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13-1 Standard Standard Costing, Costing, Variable Variable Costing, and Costing, and Throughput Throughput Costing Costing Prepared by Douglas Cloud Pepperdine University 1 1 3 3

# 1 3 Standard Costing, Variable Costing, and Throughput Costing

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After reading this chapter, you should be able to: Objectives Describe standard costing and explain why it is the predominant costing method. Develop standard fixed overhead rates and apply fixed overhead to products. Prepare standard absorption costing income statement. Compare, contrast, and distinguish actual, normal, and standard costing. After reading this chapter, you should be able to: Continued

### Text of 1 3 Standard Costing, Variable Costing, and Throughput Costing

13-1

Standard Costing, Standard Costing, Variable Costing, Variable Costing, and Throughput and Throughput

CostingCostingPrepared by

Douglas Cloud Pepperdine University

1133

13-2

Describe standard costing and explain why it is the predominant costing method.

Prepare standard absorption costing income statement.

Compare, contrast, and distinguish actual, normal, and standard costing.

ObjectivesObjectives

After reading this After reading this chapter, you should chapter, you should

be able to:be able to:

ContinuedContinued

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Explain why variable costing offers advantages over absorption costing for internal reporting purposes.

Prepare variable costing income statements. Describe throughput costing and prepare

income statements.

ObjectivesObjectives

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Standard Absorption CostingStandard Absorption Costing

Under standard costing inventories appear at standard cost, not actual or normal cost.

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Standard Absorption CostingStandard Absorption Costing

An important reason for using standard costing is that it integrates standard costs and variances into

the company’s record.

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SMP Company, Operating Data 20X1SMP Company, Operating Data 20X1Production in units

110,000Sales in units, at \$80 each

90,000Ending inventory in units

20,000Actual production costs:

Variable

\$2,255,000Fixed

Variable at \$5 per unit

\$450,000Fixed

\$1,400,000Standards and budgets:

Budgeted fixed production costs

\$3,000,000Standard variable production costs

\$20 per unit

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Calculating A Standard Fixed Cost

The standard fixed cost per unit depends on two things:(1) The choice of a measure of activity (e.g.,

direct labor hours, machine hours, setup time etc.).

(2) A level of activity.

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Calculating A Standard Fixed Cost

Normal activity is the average activity

expected or budgeted over the coming two

to five years.

Practical activity is the maximum

activity the company can achieve given the usual kinds of

interruptions.

Theoretical activity is the absolute

maximum that a plant can produce,

with no interruptions or problems at all.

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Calculating A Standard Fixed Cost

SMP’s management decides to set the standard per-unit fixed cost using normal capacity of 100,000 units.

Standard fixed cost per unit =

Budgeted fixed production costsLevel of activity

=\$3,000,000

100,000

= \$30 per unit

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VariancesVariances

Total actual variable productioncost (for source of data, turn

click on button below) \$2,255,000

Standard variable costs(110,000 x \$20) 2,200,000

Unfavorable variable cost variances \$ 55,000

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VariancesVariances

Fixed overhead applied(110,000 x \$30) 3,300,000

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\$100,000 F

VariancesVariances

Budget variance Volume variance\$200,000 U \$300,000 F

Budgeted fixed

Applied fixed

\$3,200,000 \$3,000,000 \$3,300,000(110,000 x \$30)

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Dollars

Production in Units

100,000 110,000

\$3,300,000\$3,200,000

\$3,000,000

Applied, \$30 x units produced

Applied at 110,000 units

Budget variance, \$200,000 U

Actual\$3,200,000

Budget

Volume Variance\$300,000 F

Budget Variance \$200,000 U

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SMP Company, Income Statement for 20X1

Sales\$7,200,000

Standard cost of sales:Beginning inventory \$ 0Standard variable production costs 2,200,000Applied fixed production costs 3,300,000Cost of goods available for sale \$5,500,000Ending inventory 1,000,000Standard cost of sales

4,500,000Standard gross margin

\$2,700,000Continued

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Standard gross margin \$2,700,000Variances:

Fixed manufacturing cost budget variance \$200,000 U

Fixed manufacturing cost volume variance 300,000 F

Variable manufacturing cost variance 55,000 U 45,000F

Actual gross margin \$2,745,000Selling and administrative expenses 1,850,000Profit \$ 895,000

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SMP Company, Income Statement for 20X1

Sales \$7,200,000Cost of sales:

Standard cost of sales \$4,500,000 Variances: Fixed manufacturing cost budget variance 200,000U Fixed manufacturing cost volume variance 300,000F Variable manufacturing cost variances 55,000U Cost of sales 4,455,000

Gross margin \$2,745,000Selling and administrative expenses 1,850,000Profit \$ 895,000

Alternative Format

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Review ProblemReview ProblemSMP, 20X1

Production, in units 95,000Sales, in units, at \$80 each 100,000Ending inventory, in units 15,000Actual production costs:

Variable \$1,881,000Fixed \$2,950,000

Selling and administrative expenses:Variable at \$5 per unit \$ 500,000Fixed \$1,400,000

Standard variable production cost (per unit) \$20Budgeted fixed production costs \$3,000,000

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SMP Company, Income Statement for 20X1

Sales \$8,000,000Standard cost of sales:

Beginning inventory \$1,000,000Standard variable production costs 1,900,000Applied fixed production costs 2,850,000Cost of goods available for sale \$5,750,000Ending inventory 750,000Standard cost of sales \$5,000,000Variances:

Fixed mfg. cost budget variance 50,000 FFixed mfg. cost volume variance 150,000 UVariable mfg. cost variances 19,000 F

Continued

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Sales (100,000 x \$80)\$8,000,000

