Standard Costing and Variance Analysis: Multimedia Slides By: Gail A. Mestas, Macc, New Mexico State University

Chapter 22
Standard Costing and Variance Analysis
Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University
Learning Objectives
1. Define standard costs and describe how managers use standard costs in the management cycle. 2. Explain how standard costs are developed and compute a standard unit cost. 3. Prepare a flexible budget and describe how variance analysis is used to control costs.
Copyright Houghton Mifflin Company. All rights reserved. 222
Learning Objectives (contd)

4. Compute and analyze direct materials variances. 5. Compute and analyze direct labor variances. 6. Compute and analyze manufacturing overhead variances. 7. Explain how variances are used to evaluate managers performance.
Standard Costing
Objective 1
Define standard costs and describe how managers use standard costs in the management cycle
Copyright Houghton Mifflin Company. All rights reserved.
224
Standard Costing
is a method of cost control that includes a measure of actual performance and a measure of the difference, or variance, between standard and actual performance
225
Standard Costs
Realistic estimates of costs
Based on analysis of both past and projected operating costs and conditions
Provide a predetermined performance level for the standard costing method Usually stated in terms of cost per unit
226
Standard Costs (contd)

Based on
Past costs Engineering estimates Forecasted demand Worker input Time and motion studies Type and quality of direct materials
227
Standard Costing
How the standard costing method differs from the normal and actual costing methods
Product Cost Elements Direct Materials Direct Labor Manufacturing Overhead Standard Costing Estimated costs Estimated costs Estimated costs Normal Costing Actual costs Actual costs Estimated costs Actual Costing Actual costs Actual costs Actual costs
228
Standard Costs and the Management Cycle
Planning
Managers use standard costs to
Develop budgets
Direct materials Direct labor Variable manufacturing overhead
Establish goals for product costing
229
Standard Costs and the Management Cycle (contd)
Executing
Managers use standard costs to
Apply dollar, time, and quality standards to work Collect actual cost data
2210
Reviewing
Managers compare standard and actual costs
Compute variances
Provide measures of performance that can be used to control costs and evaluate managers Analyze significant variances to determine cause Unfavorable variances may reveal operating problems that require correcting Favorable variances may indicate favorable practices that should be implemented elsewhere
Reporting
Managers use standard costs to report on
Operations Managers performance
2212
Standard Costing, Variance Analysis, and the Management Cycle
2213
The Relevance of Standard Costing in Today's Business Environment

Manufacturing companies
Increased automation
Significant decrease in direct labor cost
Corresponding decline in importance of labor-related standard costs and variances
Many companies now apply standard costing only to direct materials and manufacturing overhead
Service organizations
Use standard costing for direct labor and service overhead costs
2214
Discussion
Q. What is the main difference between the standard costing and normal costing methods?
A. The standard costing method uses estimated costs for direct materials and direct labor, whereas the normal costing method uses actual costs for these items
The methods are similar in that both use estimated costs for manufacturing overhead
Computing Standard Costs

Objective 2
Explain how standard costs are developed and compute a standard unit cost
2216
Computing Standard Costs

Fully integrated standard costing system
Uses standard costing for all elements of product cost
Direct materials Direct labor Manufacturing overhead
Inventory accounts and Cost of Goods Sold account

Maintained and reported in terms of standard costs Standard unit costs used to compute account balances Actual costs recorded separately
Actual and standard costs can then be compared
Computing Standard Costs (contd)

Six elements of a standard unit cost for a manufactured product
1. Price standard for direct materials 2. Quantity standard for direct materials 3. Standard for direct labor rate 4. Standard for direct labor time 5. Standard for variable overhead rate 6. Standard for fixed overhead rate
Standard Direct Materials Cost

is found by multiplying the price standard for direct materials by the quantity standard for direct materials
Standard Direct Materials Cost = Direct Materials Price Standard x Direct Materials Quantity Standard
2219
Standard Direct Materials Cost (contd)

Direct materials price standard
Careful estimate of the cost of a specific direct material in the next accounting period Developed by purchasing agent or purchasing department
Takes into account
All possible price increases Changes in available quantities New sources of supply
2220
Standard Direct Materials Cost (contd)

