
SMStandard Mix
AM x
AQ x
SP
SM x
AQ x
SP
Material
Mix
Variance
SM x
SQ x
SP
Material
Yield
Variance
What should
have been
used for level
of output?
Labor Rate, Mix, and Yield Variances

AM x
AH x
AR
Labor
Rate
Variance
MMix
HHours
RRate
AM x
AH x
SR
SM x
SH x
SR
SM x
AH x
SR
Labor
Mix
Variance
Labor
Yield
Variance
What should
have been
used for level
of output?
Questions
How are standards set for material, labor,

and overhead?
How is variance analysis used for control
and performance evaluation?
Why are labor and overhead elements
sometimes combined into a single
conversion element?
Potential Ethical Issues
Setting high standards to create favorable variances

Ignoring effects of one production area on another
Setting overhead rates too low based on high
production levels to distort inventory cost and
operating income
Producing inventory only to create a favorable volume
variance
Not updating standards so that favorable variances
are created
Using low quality materials or labor to create favorable
variances and low quality products

Kinney8e PPT Ch07

Uploaded by

Copyright:

Available Formats

Kinney8e PPT Ch07

Uploaded by

Document Information

Original Description:

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

Kinney8e PPT Ch07

Uploaded by

Copyright:

Available Formats

Chapter 7:

Standard Costing and

How are material, labor, and overhead standards

Standard Cost Systems

Standard costs are budgeted costs to

Manufacture a single unit of product or

To develop standards, identify

Material and labor types, quantities, and prices

Balance cost, quality, and projected sales price

Unit Purchase Price * quantity

Include wages, payroll

Hours * Wage Rate

Standard Cost Card

AP = actual cost/price per unit of materials or hours of

(AP SP) x AQ*

Material Price Variance (MPV)

(AP SP) x AQ*

Material Quantity Variance (MQV)

Labor Rate Variance (LRV)

(AP SP) x AQ*

Labor Efficiency Variance (LEV)

Actual variable overhead

Actual fixed overhead is

Variable Overhead Variances

Total VOH Variance

VOH Spending Variance

Caused by price differences

Managers have little control over prices

Caused by shrinkage or waste

Managers should be held accountable

Fixed Overhead Variances

Total FOH Variance

FOH Spending and Volume Variance

Calculate variance for

FOH Volume Variance

Alternative Overhead Variance

One Variance Approach

Two Variance Approach

Three Variance Approach

Standard Cost Journal Entries

Variances recorded in accounting system

Inventories are recorded at standard cost

Year-End Treatment for VOH

Year-End Treatment for FOH

Year-End Treatment of Variances

All other variances

Why Use Standard Cost Systems

Setting Standards and Trends

Combine direct labor and manufacturing

Spending variance for overhead

Material Price, Mix, and Yield Variances

Labor Rate, Mix, and Yield Variances

How are standards set for material, labor,

Potential Ethical Issues

Setting high standards to create favorable variances

You might also like