Standard costing and variance analysis ppt

Standard Costs and Variances

Chapter 10

PowerPoint Authors:

Susan Coomer Galbreath, Ph.D., CPA

Charles W. Caldwell, D.B.A., CMA

Jon A. Booker, Ph.D., CPA, CIA

Cynthia J. Rooney, Ph.D., CPA

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Standard Costs-1

Standards are benchmarks or “norms” for measuring performance. In managerial accounting,

two types of standards are commonly used.

Quantity standards specify how much of an input should be used to make a product or provide a service.

Price standards specify how much should be paid for each unit of the input.

Examples: Firestone, Sears, McDonald’s, hospitals,

construction, and manufacturing companies.

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A standard is a benchmark or “norm” for measuring performance. In managerial accounting, two types of standards are commonly used by manufacturing, service, food, and not-for-profit organizations:

Quantity standards specify how much of an input should be used to make a product or provide a service. For example:

Auto service centers like Firestone and Sears set labor time standards for the completion of work tasks.

Fast-food outlets such as McDonald’s have exacting standards for the quantity of meat going into a sandwich.

Price standards specify how much should be paid for each unit of the input. For example:

Hospitals have standard costs for food, laundry, and other items.

Home construction companies have standard labor costs that they apply to sub-contractors such as framers, roofers, and electricians.

Manufacturing companies often have highly developed standard costing systems that establish quantity and price standards for each separate product’s material, labor, and overhead inputs. These standards are listed on a standard cost card.

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Hanson Inc. has the following direct material standard to manufacture one Zippy:

1.5 pounds per Zippy at $4.00 per pound

Actual: Last week, 1,700 pounds of material were purchased and used to make 1,000 Zippies. The material cost a total of $6,630.

Quick Check Material-1

BOARD: Price & Quantity

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3

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.

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Hanson Inc. has the following material standard to manufacture one Zippy:

1.5 pounds per Zippy at $4.00 per pound

Last week, 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700 pounds were used to make 1,000 Zippies.

Quick Check Material-2 Continued

BOARD: Price variance [Material price variance at Purchase NOT at USE] & Quantity

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Let’s extend the Hanson example by increasing the quantity of material purchased to 2,800 pounds at a total cost of $10,920. All other information is the same as before.

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Hanson Inc. has the following direct labor standard to manufacture one Zippy:

1.5 standard hours per Zippy at $12.00 per direct labor hour

ACTUAL: Last week, 1,550 direct labor hours were worked at a total labor cost of $18,910 to make 1,000 Zippies.

Quick Check LABOR [VOH later]

BOARD: Rate & Efficiency [Qty]

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Let’s return to the Hanson Company and compute labor variances.

The direct labor standard to produce each Zippy is 1.5 hours at $12.00 per hour. Last week, it took 1,550 direct labor hours to produce 1,000 Zippies, and the total labor cost was $18,910.

Next, 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. Also, just as you did with the material variance questions, try to answer each question before advancing to the solution.

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Standard Costs-2

Direct Material

Deviations [Variances/Differences]

from Standards deemed significant are brought to the attention of management, a practice known as management by exception.

Type of Product Cost

Amount

Direct Labor

Manufacturing Overhead

Standard

Management corrective action

Manage by correction of significant controllable Variances

McGraw-Hill/Irwin

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Management by exception is a system of management in which standards are set for various operating activities, with actual results compared to these standards. Any deviations that are deemed significant are brought to the attention of management as “exceptions.”

This chapter applies the management by exception principle to quantity and price standards with an emphasis on manufacturing applications.

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Setting Standard Costs-3

Should we use ideal standards that require employees to work at 100 percent peak efficiency?

Process Engineer

Managerial Accountant

I recommend using practical standards that are currently attainable with improvement through attainable effort.

Standards should include performance improvement

In 20x1 actual efficiency @ 86% = 1.22 hrs. unit

for 20x2 set std. @ 1.18 hrs. unit 90% [practical]

or @ 1.04 hrs. unit 100%. [Ideal]

McGraw-Hill/Irwin

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Standards tend to fall into one of two categories:

Ideal standards can only be attained under the best of circumstances. They allow for no work interruptions and they require employees to work at 100% peak efficiency all of the time.

Practical standards are tight, but attainable. They allow for normal machine downtime and employee rest periods and can be attained through reasonable, highly efficient efforts of the average worker. Practical standards can also be used for forecasting cash flows and in planning inventory.

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Accountants, engineers, supply chain/purchasing agents, and production managers combine efforts to set standards that encourage MORE efficient future operations.

Setting Standard Product Costs-4

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Setting price and quantity standards requires the combined expertise of everyone who has responsibility for purchasing and using inputs. In a manufacturing setting, this might include accountants, engineers, purchasing managers, production supervisors, line managers, and production workers.

Standards should be designed to encourage efficient future operations, not just a repetition of past inefficient operations.

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Six sigma = 6 Std. deviations

Six Sigma advocates have sought to eliminate all defects and waste, rather than continually build them into standards.

As a result allowances for waste and spoilage that are built into standards should be reduced over time.

'Long Term Yield' (basically the percentage of successful outputs or operations) % Defects Per Million Opportunities (DPMO) 'Processs Sigma'
99.99966 3.4 6
99.98 233 5
99.4 6,210 4
93.3 66,807 3
69.1 308,538 2
30.9 691,462 1