Direct materials quantity standard
Estimate of the amount of direct materials that will be used in the accounting period
Includes scrap and waste
Influenced by
Product engineering specifications Quality of direct materials Age and productivity of machinery Quality and experience of work force
Established and monitored by

Production managers Management accountants Others
Engineers, purchasing agents, machine operators
Standard Direct Labor Cost

for a product, task, or job is calculated by multiplying the standard wage for direct labor by the standard hours of direct labor
Standard Direct Labor Cost = Direct Labor Rate Standard x Direct Labor Time Standard
2222
Standard Direct Labor Cost (contd)

Direct labor rate standard
Hourly direct labor rate expected to prevail during the next accounting period
For each function or job classification
Average standard rate is developed for each task

Standard rate is used even if worker is paid more or less than the standard rate
Easy to establish
Rates are set by labor unions or defined by the company
Standard Direct Labor Cost (contd)

Direct labor time standard
Expected time required for each department, machine, or process to complete the production of one unit or one batch of output Developed using
Current time and motion studies of workers and machines Records of past performance
Should be revised when

Machinery is replaced Quality of work force changes
2224
Standard Manufacturing Overhead Cost

is the sum of the estimates of variable and fixed overhead costs in the next accounting period
Two parts
Variable costs and fixed costs
Compute separately because their cost behavior differs
Standard Manufacturing Overhead Cost (contd)
Standard variable overhead rate

Computed by dividing the total budgeted variable overhead costs by an expression of capacity, such as number of standard direct labor hours or standard machine hours
Standard Variable Overhead Rate = Total Budgeted Variable Overhead Costs Expected Number of Standard Machine Hours
2226
Standard Manufacturing Overhead Cost (contd)
Standard fixed overhead rate

Computed by dividing the total budgeted fixed overhead costs by an expression of capacity, usually normal capacity in terms of standard hours or units
Denominator expressed in same terms as the variable overhead rate
StandardFixed = Overhead Rate Total Budgeted FixedO verhead Costs Normal Capacity in Terms o f Standard M achine H ours
Its use ensures that all fixed OH* costs have been applied to units produced by the time normal capacity is reached
*Overhead
Normal capacity is the level of operating capacity needed to meet expected sales demand
Total Standard Unit Cost

Remember When, Inc., recently updated the standards for its line of watches
Direct materials price standards Casing materials Movement mechanism Direct materials quantity standards Casing materials Movement mechanism Direct labor time standards Case Stamping Department Watch Assembly Department Direct labor rate standards Case Stamping Department Watch Assembly Department Standard manufacturing overhead rates Standard variable overhead rate Standard fixed overhead rate $9.20 per square foot $2.17 each .025 square foot per watch 1 per watch .01 hour per watch .05 hour per watch $8.00 per hour $10.20 per hour $12.00 per direct labor hour $9.00 per direct labor hour
Compute the total standard cost of one watch
Direct materials costs Casing ($9.20 per sq.ft. x .025 sq.ft.) One movement mechanism Direct labor costs Case Stamping Dept. ($8.00 per hour x .01 hour per watch) Watch Assembly Dept. (10.20 per hour x .05 hour per watch) Variable overhead ($12.00 per hour x .06 hour per watch) Total standard variable cost of one watch Fixed overhead ($9.00 per hour x .06 hour per watch) Total standard cost of one watch
$ .23 2.17 .08 .51 .72 $3.71 .54 $4.25

