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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
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.
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.
ObjectivesObjectives
After reading this After reading this chapter, you should chapter, you should
be able to:be able to:
ContinuedContinued
13-3
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
$3,200,000Selling and administrative expenses:
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
Total actual fixed overhead $3,200,000
Fixed overhead applied(110,000 x $30) 3,300,000
Overapplied overhead $ 100,000
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$100,000 F
Overapplied overhead
VariancesVariances
Budget variance Volume variance$200,000 U $300,000 F
Budgeted fixed
overhead
Actual fixed overhead
Applied fixed
overhead
$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
SMP Company, Fixed Overhead, 20X1
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
13-19
Sales (100,000 x $80)$8,000,000
Cost of sales 5,081,000
Gross margin$2,919,000
Selling and administrative expenses 1,900,000
Profit $1,019,000
Variances:Variable cost: $1,881,000 – ($20 x 95,000) = $19,000 F
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Budgeted fixed
overhead
Actual fixed overhead
Applied fixed
overhead
$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
Total fixed overhead variances
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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
Total overapplied overhead
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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
Overhead
Fixed Manufacturing
Overhead
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
$5,355,000Variable selling and administrative exp.
450,000Contribution margin
$4,905,000Actual fixed costs
4,600,000Profit $ 305,000
13-28
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
$6,006,000Variable selling and administrative exp.
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
$3,200,000Selling and administrative expenses:
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
Return to Slide 13-10
