BUS A202 Ch. 10 & 10B
Potential Problems with Standard Costs (when used improperly)
-As a consequence of being reported infrequently, the information in the reports may be so outdated that it is almost useless -Morale may suffer -Labor-hour standards assume that the production process is labor-paced and the computations assume that labor is a variable cost -In some cases, a "favorable" variance can be worse than an "unfavorable" variance -Too much emphasis on meeting the standards may overshadow other important objectives such as maintaining and improving quality, on-time delivery, and customer satisfaction -Just meeting standards is not sufficient because companies need to continually improve to remain competitive
Types of Quantity Variances
-Materials Quantity Variance in the case of direct materials -Labor Efficiency Variance in the case of direct labor -Variable Overhead Efficiency Variance in the case of variable manufacturing overhead
Standard
A benchmark for measuring performance
How to record an favorable variance
Credit the entry
Standard cost card
Shows the standard quantity (or hours) and standard price (or rate) of the inputs required to produce a unit of a specific product
Factors that can influence excessive materials usage
-Faulty machines -Inferior materials quality -Untrained workers -Poor supervision
Factors that can influence the prices paid for goods
-How many units are ordered -How the order is delivered -Whether the order is a rush order -The quality of materials purchased
Advantages of Standard Costs
-Key element in a management by exception approach as defined in the previous chapter (helps managers identify and focus on more important issues) -If viewed as reasonable by employees can promote economy and efficiency. They provide benchmarks that individuals can use to judge their own performance -Can greatly simplify bookkeeping -Fit naturally in an integrated system of "responsibility accounting"
Types of Price Variances
-Materials Price Variance in the case of direct materials -Labor Rate Variance in the case of direct labor -Variable Overhead Rate Variance in the case of variable manufacturing overhead
Possible causes of an unfavorable labor efficiency variance
-Poorly trained or motivated workers -Poor-quality materials, requiring more labor time -Faulty equipment, causing breakdowns and work interruptions -Poor supervision of workers -Inaccurate standards -Insufficient demand for the company's products
Rough sketch of the flow of costs when journalizing
1) Debit Raw Materials, Credit A/P or Cash, Credit or Debit favorable or unfavorable MPV 2) Debit Work In Process, Credit or Debit favorable or unfavorable MQV, Credit Raw Materials 3) Debit Work In Process, Credit or Debit favorable or unfavorable LEV and LRV, Credit Wages Payable
How to record an unfavorable variance
Debit the entry
Standard hours per unit
Defines the amount of direct labor-hours that should be used to produce one unit of finished goods
Standard quantity per unit
Defines the amount of direct materials that should be used for each unit of finished product, including an allowance for normal inefficiencies, such as scrap and spoilage
Standard rate per hour
Defines the company's expected direct labor wage rate per hour, including employment taxes and fringe benefits
Standard price per unit
Defines the price that should be paid for each unit of direct materials and it should reflect the final, delivered cost of those materials
Standard rate per unit that a company expects to pay for variable overhead
Equals the variable portion of the predetermined overhead rate
Activity variance calculation
Flexible Budget Amount - Planning Budget Amount
The standard quantity (or hours) allowed is multiplied by the standard price (or rate) per unit of the input (SQ or SH x SP/unit or SR/unit)
How to obtain the total cost according to the flexible budget
What happens if either the quantity or acquisition price of an input departs significantly from the standard
Managers investigate the discrepancy to find the cause of the problem and eliminate it
Standard hours per unit for variable overhead
Measures the amount of the allocation base from a company's predetermined overhead rate that is required to produce one unit of finished goods
Materials Price Variance (MPV)
Measures the difference between an input's actual price and its standard price, multiplied by the actual quantity purchased
Labor Rate Variance (LRV)
Measures the difference between the actual hourly rate and the standard hourly rate, multiplied by the actual number of hours worked during the period
Labor Efficiency Variance (LEV)
Measures the difference between the actual hours used and the standard hours allowed for the actual output, multiplied by the standard hourly rate
Variable Overhead Efficiency Variance (VOEV)
Measures the difference between the actual level of activity and the standard activity allowed for the actual output, multiplied by the variable part of the predetermined overhead rate
Materials Quantity Variance (MQV)
Measures the difference between the actual quantity of materials used in production and the standard quantity of materials allowed for the actual output, multiplied by the standard price per unit of materials
Variable Overhead Rate Variance (VORV)
Measures the difference between the actual variable overhead cost incurred during the period and the standard cost that should have been incurred based on the actual activity of the period
Standard Quantity/Hours Allowed
Refers to the amount of an input that should have been used to manufacture the actual output of finished goods produced during the period. It is computed by multiplying the actual output by the standard quantity (or hours) per unit (AO x SQ or SH)
Quantity standards
Specify how much of an input should be used to make a product or provide a service
Price standards
Specify how much should be paid for each unit of the input
Quantity Variance
The difference between how much of an input was actually used and how much should have been used and is stated in dollar terms using the standard price of the input [(SQ - AQ) SP]
Price Variance
The difference between the actual amount paid for an input and the standard amount that should have been paid, multiplied by the actual amount of the input purchased [(SC - AC) AP]
Standard cost per unit formula for variable overhead
The standard quantity (or hours) per unit is multiplied by the standard price (or rate) per unit
What happens as a consequence of the price variance being based on the amount purchased and the quantity variance being based on the amount used
The two variances do not generally sum to the spending variance from the flexible budget, which is wholly based on the amount used
If actual costs incurred are less than the standard cost allowed for the actual level of output
The variance is labeled favorable
What happens when variable manufacturing costs are negative
The variance is labeled favorable because actual cost is less than budgeted cost
When actual cost incurred exceeds the standard cost allowed for the actual level of output
The variance is labeled unfavorable
What happens when variable manufacturing costs are positive
The variance is labeled unfavorable because actual cost is more than budgeted cost
When LRV is labeled unfavorable
When actual hourly rate is greater than the standard hourly rate
When LRV is labeled favorable
When actual hourly rate is less than the standard hourly rate
When MPV is labeled unfavorable
When actual purchase price exceeds the standard purchase price
When MPV is labeled favorable
When actual purchase price per pound is less than the standard purchase price per pound
Relation between LEV and VOEV
When direct labor is used as the base for overhead, whenever the direct labor efficiency variance is favorable, the variable overhead efficiency variance will also be favorable. And whenever the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will be unfavorable
When MQV is labeled unfavorable
When the actual quantity of material used in production is greater than the quantity of material that should have been used according to the standard
When MQV is labeled favorable
When the actual quantity of material used in production is less than the quantity of material that should have been used according to the standard