2228
Discussion
Q. Why are the variable and fixed components for the standard manufacturing overhead cost computed separately?
A. Variable costs and fixed costs are computed separately because their cost behavior differs
2229
Variance Analysis
Objective 3
Prepare a flexible budget and describe how variance analysis is used to control costs
2230
Variance Analysis
is the process of computing the differences between standard costs and actual costs and identifying the causes of those differences
Managers use
Flexible budgets to improve variance analysis Variance analysis to control costs
2231
The Role of Flexible Budgets in Variance Analysis
Accuracy of variance analysis depends greatly on the type of budget managers use when comparing variances
Static budget Flexible budget
2232
The Role of Flexible Budgets in Variance Analysis (contd)
Static budget
Also called fixed budget Forecasts revenues and expenses for just one level of sales and just one level of output
Does not allow for changes in output level
If actual output differs from budgeted output, a variance between actual and budgeted amounts will occur Cannot judge performance accurately
2233
Performance Report Using Data from a Static Budget
2234
Flexible budget
Also called variable budget Summary of expected costs for a range of activity levels
Provides forecasted data that can be adjusted for changes in output level
Used primarily as a cost control tool in evaluating performance
2235
Flexible budget formula

An equation that determines the expected, or budgeted, cost for any level of output
Includes
Per unit amount for variable costs Total amount for fixed costs
Total Budgeted Costs = (Variable Cost per Unit No. of Units Produced) + Budgeted Fixed Costs
2236
Flexible Budget for Evaluation of Overall Performance
2237

The flexible budget formula for Remember When, Inc. is
Total Budgeted Costs = ($3.71 No. of Units Produced) + $9,450
The company produced 19,100 units during 20x5

Total Budgeted Costs = ($3.71 19,100) + $9,450 = $70,861 + $9,450 = $80,311
Performance Report Using Data from a Flexible Budget
2239
Using Variance Analysis to Control Costs

Step 1
Compute variance
Is the variance significant? Yes

Step 2
No
No corrective action needed
Analyze variance to determine its cause
Step 3
Select performance measures to correct the problem
Step 4
Take corrective action

2240
Using Variance Analysis to Control Costs (contd)
Computing the amount of a variance is important

But, this does not prevent the variance from reoccurring Must determine its cause
Select performance measures that will help track the problem Must then find the best solution
2241
Discussion
Q. What is the flexible budget formula?
A. It is an equation used to determine expected, or budgeted cost for any level of output
Total Budgeted Costs = (Variable Cost per Unit No. of Units Produced) + Budgeted Fixed Costs
2242
Computing and Analyzing Direct Materials Variances
Objective 4
Compute and analyze direct materials variances
2243
Computing and Analyzing Direct Materials Variances
To control operations, managers compute and analyze variances for

Whole cost categories
Such as total direct materials costs
Elements of those categories

Such as the price and quantity of each direct material
The more detailed the analysis of a variance is, the more effective managers will be in controlling costs
2244
Computing Direct Materials Variances

Total direct materials cost variance
Difference between the standard cost and actual cost of direct materials
2245
Computing Direct Materials Variances

Cambria Company makes leather bags. Each bag should use 4 feet of leather (standard quantity), and the standard price of leather is $6.00 per foot. During August, the company purchased 760 feet of leather costing $5.90 per foot and used the leather to produce 180 bags
Standard cost Standard price standard quantity = $6.00 per foot (180 bags 4 feet per bag) = $6.00 per foot 720 = $4,320 Less actual cost Actual price actual quantity = Total direct materials cost varia nce
This is an unfavorable (U) situation
$5.90 per foot 760 = 4,484 $ 164 (U)

Actual cost > standard cost
Computing Direct Materials Variances (contd)
Total direct materials cost variance must be broken into two parts to find the cause of the variance
Direct materials price variance Direct materials quantity variance
2247

Direct materials price variance
Difference between the standard price and the actual price per unit multiplied by the actual quantity purchased Also called the direct materials spending or rate variance
Direct Materials Price Variance = (Standard Price Actual Price) Actual Quantity = ($6.00 $5.90) 760 feet = $76 (F)
Because the company paid less for direct materials than it expected, the variance is favorable (F)

Direct materials quantity variance
Difference between the standard quantity and the actual quantity used multiplied by the standard price Also called the direct materials efficiency or usage variance
Direct Materials Quantity Variance = Standard Price (Standard Quantity Allowed Actual Quantity) = $6.00 per foot (720 feet 760 feet) = $240 (U)
Because the company used more for direct materials than it expected, the variance is unfavorable (U)
Test calculations of variances

