ACC3200 STANDARD COSTING. Learning Objectives Describe the standard-setting process and explain how standard costs relate to budgets and variances

ACC3200

STANDARD COSTING

Learning Objectives

Describe the standard-setting process and explain how standard costs relate to budgets and variances.

Prepare a flexible budget and show how total costs change with sales volume.

Calculate and interpret the direct materials price and quantity variances.

Calculate and interpret the direct labor rate and efficiency variances.

Calculate and interpret the variable overhead rate and efficiency variances.

Calculate and interpret the fixed overhead spending variance.

Standard Cost Systems

Benchmarks formeasuring performance.

The expected levelof performance.

Based on carefullypredetermined amounts.

Used for planning labor, materialand overhead requirements.Standard

Costs are

In a standard cost system, all manufacturing costsare recorded at standard rather than actual amounts.

Ideal versus Attainable Standards

Should we useideal standards that require employees towork at 100 percent

peak efficiency?

I recommend using attainable standards that can be

achieved with reasonableand efficient effort.

Types of Standards

Definition ExamplesQuantity The amount of input Ounces of aluminum in a can of Coca Cola Standard that should go into a Tons of steel in a Ford F-150 truck

single unit of product Yards of denim in a pair of Levi's 550 jeans Price The price that should Price per ounce of aluminum

Standard be paid for a specific Price per ton of steel quantity of input Price per yard of denim

The Standard Cost Card

Standard StandardDirect Costs Quantity Unit Cost Ice Cream 10 oz. 0.05$ per oz. 0.50$ Mix-in Ingredients 2 oz. 0.10$ per oz. 0.20 Direct Labor 0.10 hrs. 8.00$ per hr. 0.80 Manufacturing Overhead Costs Variable Manufacturing Overhead 0.10 hrs. 1.00$ per hr. 0.10 (Based on Direct Labor Hours) Fixed Manufacturing Overhead $6,000 ÷ 15,000 units = $0.40 per unit 0.40 Standard Manufacturing Cost per Unit 2.00$

StandardPrice (Rate)

10-6

Master Budgets Versus Flexible Budgets

The master budget is based on managers’ best estimate ofactivity (15,000 units) multiplied by the standard unit cost.

The flexible budget shows how total costs are expected to change ifactivity is lower (12,000 units) or higher (18,000 units) than expected.

10-7

Planning Process

Based on estimated(budgeted)

sales volume.

Master Budget

Control Process

Flexible Budget

Actual Results

Compare actual results to the flexiblebudget to evaluate performance, after

controlling for actual sales volume.

A flexible budget for the actualactual activityis compared with actual results.

Flexible Budget as a Benchmark

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Cold Stone Creamery’s master budget of $7,500 for ice cream was based on a sales forecast of 15,000 units ($.50 per unit × 15,000

units). During the period, the amount spent for ice cream was $8,000, or $500 higher than the master budget. Did Cold Stone do

a good job controlling ice cream costs?

There are two possible reasons why spending exceeded the master budget:1. Cold Stone may have spent more than $.50 on ice cream for each unit produced.2.Cold Stone may have produced more than 15,000 units,requiring more ice cream than planned.

Cold Stone actually produced 18,000 units for the period. Let’sprepare a flexible budget at 18,000 and evaluate performance.

Flexible Budget as a Benchmark

10-9

Volume Variance versus Spending Variance

Based on18,000 units

ActualCost

$8,000


FlexibleBudget$9,000

SpendingVariance $1,000 F


MasterBudget$7,500

VolumeVariance1,500 U

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Type of Product Cost

Am

ou

nt

DirectLabor

Standard

Favorable versus Unfavorable Variances

This variance is unfavorable because the actual cost

exceeds the standard cost.

DirectMaterial

These variances are favorable because the actual cost

is less than the standard cost.

ManufacturingOverhead

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Favorable versus Unfavorable Variances

10-12

Use of Flexible Budgets to Calculate Cost Variances

A standard is the expected cost for one

unit.

