Hansen and Mowen Management Accounting CH 9

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PowerPoint Presentation by

Gail B. WrightProfessor Emeritus of AccountingBryant University

Copyright 2007 Thomson South-Western, a part of TheThomson Corporation. Thomson, the Star Logo, and

South-Western are trademarks used herein under license.

MANAGEMENTACCOUNTING

8th EDITION

BY

HANSEN & MOWEN

9 STANDARD COSTING

STUDENT EDITION


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1. Tell how unit standards are set; whystandard costing systems are adopted.

2. State the purpose of a standard cost sheet.3. Describe basic concepts underlying

variance analysis & explain how they are

used for control.

L EA RNING OB J ECTIVES

Continued


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4. Compute materials & labor variances;explain how they are used for control.

5. Calculate variable & fixed overheadvariances & give their definitions .

6. Prepare journal entries for variances

(Appendix).

L EA RNING OB J ECTIVES


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QUANTITY STANDARDS:

Definition

Tell the amount of input thatshould be used per unit of

output.

LO 1


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Where do quantity & pricestandards come from?

Quantity standards come fromexperience, studies, & personnel.

Price standardscome fromoperations, purchasing, personnel,

& accounting.

LO 1

Quantity

Price


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What is the difference

between ideal andattainable standards?

Ideal standards only work under perfect conditions. Attainable

standards can be achieved under efficient operating conditions.

LO 1


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STANDARD COST SYSTEMS

Why adopt a standard cost system?For planning & control

To improve performance measuresTo give manager more information by decomposingtotal variances into price & usage variances

For product costingTo use unit cost system that is readily available in

pricing

LO 1

product costing


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STANDARD COST PER UNIT:

Definition

Is the sum of standards costs for direct materials (DM), direct

labor (DL), & overhead.

LO 2


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TOTAL BUDGET VARIANCE:

Definition

Is the difference between actual cost & planned cost of

production.

LO 3


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FAVORABLE & UNFAVORABLE

The difference between actual & planned can be favorable (actual price or usage < standard) or unfavorable (actual price or usage> standard). Does not mean good or

bad!

LO 3


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What should we do whenwe find variances?

If variances are significant, that isif they are beyond our control

limits, they should be investigatedif it is cost beneficial to do so.

LO 3


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FORMULA: Total VarianceTotal variance is Actual cost Applied cost or Total cost Standard cost.

LO 3

Total Variance

= (AP X AQ) (SP X SQ)= Actual price x Actual quantity

Standard Price x Standard Quantity


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How can we make totalvariances more useful?

Total variances provide moreinformation if they are divided

into Price variances & Efficiencyvariances.

LO 3


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MATERIALS VARIANCES

LO 4

EXHIBIT 9-6

Decompose totalmaterials varianceinto price & usage variances.


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FORMULA: Materials Usage

Variance (MUV) Materials usage variance tells whether a companyused more raw materials than expected.

LO 4

MUV

= (AQ X SP) (SQ X SP)

= (AQ SQ) SP

= (780,000 873,000) $0.006

= $ 558 F


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FORMULA: Labor Rate Variance

(LRV) Labor rate variance tells whether a company paid more than expected for labor.

LO 4

LRV

= (AH X AR) (AH X SR)

= (AR SR) AH

= ($7.35 - $7.00) 360

= $ 126 U


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LO 5


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FORMULA: Total Variable

Overhead VarianceTotal overhead variance is the differencebetween actual and applied variable overhead.

LO 5

Total Variable Overhead

= Actual Applied Overhead

= $1,600 - $1,456

= $ 144 U

LO 5


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VARIABLE OVERHEADSPENDING VARIANCE

Variable overhead spending variancearises because prices change. Itincludes things such as indirectmaterials, indirect labor, electricitymaintenance, etc. Increase or decreasein these items is beyond control of managers.

LO 5

LO 5


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FORMULA: Variable Overhead

Efficiency VarianceVariable overhead efficiency variancemeasures change in variable overhead consumption because relies on direct labor.

LO 5

Efficiency Variance

= (AH SH) SVOR

= (400 378.3) $3.85

= $ 84 U

LO 5


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FIXED OVERHEAD VARIANCES

LO 5

EXHIBIT 9-11

Decompose totalfixed overheadvariance intospending &volume variances.

LO 5


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FIXED OVERHEAD SPENDINGVARIANCE

Fixed overhead spending variance is thedifference between actual and

budgeted fixed overhead. It includesthings such as salaries, depreciation,taxes, and insurance. Increase or decrease in these items is beyondcontrol of managers.

LO 5

LO 5


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FORMULA: Fixed Overhead

Volume Variance Fixed overhead volume variance measures theeffect of actual output differing from output used to compute predetermined standard fixed overhead rate.

LO 5

Volume Variance

= Budgeted Applied fixed overhead

= $479,970 - $687,473

= $62,497 U


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TH E END

CHAPTER 9

Documents

Hansen and Mowen Management Accounting CH 9