If correct, the net of the direct materials price variance and direct materials quantity variance will equal the total direct materials cost variance
Direct materials price variance Direct materials quantity variance Total direct materials cost variance $ 76 (F) 240 (U) $164 (U)
2250
Diagram of Direct Materials Variance Analysis
2251
Analyzing and Correcting Direct Materials Variances

Company had been experiencing direct materials price variances and quantity variances for some time For three months, managers tracked
Purchasing activities
Discovered that the purchasing agent had purchased, without authorization, a lower grade of leather at a reduced price
After analysis, engineers determined the lower grade of leather was not appropriate
Scrap and rework

Discovered that inferior leather was causing the unfavorable quantity variance
Discussion
Q. What is the direct materials price variance?
A. It is the difference between the standard price and the actual price per unit multiplied by the actual quantity purchased. It is also called the direct materials spending or rate variance
Direct Materials Price Variance = (Standard Price Actual Price) Actual Quantity
Computing and Analyzing Direct Labor Variances
Objective 5
Compute and analyze direct labor variances
2254
Computing Direct Labor Variances

Total direct labor cost variance
Difference between the standard direct labor cost for good units produced and actual direct labor costs
Good units are the total units produced less units that are scrapped or need to be reworked
2255
Computing Direct Labor Variances (contd)

At Cambria Company, each leather bag requires 2.4 standard direct labor hours, and the standard direct labor rate is $8.50 per hour. During August, 450 direct labor hours were used to make 180 bags at an average pay rate of $9.20 per hour
Standard cost Standard rate standard hours allowed = $8.50 per foot (180 bags 2.4 hours per bag) = $8.50 per hour 432 hours = $3,672 Less actual cost Actual rate actual hours = $9.20 per hour 450 hours = 4,140 $ 468 (U)
Total direct labor cost varia nce
Total direct labor cost variance must be broken onto two parts to find the cause of the variance
Direct labor rate variance Direct labor efficiency variance
2257

Direct labor rate variance
Difference between the standard direct labor rate and the actual direct labor rate multiplied by the actual direct labor hours worked Also called the direct labor spending variance
Direct Labor Rate Variance = (Standard Rate Actual Rate) Actual Hours = ($8.50 $9.20) 450 hours = $315 (U)
Because the company paid more per hour for direct labor than it expected, the variance is unfavorable

Direct labor efficiency variance
Difference between the standard direct labor hours allowed for good units produced and the actual direct labor hours worked multiplied by the standard direct labor rate Also called the direct labor quantity or usage variance
Direct Labor Efficiency Variance = Standard Rate (Standard Hours Allowed
Actual Hours) = $8.50 per hour (432 hours 450 hours)

= $153 (U)
Because the company used more direct labor hours than it expected, the variance is unfavorable (U)

If correct, the net of the direct labor rate variance and direct labor efficiency variance will equal the total direct labor cost variance
Direct labor rate variance Direct labor efficiency variance Total direct labor cost variance $ 315 (U) 153 (U) $468 (U)
2260
Diagram of Direct Labor Variance Analysis
2261
Analyzing and Correcting Direct Labor Variances

Managers analyzed
Employee time cards
An assembly worker who had fallen ill was replaced with a machinery operator from another department
Assembly worker is paid $8.50 per hour and the machine operator is paid $9.20 per hour Machine operator not as skilled as the assembly worker Temporary situation so no corrective action taken
Materials handling
Parts delivered late on five occasions
Will track delivery time and number of delays for next three months
Discussion
Q. What is the direct labor efficiency variance?
A. The direct labor efficiency variance is the difference between the standard direct labor hours allowed for good units produced and the actual direct labor hours worked multiplied by the standard direct labor rate. It is also called the direct labor quantity or usage variance
Direct Labor Efficiency Variance = Standard Rate (Standard Hours
Allowed Actual Hours)

Computing and Analyzing Manufacturing Overhead Variances
Objective 6
Compute and analyze manufacturing overhead variances
2264
Computing and Analyzing Manufacturing Overhead Variances

Controlling variable and fixed overhead costs is more difficult for managers than controlling direct materials and direct labor costs
Responsibility for manufacturing overhead costs is hard to assign
Fixed overhead costs
Unavoidable past costs Not under the control of any department manager
Variable overhead costs

