Handout 8 Standard Costing
Facilitate management planning.
. It is a useful tool in comparing actual costs incurred to the cost allowable for the actual output (or activity level) achieved.
price and usage
. To help managers in achieving their objectives, total variances are subdivided and further analyzed into __ and ___ components
Simplify the costing of inventories and reduce clerical costs.
A company using standard costs usually utilizes lesser clerical time and effort in determining costs necessary for decision making than in an actual costing system. This is because when using standard costing, costs are assumed to be constant for some period.
Help set selling prices.
As standard costs are set, management can determine how much to charge for a product so that it can produce the desired net income. As the business actually incurs these costs, management determines if the selling prices set are still reasonable and, when necessary, considers some price adjustments after taking competition into account.
standard quantity (SQ)
It is computed by multiplying the actual output by the standard quantity (or hours) per unit.
FOH Spending Variance
It is the difference between the actual FOH and the budgeted FOH based on budgeted input activity.
Facilitate management planning.
Planning requires estimates of the future. Managers can use current standards to estimate future costs and quantities. This is achieved through flexible budget, a budget that changes based on the level of activity.
Promote greater economy and efficiency by making employees more cost-conscious.
Standards serve as the information for management's expectations of workers. Standards should be achievable, and workers should be informed of rewards for the attainment of those standards. In this way, they are more likely to be motivated to strive and do their best to accomplish their tasks.
Contribute to management control by providing a basis for evaluation of cost control.
The controlling function starts with the establishment of standards that provide a basis for comparing actual costs to determine variances, if any.
Contribute to management control by providing a basis for evaluation of cost control.
The system helps managers who or what is responsible for each variance and who can best explain it. An early measurement and reporting system allow managers to monitor operations to take remedial action on issues, evaluate performance, and motivate workers to achieve the standards set.
material purchase price variance (MPPV)
The variance is called ____ because it is based on the quantity of materials purchased
Normal or practical standards
These represent efficient levels of performance that are attainable under expected operating conditions.
Ideal standards.
These represent optimum levels of performance under perfect operating conditions.
True
True/False Direct labor quantity and price standards are usually expressed in terms of labor hours or labor rate.
True
True/False the materials price variance is computed using the quantity of materials purchased rather than the quantity of materials used.
True
Trye/False standards and budgets are essentially the same.
Help highlight variances in management by exception.
When the top management receives variance reports highlighting the operating performance of the subordinate managers, the top management would be able to know when costs were not controlled and by which managers. It allows the top management to provide feedback to subordinates, investigate areas of concern, and make performance evaluations about who needs additional supervision, who should be replaced, or who should be promoted.
FOH Volume Variance
a. It is the difference between the budgeted FOH based on budgeted input activity and the applied or standard FOH based on actual output achieved. It is caused solely by producing at a level that differs from that used to compute the predetermined fixed overhead rate.
standard quantity (SQ)
allowed (when computing direct materials variances) or standard hours allowed (when computing direct labor and variable manufacturing overhead variances) refers to the amount of an input that should have been used to manufacture the actual output of finished goods during the period.
standard quantity (or hours)
allowed is then multiplied by the standard price (or rate) per unit of the input to obtain the total cost according to the flexible budget.
Standards
are benchmarks for measuring performance. Standard costs relate to the quantity and acquisition price (or cost) of the inputs used in manufacturing products or providing services
fixed overhead (FOH) variances can
can also be computed using the general model. However, instead of using adjusted cost or actual quantity of input at standard price, the budgeted cost at budgeted level of activity is used.
Costs
can be assigned to inventory at a predetermined rate regardless of actual conditions.
(1) a predetermined or standard performance level, (2) a measure of actual performance, and (3) a comparison between standard and actual performance.
control system has three (3) basic parts:
standard cost
cost is the predetermined unit cost that is used as a measure of performance.
labor rate variance
in the case of direct labor
Labor Rate Variance (LRV)
in the case of direct labor, and
variable overhead efficiency variance (VEV)
in the case of variable manufacturing overhead.
variable overhead rate variance (VRV)
in the case of variable manufacturing overhead.
favorable price variance
indicates that the actual price (AP) of the input was less than the standard price (SP) per unit
unfavorable price variance
indicates that the actual price (AP) per unit of the input was greater than the standard price (SP) per unit.
unfavorable price variance
indicates that the actual quantity (AQ) of the input used was greater than the standard quantity allowed (SQ).
favorable price variance
indicates that the actual quantity (AQ) of the input used was less than the standard quantity allowed (SQ).
Price variance
is called materials price variance (MPV) in the case of direct materials
Quantity variance
is called materials quantity variance (MQV) in the case of direct materials
Standard quantity
is the amount of input factor that should be used to make a unit of product
Standard price or rate
is the amount that should be paid for one (1) unit of input factor.
standard cost
is the company's best estimate of the average cost to produce a single unit of product or service.
Total variance
is the difference between the total actual cost incurred and the total standard cost applied to the actual output produced or achieved during the period.
Management by exception
is the practice of giving attention only to those situations in which large variances occur so that management may have more time for more important problems of the business, not just routine supervision of subordinates.
Price variance 𝑃𝑟𝑖𝑐𝑒 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 = (𝐴𝑃 − 𝑆𝑃)𝑥 𝐴𝑄
reflects the difference between what was paid for inputs and what should have been paid for inputs.
Usage variance 𝑈𝑠𝑎𝑔𝑒 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 = (𝐴𝑄 − 𝑆𝑄)𝑥 𝑆𝑃
shows the difference between how much of the input was actually used and how much should have been used for the actual level of output.
Price standards
specify how much should be paid for each unit of the input.
standard rate per unit
that a company expects to pay for variable overhead equals the variable portion of the predetermined overhead rate.
standard hours per unit
· defines the amount of direct labor hours that should be used to produce a unit of product.
standard rate per hour
· defines the company's expected direct labor wage rate per hour, including employment taxes and fringe benefits.
standard quantity per unit
· defines the number of direct materials that should be used for each unit of the finished product, including an allowance for normal inefficiencies, such as waste and spoilage.
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 (1) unit of finished goods.
standard price per unit
· is the cost per unit of direct materials that should be incurred. This standard should be based on the purchasing department's best estimate of the cost of raw materials.