Cost of sales 5,081,000

Gross margin\$2,919,000

Profit \$1,019,000

Variances:Variable cost: \$1,881,000 – (\$20 x 95,000) = \$19,000 F

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Budgeted fixed

Applied fixed

\$2,950,000 \$3,000,000 ( 95,000 x \$30)

SMP Company Example

Budget variance Volume variance

\$50,000 F \$150,000 U

\$2,850,000

\$100,000

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Multiple Products and Multiple Products and Activity-Based CostingActivity-Based Costing

Portable Model Table Model

Standard direct labor hours 8 12Number of component parts 100 200Budgeted production 6,000 2,000Total budgeted use of

components 600,000 400,000

ARG Company

Standard fixed overhead rate per component Standard fixed overhead rate per component (\$500,000/(600,000 (\$500,000/(600,000 + 400,000) = \$0.50+ 400,000) = \$0.50

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Multiple Products and Multiple Products and Activity-Based CostingActivity-Based Costing

Portable Model Table ModelMaterial related:

Portable model (\$100 x \$0.50) \$50Table model (200 x \$0.50) \$100

Direct labor-related:Portable model (8 hours x \$4) 32Table model (12 hours x \$4) 48

Standard fixed overhead costper unit \$82 \$148

ARG Company

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Budgeted CostActual Cost Applied

Cost

\$510,000 \$500,000 \$550,000

ARG Company Example

Budget variance Volume variance

\$10,000 U \$50,000 F

\$40,000

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Comparison of Standard and Comparison of Standard and Normal CostingNormal Costing

Manufacturing Costs Direct Direct Materials Labor Overhead

Actual cost system Actual Actual Actual

Normal cost system Actual Actual Applied

Standard cost system Standard Standard Standard

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Variable costing excludes fixed

production costs from the unit costs of

inventories, and treats all fixed costs as expenses in the period incurred.

Variable CostingVariable Costing

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Cost of Cost of Goods Goods Sold on Sold on income income

statementstatement

Flow of Costs in a Manufacturing Firm

Finished Finished Goods Goods

InventoryInventory

Materials Inventory

Direct Labor

Variable Manufacturing

Fixed Manufacturing

Work in Work in Process Process

InventoryInventory

Absorption costing

Expense Expense on income on income statementstatement

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SMP Company, Income Statement for 20X1—Actual Variable Costing

Sales \$7,200,000Variable cost of sales:

Beginning inventory \$ 0Actual variable production costs 2,255,000Cost of goods available for sale \$2,255,000Ending inventory 410,000Variable cost of sales

1,845,000Variable manufacturing margin

450,000Contribution margin

\$4,905,000Actual fixed costs

4,600,000Profit \$ 305,000

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SMP Company, Income Statement for 20X2—Actual Variable Costing

Sales \$8,000,000Variable cost of sales:

Beginning inventory \$ 410,000Actual variable production costs 1,881,000Cost of goods available for sale \$2,291,000Ending inventory 297,000Variable cost of sales

1,994,000Variable manufacturing margin

500,000Contribution margin

\$5,506,000Actual fixed costs

4,350,000Profit \$

1,156,000

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SMP Company, Standard Variable Costing Income Statement for 20x2

Sales \$8,000,000Variable standard cost of goods sold 2,000,000Standard variable manufacturing margin \$6,000,000Variable manufacturing cost variances 19,000Variable manufacturing margin \$6,019,000Variable selling and administrative 500,000Contribution margin \$5,519,000Actual fixed costs:

Budgeted fixed mfg. costs \$3,000,000Fixed mfg. cost budget variance \$50,000Selling and administrative 1,400,000 4,350,000

Profit \$1,169,000

F

F

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Reconciliation of Incomes—Variable Reconciliation of Incomes—Variable and Absorption Costingand Absorption Costing

20x1 20x2Variable costing net income \$ 295,000\$1,169,000Absorption costing net income 895,000 1,019,000Difference to be explained \$ (600,000) \$ 150,000

Explanation of income differences:Fixed production costs-beg. inventory \$ 0\$ 600,000Fixed production costs during year 3,200,000 2,950,000\$3,200,000 \$3,550,000

Less fixed production costs-end. inventory 600,000 450,000Total fixed costs expensed—absorption costing \$2,600,000\$3,100,000Total fixed costs expensed—variable costing 3,200,000 2,950,000Difference in incomes \$ (600,000) \$ 150,000

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Throughput CostingThroughput Costing An extreme form of variable costing which follows

the principles of the Theory of Constraints. It is a radical departure from other methods in that it

treats all costs except unused materials as expenses. It does not record work in process or finished goods

inventories. It treats all direct labor and manufacturing overhead

costs as period costs expensing them as they are incurred.

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Income Statement ComparisonIncome Statement Comparison

Absorption Costing

Variable Costing

Throughput Costing

Sales \$180,000 \$180,000 \$180,000Cost of sales 90,000 63,000 50,000Gross margin 90,000 117,000 130,000Other expenses:

Other mfg. costs 30,000 50,000Selling and admin. 15,000 15,000 15,000

Total other expenses 15,000 45,000 65,000Income \$ 75,000 \$ 72,000 \$ 65,000

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The End

Chapter 13Chapter 13

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SMP Company, Operating Data 20X1SMP Company, Operating Data 20X1Production in ;units

110,000Sales in units, at \$80 each

90,000Ending inventory in units

20,000Actual production costs:

Variable

\$2,255,000Fixed

Variable at \$5 per unit

\$450,000Fixed

\$1,400,000Standards and budgets:

Budgeted fixed production costs

\$3,000,000Standard variable production costs

\$20 per unit

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