Some control possible if they can be related to departments or activities
2265
Using a Flexible Budget to Analyze Manufacturing Overhead Variances
Cambria Companys managers use a flexible budget to evaluate performance

For manufacturing overhead costs only Evaluate activity level using direct labor hours
Variable costs vary with the number of direct labor hours worked Total fixed overhead costs remain constant
2266
Flexible Budget for Evaluation of Manufacturing Overhead Costs
2267
Using a Flexible Budget to Analyze Manufacturing Overhead Variances

Flexible budget formula
Total Budgeted OH Costs = (Variable Costs per Direct Labor Hour Number of Direct Labor Hours) + Budgeted Fixed OH Costs
Flexible budget formula when applied to Cambrias data

Total Budgeted OH Costs = ($5.75 No. of Direct Labor Hours) + $1,300
To find the total monthly budgeted overhead costs, insert direct labor hours into the flexible budget
Computing Manufacturing Overhead Variances
Total manufacturing overhead variance

Difference between actual overhead costs and standard overhead costs
Standard overhead costs are applied to production using a standard overhead rate
Standard overhead rate has two parts Variable Fixed
2269
Computing Manufacturing Overhead Variances (contd)

For Cambria Company, the standard variable overhead rate is $5.75 per direct labor hour (from the flexible budget). Total budgeted overhead is $1,300 by normal capacity, which is 400 direct labor hours.
Fixed overhead rate Budgeted fixed overhead normal capacity = $1,300 400 direct labor hours = $3.25 Total standard overhead rate Standard variable overhead rate + standard fixed overhead rate = $5.75 + $3.25 = $9.00
2270
Computing Manufacturing Overhead Variances (contd)

For Cambria Company, the standard variable overhead rate is $5.75 per direct labor hour (from the flexible budget). Total budgeted overhead is $1,300 by normal capacity, which is 400 direct labor hours.
Standard OH costs applied to good units produced Total standard OH rate ( No. good units produced standard hours allowed) = $9.00 per direct labor hour (180 bags 2.4 hours per bag) = $3,888 4,100 Less actual overhead costs Total manufactur ing overhead variance $ 212 (U)
Actual cost > standard cost This amount can be divided into variable overhead variances and fixed overhead variances
Variable Overhead Variance

Total variable overhead variance
Difference between actual variable overhead costs and the standard variable overhead costs that are applied to good units produced using the standard variable rate
2272
Variable Overhead Variances (contd)

At Cambria Company, each leather bag requires 2.4 standard labor hours and the variable overhead rate is $5.75 per direct labor hour. During August, the company incurred $2,500 of variable overhead costs
Overhead applied to good units produced Standard variable rate standard direct labor hours allowed = $5.75 per hour (180 bags 2.4 hours per bag) = Less actual cost $5.75 per hour 432 hours = $2,484 2,500 $ 16 (U)
Total variable overhead cost variance
2273
Diagram of Variable Overhead Variance Analysis
2274

Total variable overhead cost variance must be broken into two parts to find the cause of the variance
Variable overhead spending variance Variable overhead efficiency variance
2275

Variable overhead spending variance
Difference between the budgeted variable overhead costs at actual hours and actual variable overhead
Variable OH Spending Variance = Budgeted Variable Costs at Actual Hours Actual Variable Overhead = (Standard Variable Rate Actual Hours Worked) Actual Variable OH = ($5.75 450 hours) $2,500 = $87.50 (F)

Variable overhead efficiency variance
Difference between the standard direct labor hours allowed for good units produced and the actual hours worked multiplied by the standard variable overhead rate
Variable OH Efficiency Variance = Standard Variable Rate (Standard
Hours Allowed Actual Hours)
2277

Compute standard hours allowed
Standard Hours Allowed = Good Units Produced Standard Hours per Bag = 180 bags 2.4 hours per bag
= 432 hours
Compute variable overhead efficiency variance

Variable OH Efficiency Variance = Standard Variable Rate (Standard
Hours Allowed Actual Hours)
= $5.75 (432 hours 450 hours) = $103.50 (U)