A budget is the expected cost for all units

produced.

What is the difference between standards

and budgets?

10-13

SQ basedon actual

units

SQ basedon budgeted

unitsAP = Actual price of inputAQ = Actual quantity of inputSP = Standard price of inputSQ = Standard quantity of input allowed to achieve the actual units of output

SP × AQActualcost

AP × AQ

Spendingvariance

Calculation of Direct Cost Variances

Quantity varianceSP × (SQ – AQ)

Masterbudget

SQ × SP

Flexiblebudget

SP × SQ

10-14

Price varianceAQ × (SP – AP)

Direct Materials Variances

Standard StandardQuantity Unit Cost

Ice Cream 10 oz. 0.05$ per oz. 0.50$

StandardPrice

Cold Stone’s Standard Cost Information for Ice Cream

Cold Stone’s actual results for the period were:• 18,000 units produced and sold.• 200,000 ounces of ice cream purchased at a total cost of $8,000.

• Actual Price (AP) = $8,000 ÷ 200,000 ounces = $.04 per ounce• Actual Quantity (AQ) = 200,000 ounces• Standard Price (SP) = $.05 per ounce• Standard Quantity (SQ) = 10 ounces per unit × 18,000 actual units = 180,000 ounces

10-15


AP × AQ$.04 × 200,000

$8,000

SP × AQ$.05 × 200,000

$10,000

SP × SQ

SQ =18,000 actual units × 10 ounces

Spending Variance

Quantity VarianceSP × (SQ – AQ)

Price VarianceAQ × (SP – AP)

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AP × AQ SP × AQ

Materials Price Variance Materials Quantity Variance

Production ManagerPurchasing Manager

The standard price is used to compute the quantity varianceso that the production manager is not held responsible for

the purchasing manager’s performance.


10-17

Direct Labor Variances

SH Basedon actual

units produced

AR = Actual hourly labor rateAH = Actual labor hoursSR = Standard hourly labor rateSH = Standard labor hours allowed to achieve the actual units of output

Actualcost

AR × AH

Rate varianceAH × (SR – AR)

SR × AHFlexiblebudget

SR × SH

Direct laborvariances

Efficiency varianceSR × (SH – AH)

10-18


Standard StandardHours Unit Cost

Direct Labor 0.10 hrs. $8.00 per hr. 0.80$

StandardRate

Cold Stone’s Standard Cost Information for Direct Labor

• Actual Rate (AR) = $16,500 ÷ 2,000 hours = $8.25 per hour• Actual Hours (AH) = 2,000 hours• Standard Rate (SR) = $8.00 per hour• Standard Hours (SH) = 0.10 hours per unit × 18,000 actual units = 1,800 hours

Cold Stone’s actual results for the period were:• 18,000 units produced and sold.• Direct labor costs were $16,500 for 2,000 hours worked.

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AR × AH

Spending variance

SR × AH SR × SH

Efficiency varianceSR × (SH – AH)

Rate varianceAH × (SR – AR)

SH = 18,000 actual units × 0.10 hours

10-20

Responsibility for Labor Variances

Production Manager

Production managers areusually held accountable

for labor variancesbecause they can

influence the:

Mix of skill levelsassigned to work tasks.

Level of employee motivation.

Quality of production supervision.

Quality of training provided to employees.

10-21

Manufacturing Overhead Cost Variances

Contain variable overheadthat increases asactivity increases.

Contain fixed overheadthat remains constantas activity changes.

Are a function of the activity levelchosen to determine the rate.

