Ch 10 acct variance analysis

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.

materials price variance

measures the difference between a direct material's actual price per unit and its standard price per unit, multiplied by the actual quantity purchased.

labor rate variance

measures the difference between the actual hourly rate and the standard hourly rate, multiplied by the actual number of hours worked during the period.

The labor efficiency variance

measures the difference between the actual labor-hours used and the standard hours allowed for the actual output, multiplied by the standard hourly rate.

A 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.

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. 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.

variable overhead efficiency variance 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.

The variable overhead rate variance 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.

Price/Quantity standards

• Quantity standards refer to how much of an input - materials, labor, overhead - should be consumed in making a unit of product. • Price standards refer to how much should be paid for each unit of the production input (price per pound, wage per hour, etc.)

Note Regarding Materials Variances

• The price variance will be based on the actual units of materials purchased whereas the quantity variance will be based on the actual units of materials used in the production. • This means that, in most cases the price and quantity variance for materials will not sum to the total materials spending variance. • Labor and overhead rate and efficiency variances should sum to the spending variances.

Responsibility for Variances

• Who is responsible for the direct materials price variance? - Purchasing Manager • Who is responsible for the direct materials quantity variance? - Production Manager

standard hours per unit

defines the amount of direct labor-hours that should be used to produce one unit of finished goods.

Standard cost systems have a number of advantages.

1. Standard cost variance reports are usually prepared on a monthly basis and often are released days or even weeks after the end of the month. As a consequence, the information in the reports may be so outdated that it is almost useless. Timely, frequent reports that are approximately correct are better than infrequent reports that are very precise but out of date by the time they are released. Some companies are now reporting variances and other key operating data daily or even more frequently. 2. If managers use variances only to assign blame and punish subordinates, morale may suffer. Furthermore, subordinates may be tempted to cover up unfavorable variances or take actions that are not in the best interests of the company to make sure the variances are favorable. 3. Labor-hour standards and efficiency variances make two important assumptions. First, they assume that the production process is labor-paced; if labor works faster, output will go up. However, output in many companies is not determined by how fast labor works; rather, it is determined by the processing speed of machines. Second, the computations assume that labor is a variable cost. However, direct labor can often be a fixed cost. If labor is fixed, then an undue emphasis on labor efficiency variances creates pressure to build excess inventories. 4. In some cases, a "favorable" variance can be worse than an "unfavorable" variance. For example, Hardee's has a standard for the amount of hamburger meat that should be in a beef patty. A "favorable" variance would mean that less meat was used than the standard specifies. The result is substandard hamburgers and possibly numerous dissatisfied customers. 5. Too much emphasis on meeting the standards may overshadow other important objectives such as maintaining and improving quality, on-time delivery, and customer satisfaction. This tendency can be reduced by using supplemental performance measures that focus on these other objectives. 6. Just meeting standards is not sufficient because companies need to continually improve to remain competitive. For this reason, some companies focus on the trends in their standard cost variances—aiming for continual improvement rather than just meeting the standards. In other companies, engineered standards are replaced either by a rolling average of actual costs, which is expected to decline, or by very challenging target costs.

Why are standards separated into two categories—price and quantity?

Price variances and quantity variances usually have different causes. In addition, different managers are usually responsible for buying and using inputs. For example, in the case of a raw material, the purchasing manager is responsible for its price and the production manager is responsible for the amount of the raw material actually used to make products. Therefore, it is important to clearly distinguish between deviations from price standards (the responsibility of the purchasing manager) and deviations from quantity standards (the responsibility of the production manager).

SQSP formula

Standard quality allowed = actual output x standard quantity per unit

A quantity variance

is the difference between how much of an input was actually used and how much should have been used for the actual level of output and is stated in dollar terms using the standard price of the input.

price variance

is 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.

materials quantity variance

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. It is labeled as unfavorable (favorable) when the actual quantity of material used in production is greater than (less than) the quantity of material that should have been used according to the standard.