If correct, the net of the variable overhead spending variance and variable overhead efficiency variance will equal the total variable overhead cost variance
Variable overhead spending variance Variable overhead efficiency variance Total variable overhead cost variance $ 87.50 103.50 $ 16.00 (F) (U) (U)
2279
Fixed Overhead Variances

Total fixed overhead variance
Difference between actual fixed overhead costs and the standard fixed overhead costs that are applied to good units produced using the standard fixed overhead rate
2280
Diagram of Fixed Overhead Variance Analysis
2281
Fixed Overhead Variances (contd)

At Cambria Company, each leather bag requires 2.4 standard direct labor hours and the standard fixed overhead rate is $3.25 per direct labor hour. During August, the company incurred $1,600 of actual fixed overhead costs
Overhead applied to good units produced Standard fixed rate standard direct labor hours allowed = $3.25 per hour (180 bags 2.4 hours per bag) = $3.25 per hour 432 hours = $1,404 Less actual cost 1,600
Total fixed overhead cost variance
$ 196 (U)
2282

Total fixed overhead cost variance must be broken into two parts to find the cause of the variance
Fixed overhead budget variance Fixed overhead volume variance
2283

Fixed overhead budget variance
Difference between the budgeted and actual fixed overhead costs Also called budgeted fixed overhead variance
Fixed OH Budget Variance = Budgeted Fixed Overhead
Actual Fixed Overhead
= $1,300 $1,600 = $300 (U)
2284

Fixed overhead volume variance
Difference between budgeted fixed overhead costs and manufacturing overhead costs applied to production using the standard fixed overhead rate
Standard fixed OH applied for 432 direct labor hours
$3.25 per direct labor hour (180 bags 2.4 hours per bag) Less total budgeted fixed overhead
Total variable overhead cost variance
$1,404 1,300
$ 104 (F)
2285

A volume variance will occur if more or less than normal capacity is used
Fixed overhead volume variance measures the use of existing facilities and capacity Favorable overhead volume variance
Capacity exceeds the expected amount
Unfavorable overhead volume variance

Company operates at a level below normal capacity
May be in best interest of company during periods of slow sales Means company is not building up excess inventory
Summary of Manufacturing Overhead Variances
Variable overhead spending variance Variable overhead efficiency variance Fixed overhead budget variance Fixed overhead volume variance Total manufacturing overhead variance
$ 87.50 103.50 300.00 104.00 $212.00
(F) (U) (U) (F) (U)
2287
Analyzing and Correcting Manufacturing Overhead Variances
Variance Variable overhead spending variance Variable overhead efficiency variance Fixed overhead budget variance Fixed overhead volume variance
Amount
Cause
Corrective Action No action Consider feasibility of implementing a program for cross-training employees Study insurance claims filed over a three-month period No action necessary because variance fell within anticipated range
$87.50 (F) Savings on purchases Inefficiency of machine 103.50 (U) operator who substituted for ill assembly worker Higher than expected factory insurance premiums due to 300.00 (U) increased claims filed by employees Overutilization of capacity 104.00 (F) traced to high seasonal demand
2288
Discussion
Q. What four variances are used to analyze the total manufacturing overhead variance?
A. Variable overhead spending variance
Variable overhead efficiency variance Fixed overhead budget variance Fixed overhead volume variance
Using Cost Variances to Evaluate Managers Performance
Objective 7
Explain how variances are used to evaluate managers performance
2290
Using Cost Variances to Evaluate Managers Performance
The effectiveness and fairness of a manager's performance evaluation depends on

Human factors Company policies
Should be based on input from managers and employees Should specify procedures that managers are to use
Using Cost Variances to Evaluate Managers Performance (contd)

Procedures that should be specified for managers
Preparing operational plans Assigning responsibility for carrying out the operational plans Communicating operational plans to key personnel Evaluating performance in each area of responsibility Identifying causes of significant variances from the operational plan Taking corrective action to eliminate problems
2292
Variance analysis
Provides detailed data about differences between standard and actual costs
Effective at pinpointing efficient and inefficient operating areas
Basic comparison of budgeted and actual data not as effective
2293