Overhead Rates

10-22

Variable Manufacturing Overhead Variances

AR = Actual variable overhead rateSR = Standard variable overhead rate AH = Actual direct labor hoursSH = Standard direct labor hours allowed to achieve the actual units of output

Actual VOHAR × AH

SR × AHFlexible budget

SR × SH

Variable overhead spending variances

VOH efficiency varianceSR × (SH –AH)

VOH rate varianceAH × (SR – AR)

10-23



Variable manufacturing Overhead 0.10 hrs. $1.00 per hr. 0.10$

StandardVOH Rate

Cold Stone’s Standard Cost Informationfor Variable Manufacturing Overhead

Cold Stone’s actual results for the period were:• 18,000 units produced and sold.• Actual VOH costs were $1,800 for 2,000 direct labor hours.

• Actual Direct Labor Hours (AH) = 2,000 hours• Standard Direct Labor Hours (SH) = 0.10 hours per unit × 18,000 units = 1,800 hours• Actual Variable Overhead Rate (AR) = $1,800 ÷ 2,000 hours = $.90 per hour• Standard Variable Overhead Rate (SR) = 0.10 hours per unit × $1.00 per hour = $0.10 per unit

10-24


Actual VOHAR × AH

AR × SRFlexible budget

SR × SH

Variable overhead spending variance

SH = 18,000 actual units × 0.10 hours

VOH efficiency varianceSR × (SH –AH)

VOH rate varianceAH × (SR – AR)

10-25

Rate VarianceRate Variance Efficiency VarianceEfficiency Variance

Results from paying moreor less than expected foroverhead items and from

excessive usage ofoverhead items.

A function of the selected allocation

measure (direct labor hours). It does not reflect

overhead control.


10-26

Fixed Manufacturing Overhead Spending Variance

Fixed OverheadSpending Variance

BudgetedFixed

Overhead

ActualFixed

Overhead= ‒

Cold Stone budgeted $6,000 for fixed manufacturing overhead butactually incurred $6,300 in fixed manufacturing overhead costs.

Fixed OverheadSpending Variance

$300 U$6,000 $6,300= ‒

10-27

Summary of Spending Variances

• Variances are always calculated by comparing actual results to budgeted, or standard, results. • Companies try to hold specific managers responsible for specific variances, while removing the effects of factors that are beyond managers’ control.• The formulas for variances allow only one factor, such as price, quantity or volume to change, while holding everything else constant at either actual or standard values (depending on the type of variance).• The driving factor for a variance always appears in parentheses in the formula, as well as in the name of the variance. For example, the formula for the direct materials price variance is AQ X (SP - AP). • Try not to memorize rules or rely on the formulas to determine whether a variance is favorable or unfavorable; just think about it. Spending or using more of a variable resource is unfavorable. Using more of a fixed resource is favorable, because it drives down the fixed cost per unit.

10-28

10-29

Ice Cream$8,000

Ice Cream$9,000

DM Price$2,000 F

DM Quantity$1,000 U

Mix-Ins$4,200

Mix-Ins$3,600

DM Price$700 U

DM Quantity$100 F

Direct Labor$16,500

Direct Labor$14,400

DL Rate$500 U

DL Efficiency$1,600 U

Variable OH$1,800

Variable OH$1,800

VOH Rate$200 F

VOH Efficiency$200 U

Fixed OH$6,300

Fixed OH$6,000

FOH Budget$300 U

Actual Cost$36,800

Budgeted Cost$34,800

Total Spending Variance$2,000 U

Spending VariancesActualCosts

FlexibleBudget

Summary of Spending Variances

Supplement 10A – Fixed Manufacturing Overhead Volume and Capacity Variances

Budgeted Fixed Overhead Rate

BudgetedFixed

Overhead

Budgeted Volume= ÷

Budgeted Fixed Overhead Rate$0.40 per unit

$6,00015,000 units= ÷

Cold Stone budgeted $6,000 for fixed manufacturing overhead for a budgeted volume of 15,000 units. Cold Stone’s budgeted

fixed manufacturing overhead rate is:

Fixed Overhead Rate Based on Budgeted Volume

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Fixed Overhead Volume Variance

