Accounting 2 Chapter 10
The standard rate per unit that a company expects to pay for variable overhead
= the variable portion of the predetermined overhead rate.
Labor Rate Variance
(AH x AR) - (AH x SR)
Labor Efficiency Variance
(AH x SR) - (SH x SR)
Materials Price variance
(AQ x AP) - (AQ x SP)
Materials Quantity Variance
(AQ x SP) - (SQ x SP)
Advantages of standard costs
- Standard costs are a key element of the management by exception approach. - Standards can greatly simplify bookkeeping. - Standards can provide benchmarks that promote economy and efficiency. - Standards can support responsibility accounting systems.
Actual price
amount actually paid for the input used. (materials cost/actual quantity)
Actual quantity
amount of direct materials, direct labor, and variable MOH actually used.
Actual quantity * actual price - actual quantity * standard price
Price variance
Spending variance
Price variance - quantity variance
Actual quantity * standard price - standard quantity * standard price
Quantity variance
Standard Hours per unit
The amount of direct labor-hours that should be used to produce one unit of finished goods.
Price Standard
The per unit price company needs to pay for variable overhead is the variable portion of the predetermined overhead rate.
If material efficiency variance is favorable it means that
WE used less material than allowed by the standard
IF material efficiency variance is favorable it means that
We used less materials than allowed by the standard
Standard rate per hour
company's expected direct labor wage rate per hour.
Quantity variance
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.
Price variance
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.
How is the "standard quantity allowed" computed?
multiplying the actual output in units by the standard input allowed per unit
Standard cost per unit
standard quantity (or hours) per unit is multiplied by the standard price (or rate) per unit to obtain the standard cost per unit.
Standard quantity
standard quantity allowed for the actual level of output. (
standard cost per unit
standard quantity or hours x standard price or rate
Standard quantity per unit
the amount of direct material that should be used for each unit of finished good, including an allowance for normal inefficiencies such as scrap and spoilage.
Standard price
the amount that should have been paid for the input used.
Denominator activity
the estimated total amount of the allocation base in the formula for the predetermined overhead rate