Effective managerial performance reports based on standard costs and related variances should
Identify
Causes of the differences Personnel involved Corrective actions taken
Be tailored to the managers specific areas of responsibility

Explain clearly and accurately in what way the managers department did or did not meet operating expectations
Managers should only be held accountable for cost areas under their control
Managerial performance reports should

Summarize all cost data Include variances for direct materials, direct labor, and manufacturing overhead Identify
Causes of variances Corrective actions taken
2295
The occurrence of a variance does not indicate poor performance If a variance consistently occurs, its cause is not identified, and no corrective action is taken, it may indicate poor performance on the part of the manager
2296
Discussion
Q. What items should be included in an effective managerial performance report?
A. Summarization of all cost data
Variances for direct materials, direct labor, and manufacturing overhead Identification of the causes of the variances, personnel involved, and any corrective actions taken
Time for Review

1. Define standard costs and describe how managers use standard costs in the management cycle 2. Explain how standard costs are developed and compute a standard unit cost 3. Prepare a flexible budget and describe how variance analysis is used to control costs
And Finally
4. Compute and analyze direct materials variances 5. Compute and analyze direct labor variances 6. Compute and analyze manufacturing overhead variances 7. Explain how variances are used to evaluate managers performance

Standard Costing and Variance Analysis: Multimedia Slides By: Gail A. Mestas, Macc, New Mexico State University

Uploaded by

Copyright:

Available Formats

Standard Costing and Variance Analysis: Multimedia Slides By: Gail A. Mestas, Macc, New Mexico State University

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

Standard Costing and Variance Analysis: Multimedia Slides By: Gail A. Mestas, Macc, New Mexico State University

Uploaded by

Copyright:

Available Formats

Chapter 22

Standard Costing and Variance Analysis

Learning Objectives (contd)

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

Standard Costs (contd)

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

Standard Costs and the Management Cycle

Establish goals for product costing

Copyright Houghton Mifflin Company. All rights reserved.

Standard Costs and the Management Cycle (contd)

Copyright Houghton Mifflin Company. All rights reserved.

Standard Costs and the Management Cycle (contd)

Standard Costs and the Management Cycle (contd)

Copyright Houghton Mifflin Company. All rights reserved.

Standard Costing, Variance Analysis, and the Management Cycle

The Relevance of Standard Costing in Today's Business Environment

Copyright Houghton Mifflin Company. All rights reserved.

Computing Standard Costs

Copyright Houghton Mifflin Company. All rights reserved.

Computing Standard Costs

Inventory accounts and Cost of Goods Sold account

Computing Standard Costs (contd)

Standard Direct Materials Cost

Copyright Houghton Mifflin Company. All rights reserved.

Standard Direct Materials Cost (contd)

Copyright Houghton Mifflin Company. All rights reserved.

Standard Direct Materials Cost (contd)

Established and monitored by

Standard Direct Labor Cost

Copyright Houghton Mifflin Company. All rights reserved.

Standard Direct Labor Cost (contd)

Average standard rate is developed for each task

Standard Direct Labor Cost (contd)

Should be revised when

Copyright Houghton Mifflin Company. All rights reserved.

Standard Manufacturing Overhead Cost

Standard Manufacturing Overhead Cost (contd)

Standard variable overhead rate

Copyright Houghton Mifflin Company. All rights reserved.

Standard Manufacturing Overhead Cost (contd)

Standard fixed overhead rate

Total Standard Unit Cost

Compute the total standard cost of one watch

$ .23 2.17 .08 .51 .72 $3.71 .54 $4.25

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

The Role of Flexible Budgets in Variance Analysis

Copyright Houghton Mifflin Company. All rights reserved.

The Role of Flexible Budgets in Variance Analysis (contd)

Copyright Houghton Mifflin Company. All rights reserved.

Performance Report Using Data from a Static Budget

Copyright Houghton Mifflin Company. All rights reserved.

The Role of Flexible Budgets in Variance Analysis (contd)

Used primarily as a cost control tool in evaluating performance