Applied FOH FOH Rate

×Actual

Volume

Budgeted FOH FOH Rate

×Budgeted Volume

= ‒

Fixed Overhead Volume Variance

FOH Rate×

(Actual Volume ‒ Budgeted Volume)=

Fixed Overhead Volume Variance$1,200 Favorable

$0.40×

(18,000 units ‒ 15,000 units)=

Fixed Manufacturing Overhead Volume Variance

10-31

Fixed Manufacturing Overhead Spending and Volume Variances

AU = Actual UnitsBU = Master Budget UnitsFOH = Fixed manufacturing overheadFOH Rate = Budgeted FOH cost ÷ Budgeted units

Over- or UnderappliedFixed Overhead

FOH Volume VarianceFOH Rate × (AU – BU)

FOH Spending VarianceBudgeted – Actual FOH

ActualFOH

Budgeted FOHFOH Rate × BU

Applied FOHFOH Rate × AU

10-32

Fixed Manufacturing Overhead Variances

Standard FixedQuantity Overhead Rate

Fixed Manufacturing Overhead $6,000 ÷ 15,000 units = $0.40 per unit 0.40$


Cold Stone’s Standard Cost Informationfor Fixed Manufacturing Overhead

Cold Stone’s actual results for the period were:• 18,000 units produced and sold.• Actual FOH costs were $6,300.

Cold Stone’s budget for fixed overhead was:• 15,000 units to be produced and sold.• Budgeted FOH costs were $6,000.

10-33

Actual FOHBudgeted FOH FOH Rate × BU

Applied FOHFOHR × AU


FOH Volume Variance FOH Rate × (AU – BU)

FOH Spending VarianceBudgeted – Actual FOH

Fixed Manufacturing Overhead Spending and Volume Variances

10-34

Fixed Overhead Rate Based on Practical Capacity

FixedOverhead Rate

BudgetedFixed

Overhead

PracticalCapacity= ÷

FixedOverhead Rate$0.30 per unit

$6,00020,000 units= ÷

Cold Stone budgeted $6,000 for fixed manufacturing overhead andhas a practical capacity of 20,000 units. Cold Stone’s

fixed manufacturing overhead rate is:

Practical capacity is the number of units that could be produced under normal operating conditions.

10-35

ExpectedCapacity Variance

FOH Rate×

Budgeted Volume – Practical Capacity=

Fixed Overhead Capacity Variances

ExpectedCapacity Variance

$0.30×

15,000 units – 20,000 units= = $1,500

Unfavorable

The expected capacity variance is computed before the period begins.

10-36

UnexpectedCapacity Variance

FOH Rate×

Actual Volume – Budgeted Volume=

Fixed Overhead Capacity Variances

UnexpectedCapacity Variance

$0.30×

18,000 units – 15,000 units= = $900

favorable

The unexpected capacity variance iscomputed after the period is over.

10-37

Standard FixedQuantity Overhead Rate

Fixed Manufacturing Overhead $6,000 ÷ 20,000 units = $0.30 per unit 0.30$


Cold Stone’s Cost Informationfor Fixed Manufacturing Overhead

Cold Stone’s actual results for the period were:• 18,000 units produced and sold.• Actual FOH costs were $6,300.

Practical capacity is 20,000 units.Cold Stone’s budget for fixed overhead was:• 15,000 units to be produced and sold.• Budgeted FOH costs were $6,000.

Fixed Manufacturing Overhead Spending and Capacity Variances

10-38

Actual FOHBudgeted Cost

of Capacity FOH Rate × PC

Cost of Capacity Used

FOHR × AU


FOH Capacity Variance FOH Rate × (AU – PC)

FOH Spending Variance Budgeted – Actual FOH

Fixed Manufacturing Overhead Spending and Capacity Variances

10-39

• The initial debit to an inventory account (Raw Materials, Work in Process, or Finished Goods) and the eventual debit to Cost of Goods Sold should be based on the standard cost, not the actual cost.• Cash, payables, or other accounts, such as accumulated depreciation or prepaid assets, should be credited for the actual cost incurred.• The difference between the standard cost (a debit) and the actual cost (a credit) should be recorded as the cost variance.• Unfavorable variances should appear as debit entries; favorable variances should appear as credit entries.• At the end of the accounting period, all the variances should be closed to the Cost of Goods Sold account to adjust the standard cost up or down to the actual cost.

