Ch 10: Standard Costs and Variances
price standards
specify how much should be paid for each unit of the iput
multiply standard hours per unit x Standard direct labor cost
How do you set direct labor standards?
exactly, variable, spending variance = total cost in column (1, Actual Quantity of Input at Actual Price) - total cost in column (3, Standard Quantity Allowed for actual output at Standard Price); Price Variance: Actual Quantity of Input at Actual Price - Actual Quantity of Input at Standard Price (AQ x AP - AQ x SP OR AQ x (AP-SP) ) Quantity Variance: Actual Quantity of Input at Standard Price - Standard Quantity Allowed for Actual Output at Standard Price (SP x (AQ - SQ))
the spending, price, and quantity variances are computed e______________ the same way regardless of whether one is dealing with direct materials, direct labor, or v___________ manufacturing overhead. How is it computed?
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A quantity variance is: 1. calculated using the actual price of the input 2. based only on the standard quantity of inputs 3. Based only on the actual quantity of inputs 4. calculated using the standard price of the input
F, the starndard hours or quantity allowed is the amount of the input that should have been used to produce the actual, not standard, output
T or F: The standard hours or quantity allowed for an input is the amount of the input that should have been used to produce the standard output for that period
employment taxes, fringe benefits, the base rate per hour
What does the standard rate per hour include?
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 unit
multiply the standard quantity per unit x the standard price per unit
How do you set the Direct Materials Standards cost?
Multiply the direct labor hours per unit x predetermined overhead rate
How do you set the variable manufacturing overhead standards?
unfavorable
If the actual level of activity is greater than the planned level of activity, the activity variances will be:
exception, benchmarking, bookeeping, responsibility
Advantages of Standard Costs: 1. key element in a management by e_____________ approach cost 2. can promote economy and efficiency, provide b_________________ for individuals to judge their performance 3. simplify b_______________________________, standard costs can be charged to jobs 4. fit in an integrated system of r________________________ accounting
Yes, standard quantity (or ours) per unit x standard price (or rate) per unit
FOr all three variable manufacturing costs, is the standard cost per unit computed the same way (and how)?
purchased, used, quantity;1 . delaying the computation of the price variance until the materials are used would result in less timely variance reports 2. computing the price variance when the materials are purchased allows materials to be carried in the inventory accounts at their standard costs
Most companies use the quantity of materials __________________ to compute the materials price variance and the quantity of materials __________ in production to compute the materials __________________ variance. What are the two reasons for this?
outdated
Potential Problems with Standard Costs: 1. info may be o______________ (and useless) if released late 2. can't be used only for assigning blame 3. some problematic assumptions: production process is labor-paced and that labor is a variable cost 4. In some cases, a favorable variance can be worse than an unfavorable variance 5. too much emphasis on meeting the standards may overshadow other objectives 6. meeting standards is not enough, must continually improve to remain competitive
variable overhead efficiency variance SR (AH-SH)
The difference between the actual level of activity (direct labor-hours, machine-hours, or some other base) and the standard activity allowed, multiplied by the variable part of the predetermined overhead rate.
variable overhead rate variance; AH (AR - SR)
The difference between the actual variable overhead cost incurred during a period and the standard cost that should have been incurred based on the actual activity of the period.
standard hours per unit
The most difficult standard to determine is perhaps the" 1. standard rate per direct labor hour 2. standard quantity per unit 3. standard hours per unit 4. standard price per unit
decomposes spending variances from the flexible budget into two elements: one due to the price paid for the input and the other due to the amount of the input that is used
What does the standard cost variance analysis do?
measures the amount of the allocation base from a company's predetermined overhead rate that is required to produce one unit of finished goods; the variable portion of the predetermined overhead rate
What does the standard hours per unit for variable overhead measure? What does the standard rate per unit that a company expects to pay for variable overhead equal?
materials quantity variance, labor efficiency variance, variable overhead efficiency variance:
What is a quantity variance called in the case of direct materials, direct labor, and variable manufacturing overhead?
1) maintain existing selling prices and consequently operate with lower margins 2) pass the cost increases along to customers in the form of higher prices 3) try to lower their raw materials cost
What three ways can companies respond in the face of rising raw materials cost?
Because price and quantity variances usually have different causes, and different managers are responsible for buying and using inputs
Why are standards separated into two categories?
standard; the manager investigates
a benchmark for measuring performance, in accounting they relate to quantity and acquistion price of units used in manufacturing goods or providing services; what happens if an input deviates significantly from the standard?
standard hours per unit, motion, tight
defines the amount of direct labor-hours that should be used to produce one unit of finished goods; one approach is to have an industrial engineer do a time and m_________ study, actually clocking the time required for each task. We'll assume that "t________ and attainable" labor standards are used rather than "ideaL" standards
standard quantity per unit, inefficiencies, scrap, spoilage
defines the amount of direct materials that should be used for each unity of finished product, including an allowance for normal i_______________________ (s_______ and s_____________)
standard rate per hour, mix, yes
defines the company's expected direct labor wage rate per hour, including employment taxes and fringe benefits; does the standard labor rate reflect the expected "m___" of workers even if actual hourly wage rates may vary?
standard price per unit, final
defines the price that should be paid for each unit of direct materials and it should reflect the f________, delivered cost of those materials
materials price variance; if the actual purchase price is lower than the standard purchase price: AP < SP; purchasing manager, number, quality
measures the difference between an input's actual price and its standard price, multiplied by the actual quantity pruchasesd; whenis this variance labeled favorable? Who is generallly responsible for this and has control over the price paid for goods? Factors that influence the price include the n____________ of units ordered, how the order is delivered, whether the order is a rush order, and the q______________ of the materials purchased.
labor rate variance; if AP < SP
measures the difference between the actual hourly rate and the standard hourly rate, multiplied by the actual number of hours worked during the period; when is the variance favorabe?
labor efficiency variance; poorly trained/motivated workesr, poor-quality materials, requiring more labor time, faulty equipment, poor supervision of workers, inaccurate standards; insufficient demand for company's products; 1. accept unfaborable labor efficiency variance 2. build inventory (bad idea: leads to high defect rates, obsolete goods, and inefficient operations)
measures the difference between the actual hours used and the standard hours allowed by the actual output, multiplied by the standard hourly rate; what are possible causes of an unfaborable variance? If customer orders are insuffficient to keep the workers busy, what options do managers have?
materials quantity variance; F = AQ of material used in production < SQ; can result from faulty machines, inferior materials quality untrained workers, and poor supervision; production manager
measures the difference between the actual quantity of materials used in production and the standard quantity of materials allowed for the actual output, multipled by the standard price per unit of materials. When is it labeled favorable? When does excessive materials usage happen? Who's responsibility is quantity variance generally?
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 variance
the difference between the actual amount paid for an input and the standard amount that should have been paid, multiplied by the a___________ amount of the input purchased
standard quantity allowed (SQ); actual output x standard quantity per unit = standard quantity allowed x standard price per unit = total cost according to the flexible budget
this refers to the amount of an input that should have been used to manufacture the actual output of finished goods produced during the period (when computer direct materials variances); How is it computed?
standard hours allowed
this refers to the amount of an input that should have been used to manufacture the actual output of finished goods produced during the period (when computing direct labor and variable manufacturing overhead variances)
materials price variance, labor rate variance, variable overhead rate variance
what is a price variance called when referring to direct materials? direct labor? variable manufacturing overhead?
