Chapter 10: Standard Costs and variances

setting standards

the two big standards are usually standard quantity and standard price. the standard price per unit should reflect the final delivered cost of materials.

purpose of standard costs

these systems break spending variances to measure the control of acquisition prices and how efficient is our use of an asset

note on overhead variances

these variance are the allocation of the variable portions of POHR which makes them different in efficient from the direct labor cost. so whenever direct labor is the base for POHR then the two efficiency variances will be favorable or unfavorable in tandem

insufficient demand and variances

this can also lead to inefficient labor. especially with a no layoff policy.

when material purchases is materials used

this is a rather rare occurence. the process is always the same but you can use the same prices on each side.

material quantity variance: expanded

this is measure of actual quantity used is production and standard allowed time the price per unit. when actual is greater it is unfavorable.

standard cost per unit

this is part of overhead standards. expected payment for variable overhead equals the variable portion of POHR.

meaning of "standard quantity allowed"

this is what should have been allowed or needed to make the actual output of units

unfavorable price variance

this is when the actual price per unit is greater then standard price per unit

unfavorable quantity variance

this is when the actual quantity needed to make a level of output is greater then the standard quantity allowed.

standard hours allowed

time should have needed to complete output. actual output quantity times the standard hours per unit

variable overhead variances

variable overhead rate variance and variable overhead efficiency variance

responsible for quantity variance

we use the standard price because the production manager in control and the actual price is because of the purchasing manager. faulty machining, lack of training, poor supervision

graphical computation

1) spending variances: total cost column one minus total cost column three. 2) price variances: total cost one minus two. 3) quantity variance: total cost 2 minus 3.

variable overhead rate variance

difference of actual variable overhead in a period and standard cost that should have been incurred based on activity level.

standard hours per unit

direct labor hours needed to complete one finished good unit. allowances for breaks, downtime, cleanup etc.

aspects of standard analysis

1) can find the price and quantity variance for DM,DL and OH all the same way. 2) all reflect actual amount of output per period. 3) variance computations are the same method.

reason for materials subtleties

1) if we waited until we used the goods our price variance would not be timely at all. 2) computing price with purchases more accurate for inventory purposes. the quantity difference will only be made when used.

advantages of standard costs

1) management by exception approach. allow focus redirection to the important stuff. 2) reasonable standards build economy and efficiency. benchmarks own performance. 3) standards simplify bookkeeping. 4) fit naturally with responsibility accounting.

problems of standard costs

1) slow and info often outdated. timely versus accuracy trade-off. 2) not good if used to assign blame. 3) labor efficiency assumes more output means more labor. assumes labor is variable even if it actually is fixed. 4) favorable variances may reflect poor quality. 5) to much focus on standards could mean less focus on other aspects of success. 6) shouldn't just try to meet standards. continuous improvement.

materials price variance: purchases

AQ*[AP-SP]. AQ: actual quantity of good purchased. AP: actual price per unit. SP: standard price per unit.

labor variance equations

Labor rate variance: AH*[AR-SR]. Labor efficiency variance: SR*[AH-SH] AH= actual quantity of hours in production. SH= standard quantity of hours allowed for production. AR= actual rate per unit direct labor hour. SR= standard rate per direct labor hour.

direct materials variance equations

Material price variance = AQ*[AP-SP]. Materials Quantity variance= SP*[AQ-SQ] AQ= actual quantity of unit purchases or used in production. SQ: standard quantity allowed for actual output. AP: actual price per unit of the input. SP: standard price per unit of input allowed.

materials quantity variance: production

SP*[AQ-SQ]. AQ: actual quantity used in production. SQ: standard quantity allowed for actual output. SP: standard price allowed per unit

variable overhead variances equations

Variable OH rate variance: AH*[AR-SR]. Variable OH efficiency variance: SR*[AH-SH]. AH: actual quantity of hours used in production. SH: standard quantity of hours allowed for actual output. AR: actual rate per direct labor hour. SR: standard rate per direct labor hour.

quantity variance

actual input quantity used minus the amount should have been used at this level of output times the standard price of input

standard quantity allowed for actual output

actual output and standard quantity allowed per unit. actual price almost always differs. deals with materials

standard quantity allowed formula

actual output times the standard quantity or hours per unit.

step two of standard costs: finding spending variances

after we have the standard costs and our flexible and static budgets we can compare to the actual data to find the spending variances.

variable overhead standards

again hour and rate terms. standard hours per unit of variable overhead measures amount of allocation base from the POHR that is needed to make one FG unit. often moves with standard hours per direct labor

variable overhead efficiency variance

difference of actual and standard activity allowed times the variable predetermined overhead rate.

labor rate variance: expanded

difference of actual and standard labor rates times actual hours. difference of hours times the rate is the total variance. favorable when actual lower then standard rate. altered by how managers use workers or when the skilled are given remedial tasks

labor rate variance

difference of actual hourly labor rate and standard rate times the number of hours worked during period

labor efficiency variance: expanded

difference of actual hours and hours allowed times the rate. unfavorable due to poor training or motivation, poor quality materials, poor supervision or poor benchmarks.

labor efficiency variance

difference of actual hours to finish a product and the standard hours allowed for actual output times the standard hourly labor rate

materials price variance

difference of actual per unit cost and standard cost times the quantity purchases

materials quantity variance

difference of actual quantity of materials used in production and standard quantity allowed for actual output times the standard price per unit of materials

direct labor standards

expressed in direct labor hours or direct labor costs. we have standard hours per unit which can be found by time motion studies. we have standard rate per hour which is expected direct labor cost. reflects mix of workers

responsible for materials price variances

in general the purchasing manager is responsible for these variances. quantity ordered, delivery method, rush order, materials quality.

standard rate per hour

labor rate per direct labor hour plus taxes and fringe benefits

direct labor variances

labor rate variance and labor efficiency variance

standard cost card

list of standard amounts and costs of inputs need to make one finished good unit

Direct materials variances

materials price variance and materials quantity variances

materials variances: materials price

measures the difference of inputs actual price and standard price times the quantity used or purchased.

subtleties of materials variances

most companies use quantity of materials purchased for Raw materials price variance and quantity used in production for direct materials quantity variances

standard price per unit

price should be paid for an input

standard quantity allowed

quantity of inputs should have been needed to make a finished good unit. allowances for waste, spoilage and rejects

step one of standard costs: finding standards

so usually the first step is to take each different category (DM, DL, OH) and take standard quantity and standard price/rate to find the total standard costs. this will go to static or flexible budget.

price standards

specify price to pay per unit finished good. variance investigation

total flexible budget cost

standard allowed times the standard price or rate

standard variable overhead per unit

standard hours per unit x the standard rate per unit

standard direct labor cost

standard hours times the standard labor rate

standard costs stage

standards are benchmarks. quantity standards are an amount of input to make a service or product.

general standard cost analysis

takes the spending flexible variances and breaks it into price paid for units and quantity used. price and quantity variances. segregate as the causes of these variances differ and so does the management responsible

price variance

the actual price minus the standard price times the actual input quantity q.