Common Rules

Supplement 10B – Recording Standard Costs and Variances in a Standard Cost System

10-40

RawMaterialsInventory

Cost of Goods Sold

No Work in Process or Finished Goods Inventory

Standard Direct Material

Cost

Standard Direct Laborand ManufacturingOverhead Costs

Recording Standard Costs for Cold Stone Creamery

10-41

Direct Materials Costs

Cold Stone’s actual results for the period were:• 200,000 ounces of ice cream were purchased on account for a total of $8,000, at an average actual price of $.04 per ounce.• All 200,000 ounces of ice cream were used to make and sell 18,000 units.

The journal entry to record the direct materials purchase is:



StandardPrice

Cold Stone’s Standard Cost Information for Direct Materials

10-42

Direct Materials Costs



StandardPrice

The journal entry to record the direct materials use is:

Cold Stone’s actual results for the period were:• 200,000 ounces of ice cream were purchased on account for a total of $8,000, at an average actual price of $.04 per ounce.• All 200,000 ounces of ice cream were used to make and sell 18,000 units.

Cold Stone’s Standard Cost Information for Direct Materials

10-43

Direct Labor and Manufacturing Overhead Costs


Direct Labor 0.10 hrs. $8.00 per hr. 0.80$

StandardRate

Cold Stone’s Standard Cost Information for Direct Labor

Cold Stone’s actual results for the period were:• 18,000 units produced and sold.• Direct labor costs were $16,500 for 2,000 hours worked.

The journal entry to record direct labor is:

10-44


The journal entry to record variable manufacturing overhead is:


Variable manufacturing Overhead 0.10 hrs. $1.00 per hr. 0.10$

StandardVOH Rate

Cold Stone’s Standard Cost Informationfor Variable Manufacturing Overhead

Cold Stone’s actual results for the period were:• 18,000 units produced and sold.• Actual VOH costs were $1,800 for 2,000 direct labor hours.

10-45


Fixed Manufacturing Overhead $6,000 ÷ 15,000 units = $0.40 per unit 0.40


Cold Stone’ actual results for the period:• 18,000 units produced and sold.• Actual FOH costs were $6,300.

Cold Stone’s budget for fixed overhead:• 15,000 units to be produced and sold.• Budgeted FOH costs were $6,000.

Cold Stone’s Standard Cost Informationfor Fixed Manufacturing Overhead

The journal entry to record fixed manufacturing overhead costs is:


10-46

Cost of Goods Sold and Cost Variance Summary

Actual Cost

$36,800Standard Cost

$36,000Total Cost Variance

$800 U

Recall the following from the summary of cost variances:

Cost Variance SummaryCost of Goods SoldApplied

StandardCost

= 36,000 Balance = 800

Balance = 0ActualCost = 36,800

10-47

Cost of Goods Sold and Cost Variance Summary

Debit Credit

Ice Cream Price Variance 2,000

Mix-in Quantity Variance 100

Variable Overhead Rate Variance 200

Fixed Overhead Volume Variance 1,200

Cost of Goods Sold 800

Ice Cream Quantity Variance 1,000

Mix-in Price Variance 700

Direct Labor Rate Variance 500

Direct Labor Efficiency Variance 1,600

Variable Overhead Efficiency Variance 200 Fixed Overhead Spending Variance 300

AccountsThe entry to close the variance accounts to the Cost of Goods Sold is:

10-48

End of Topic 4

Documents

ACC3200 STANDARD COSTING. Learning Objectives Describe the standard-setting process and explain how standard costs relate to budgets and variances