BUS A202 Ch. 10 & 10B

Potential Problems with Standard Costs (when used improperly)

-As a consequence of being reported infrequently, the information in the reports may be so outdated that it is almost useless -Morale may suffer -Labor-hour standards assume that the production process is labor-paced and the computations assume that labor is a variable cost -In some cases, a "favorable" variance can be worse than an "unfavorable" variance -Too much emphasis on meeting the standards may overshadow other important objectives such as maintaining and improving quality, on-time delivery, and customer satisfaction -Just meeting standards is not sufficient because companies need to continually improve to remain competitive

Types of Quantity Variances

-Materials Quantity Variance in the case of direct materials -Labor Efficiency Variance in the case of direct labor -Variable Overhead Efficiency Variance in the case of variable manufacturing overhead

Standard

A benchmark for measuring performance

How to record an favorable variance

Credit the entry

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

Factors that can influence excessive materials usage

-Faulty machines -Inferior materials quality -Untrained workers -Poor supervision

Factors that can influence the prices paid for goods

-How many units are ordered -How the order is delivered -Whether the order is a rush order -The quality of materials purchased

Advantages of Standard Costs

-Key element in a management by exception approach as defined in the previous chapter (helps managers identify and focus on more important issues) -If viewed as reasonable by employees can promote economy and efficiency. They provide benchmarks that individuals can use to judge their own performance -Can greatly simplify bookkeeping -Fit naturally in an integrated system of "responsibility accounting"

Types of Price Variances

-Materials Price Variance in the case of direct materials -Labor Rate Variance in the case of direct labor -Variable Overhead Rate Variance in the case of variable manufacturing overhead

Possible causes of an unfavorable labor efficiency variance

-Poorly trained or motivated workers -Poor-quality materials, requiring more labor time -Faulty equipment, causing breakdowns and work interruptions -Poor supervision of workers -Inaccurate standards -Insufficient demand for the company's products

Rough sketch of the flow of costs when journalizing

1) Debit Raw Materials, Credit A/P or Cash, Credit or Debit favorable or unfavorable MPV 2) Debit Work In Process, Credit or Debit favorable or unfavorable MQV, Credit Raw Materials 3) Debit Work In Process, Credit or Debit favorable or unfavorable LEV and LRV, Credit Wages Payable

How to record an unfavorable variance

Debit the entry

Standard hours per unit

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

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

Standard rate per unit that a company expects to pay for variable overhead

Equals the variable portion of the predetermined overhead rate

Activity variance calculation

Flexible Budget Amount - Planning Budget Amount

The standard quantity (or hours) allowed is multiplied by the standard price (or rate) per unit of the input (SQ or SH x SP/unit or SR/unit)

How to obtain the total cost according to the flexible budget

What happens 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

Materials Price Variance (MPV)

Measures the difference between an input's actual price and its standard price, multiplied by the actual quantity purchased

Labor Rate Variance (LRV)

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

Labor Efficiency Variance (LEV)

Measures the difference between the actual hours used and the standard hours allowed for the actual output, multiplied by the standard hourly rate

Variable Overhead Efficiency Variance (VOEV)

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

Materials Quantity Variance (MQV)

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

Variable Overhead Rate Variance (VORV)

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

Standard Quantity/Hours Allowed

Refers to the amount of an input that should have been used to manufacture the actual output of finished goods produced during the period. It is computed by multiplying the actual output by the standard quantity (or hours) per unit (AO x SQ or SH)

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

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 input [(SQ - AQ) SP]

Price Variance

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 [(SC - AC) AP]

Standard cost per unit formula for variable overhead

The standard quantity (or hours) per unit is multiplied by the standard price (or rate) per unit

What happens as a consequence of the price variance being based on the amount purchased and the quantity variance being based on the amount used

The two variances do not generally sum to the spending variance from the flexible budget, which is wholly based on the amount used

If actual costs incurred are less than the standard cost allowed for the actual level of output

The variance is labeled favorable

What happens when variable manufacturing costs are negative

The variance is labeled favorable because actual cost is less than budgeted cost

When actual cost incurred exceeds the standard cost allowed for the actual level of output

The variance is labeled unfavorable

What happens when variable manufacturing costs are positive

The variance is labeled unfavorable because actual cost is more than budgeted cost

When LRV is labeled unfavorable

When actual hourly rate is greater than the standard hourly rate

When LRV is labeled favorable

When actual hourly rate is less than the standard hourly rate

When MPV is labeled unfavorable

When actual purchase price exceeds the standard purchase price

When MPV is labeled favorable

When actual purchase price per pound is less than the standard purchase price per pound

Relation between LEV and VOEV

When direct labor is used as the base for overhead, whenever the direct labor efficiency variance is favorable, the variable overhead efficiency variance will also be favorable. And whenever the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will be unfavorable

When MQV is labeled unfavorable

When the actual quantity of material used in production is greater than the quantity of material that should have been used according to the standard

When MQV is labeled favorable

When the actual quantity of material used in production is less than the quantity of material that should have been used according to the standard