(mgmt 30B) chapter 10: standard costs and variances

Spending Variance (see chapter 9).

(SQxSP)-(AQxAP)

Three types of price variance

- Materials price variance - Labor rate variance - VOH rate variance

What are the two labor variances

-->Labor rate variance: - Mix of skill levels assigned to work tasks -Cost of living adjustments - not production manager's responsibility -->Labor efficiency variance: - Level of employee motivation -Quality of production supervision -Quality of training provided to employees

Flexible Budget (Spending) Variance Analysis is made of what two variances? Why are they seperated into two categories?

-->Price/Quantity --> usually have different causes, and different managers are responsible

Three types of quantity variance

-Materials quantity variance -Labor efficiency variance -VOH efficiency variance

What is standard hours per unit (SH) ?

-amt. of DL time that SHOULD be required to complete a single unit of product --> use time and motion studies for each labor operation -->nclude allowances for breaks, downtime, cleanup, rejects, (normal inefficiencies)

What is the standard quantity per unit (direct materials/SQ)?

-amt. of direct materials SHOULD be used for each unit of finished product --> includes allowance for normal inefficiencies (scrap/spoilage)

What is a standard cost card?

-detailed listing of the standard amounts of inputs + their costs that required to produce one unit of a specific product. -->includes standard cost per unit

What is a price variance?

-diff. between actual price and standard price --> multiplied by the actual quantity of the input.

Standard quantity is the ....

standard quantity allowed for the actual output of the period

Cost standard is the budgeted cost for _____________.

one output unit

Price standards specify how much should be.........

paid for each unit of the input.

Who is responsible for the materials quantity variance?

production manager

The ___________ is responsible for raw material purchase prices, and the _________ is responsible for the quantity of raw material used.

purchasing manager; production manager

Who is responsible for the materials price variance?

purchasing managers

In material variances, it is important to remeber that ___________ is computed only on the _________ used. The ____________ is computed on the entire __________ .

quantity variance; quantity price variance; quantity purchased.

What is quantity variance?

-diff. between actual quantity of the input used, and the quantity input SHOULD have been used for the actual level of output (SQ) ---> multiply result by the standard price of the input.

Who sets the standards for direct material?

-engineers, accountant, Production Manager, HR

What are the advantages of standard costs?

-key elements of the management by exception approach. -provide benchmarks that promote economy and efficiency. -can support responsibility accounting systems. -greatly simplify bookkeeping.

What is standard rate per hour (SR)?

-labor rate SHOULD be incurred per hour of labor time, including employment taxes and fringe benefits --> often single rate is used that reflects mix of wages earned

Actual quantity is the ......

-physical quantity of DM, DLH, and V MOH allocation base actually used

What is the standard price per unit (direct materials SP)?

-price that SHOULD be paid for each unit of DM --> should reflect final, delivered cost of those materials.

What is the quantity standard (MOH/SH per unit) ?

-quantity is the activity in allocation base for predetermined overhead

What is the price standard (standard rate per hour/SVR)?

-standard variable overhead rate -rate is the variable portion of the POHR

standard cost per unit

-the per-unit cost that should be achieved given materials, labor, and overhead standards.

What are potential problems with standard costs?

-variance reports are usually prepared on a monthly basis and may contain information that is outdated - variances are misused as a club to negatively reinforce employees, morale may suffer, and employees may make dysfunctional decisions Labor variances assume that the production process is labor-paced and that labor is a variable cost. These assumptions are often invalid in today's automated manufacturing environment where employees are essentially a fixed cost.

What TWO reasons can be given for why the labor variances are not always entirely controllable by one person or department?

1). Maintenance Department manager may do poor job of maintaining production equipment, increase the processing time required per unit = unfavorable labor efficiency variance. 2). Purchasing manager purchase lower-quality raw materials resulting = unfavorable labor efficiency variance for the production manager

Describe TWO reasons why material variances are not always entirely controllable by one person or department.

1). Production manager may schedule production in such a way that requires express delivery of raw materials = unfavorable MPV 2). Purchasing manager purchases lower-quality raw materials = unfavorable MQV for the production manager bc more waste

What are the two types of standards widely used in managerial accounting?

1). Quantity 2). Price

What are the two reasons standard quantity and standard price are developed seperately?

1). different managers responsible 2). activties occur at different times

Price variance equation

AQ(AP-SP) (AQxSP) - (AQ x AP)

Standard Quantity (SQ) for 1 unit x Standard Price (SP) =

Cost Standard

Three MORE potential problems with standard costs

Just meeting standards may not be sufficient; continuous improvement may be necessary to survive in a competitive environment. In some cases, a "favorable" variance can be as bad or worse than an unfavorable variance. Excessive emphasis on meeting the standards may overshadow other important objectives such as maintaining and improving quality, on-time delivery, and customer satisfaction.

______ managers are usually held accountable for both labor variances because they can influence key factors.

Production managers

Standard Direct Labor Cost per Unit =

SH Per unit x SR per hour

Quantity Variance equation

SP(AQ-SQ) (SPxSQ)-(AQxSP)

Standard Direct Materials Cost =

SQ per unit x SP per unit

Actual price is the .....

amount ACTUALLY paid for the input used

Standard price is the

amount that should have been paid for the input used

The standard price is used to compute the material quantity variance so that the production manager is not _____________________ .

held responsible for the purchasing manager's performance.

A standard is defined as a....

benchmarks or "norms" for measuring performance.

Where is the standard quantity per unit of output (direct materials) summarized?

bill of materials

Cost Standards

budgeted cost for a single unit of output

The________ and ________ activities occur at different times. ____________ may be held in inventory for a period of time before being used in production.

buying (price variance); using (quantity variance) Raw material purchases

In all of these variances: a POSITIVE number should be labeled as ________, and a NEGATIVE number is _______ .

favorable, unfavorable

Quantity standards specify how much of an input should be........

used to make a product or provide a service