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Chapter 9

Chapter 9. Standard Costing and Variances. Standard Costs are. Standard Cost Systems. Based on carefully predetermined amounts. Used for planning labor, material, and overhead requirements. The expected level of performance. Benchmarks for measuring performance.

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Chapter 9

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  1. Chapter 9

    Standard Costing and Variances
  2. Standard Costs are Standard Cost Systems Based on carefullypredetermined amounts. Used for planning labor, material,and overhead requirements. The expected levelof performance. Benchmarks formeasuring performance. In a standard cost system, all manufacturing costsare recorded at standard rather than actual amounts.
  3. Learning Objective 9-1 Describe the standard-setting process and explain how standard costs relate to budgets and variances.
  4. I recommend using attainablestandardsthat can be achieved with reasonableand efficient effort. Ideal versus Attainable Standards Should we useideal standards that require employees towork at 100 percent peak efficiency?
  5. Types of Standards
  6. The Standard Cost Card
  7. Learning Objective 9-2 Prepare a flexible budget and show how total costs change with sales volume.
  8. Master Budgets Versus Flexible Budgets
  9. Variance Analysis This variance is unfavorable because the actual costexceeds the standard cost. These variances are favorablebecause the actual costis less thanthe standard cost. Standard Amount DirectMaterial DirectLabor ManufacturingOverhead Type of Product Cost
  10. Variance Analysis
  11. Comparing Actual Results to the Master Budget Cold Stone Creamery’s master budget of $7,500 for ice cream was based on a sales forecast of 15,000 units ($0.50 per unit × 15,000 units). During the period, the amount spent for ice cream was $8,000, or $500 higher than the master budget. Did Cold Stone do a good job controlling ice cream costs?
  12. Comparing Actual Results to the Master Budget There are two possible reasons why spending exceeded the master budget: 1. Cold Stone may have spent more than $0.50 on ice cream for each unit produced. Cold Stone produced more than 15,000 units, requiring more ice cream than planned. Let’s prepare a flexible budget at 18,000 units and evaluate performance.
  13. Volume Variance versus Spending Variance
  14. Variable Cost Variances Spending Variance Actual Costs Actual Quantity (AQ) ×Actual Price (AP) Actual Quantity (AQ) ×Standard Price (SP) Flexible Budget Standard Quantity (SQ) ×Standard Price (SP) Price Variance Quantity Variance Total Spending Variance
  15. Learning Objective 9-3 Calculate and interpret the direct materials price and quantity variances.
  16. Direct Materials Variances Cold Stone’s Standard Cost Information for Ice Cream Cold Stone’s actual results for the period were: 18,000 units produced and sold. 200,000 ounces of ice cream purchased at a total cost of $8,000. Actual Price (AP) = $8,000 ÷ 200,000 ounces = $0.04 per ounce Actual Quantity (AQ) = 200,000 ounces Standard Price (SP) = $0.05 per ounce Standard Quantity (SQ) = 10 ounces per unit × 18,000 actual units = 180,000 ounces
  17. Direct Materials Variances Spending Variance (AQ) × (AP) 200,000 × $0.04 $8,000 (AQ) × (SP)200,000 × $0.05 $10,000 (SQ) × (SP) 180,000 × $0.05 $9,000 Price Variance $2,000F Quantity Variance $1,000U Spending Variance $1,000F
  18. Direct Materials Variances Materials Price Variance Materials Quantity Variance Purchasing Manager Production Manager The standard price is used to compute the quantity varianceso that the production manager is not held responsible forthe purchasing manager’s performance.
  19. Learning Objective 9-4 Calculate and interpret the direct labor rate and efficiency variances.
  20. Direct Labor Variances Spending Variance Actual Costs Actual Hours (AH) ×Actual Rate (AR) Actual Hours (AH) ×Standard Rate (SR) Flexible Budget Standard Hours(SH) ×Standard Rate (SR) Rate Variance Efficiency Variance Total Spending Variance
  21. Direct Labor Variances Cold Stone’s Standard Cost Information for Direct Labor Cold Stone’s actual results for the period were: 18,000 units produced and sold. Direct labor costs were $20,500 for 2,000 hours worked. Actual Rate (AR) = $20,500 ÷ 2,000 hours = $10.25 per hour Actual Hours (AH) = 2,000 hours Standard Rate (SR) = $10.00 per hour Standard Hours (SH) = 0.10 hours per unit × 18,000 actual units = 1,800 hours
  22. Direct Labor Variances Spending Variance (AH) × (AR) 2,000 × $10.25 $20,500 (AH) × (SR)2,000 × $10.00 $20,000 (SH) × (SR) 1,800 × $10.00 $18,000 Rate Variance $500U Efficiency Variance $2,000U Spending Variance $2,500U
  23. Mix of skill levelsassigned to work tasks. Level of employee motivation. Quality of production supervision. Quality of training provided to employees. Responsibility for Labor Variances Production managers areusually held accountablefor labor variancesbecause they caninfluence the: Production Manager
  24. Learning Objective 9-5 Calculate and interpret the variable overhead rate and efficiency variances.
  25. Variable Manufacturing Overhead Variances Spending Variance Actual Costs Actual Hours (AH) ×Actual Rate (AR) Actual Hours (AH) ×Standard Rate (SR) Flexible Budget Standard Hours(SH) ×Standard Rate (SR) Rate Variance Efficiency Variance Total Spending Variance
  26. Variable Manufacturing Overhead Variances Cold Stone’s Standard Cost Informationfor Variable Manufacturing Overhead Cold Stone’s actual results for the period were: 18,000 units produced and sold. Actual VOH costs were $1,800 for 2,000 direct labor hours. Actual Direct Labor Hours (AH) = 2,000 hours Standard Direct Labor Hours (SH) = 0.10 hours per unit × 18,000 units = 1,800 hours Actual Variable Overhead Rate (AR) = $1,800 ÷ 2,000 hours = $0.90 per hour Standard Variable Overhead Rate (SR) = 0.10 hours per unit × $1.00 per hour = $0.10 per unit
  27. Variable Manufacturing Overhead Variances Spending Variance (AH) × (AR) 2,000 × $0.90 $1,800 (AH) × (SR)2,000 × $1.00 $2,000 (SH) × (SR) 1,800 × $1.00 $1,800 Rate Variance $200F Efficiency Variance $200U Spending Variance $0
  28. Rate Variance Efficiency Variance Variable Manufacturing Overhead Variances Results from paying moreor less than expected foroverhead items and from excessive usage ofoverhead items. A function of the selected allocation measure (direct labor hours). It does not reflect overhead control.
  29. Summary of Spending Variances Variances are always calculated by comparing actual results to budgeted, or standard, results. Companies try to hold specific managers responsible for specific variances, while removing the effects of factors that are beyond managers’ control. The formulas for variances allow only one factor, such as price, quantity or volume to change, while holding everything else constant at either actual or standard values (depending on the type of variance). The driving factor for a variance always appears in parentheses in the formula, as well as in the name of the variance. For example, the formula for the direct materials price variance is AQ X (SP - AP). Try not to memorize rules or rely on the formulas to determine whether a variance is favorable or unfavorable; just think about it. For example, paying more for material, or using more materials to produce the same number of units is unfavorable.
  30. Learning Objective 9S-1 Calculate and interpret the fixed overhead spending and volume variances.
  31. Framework for Fixed Overhead Spending and Volume Variances
  32. Fixed Overhead Rate Based on Budgeted Volume Budgeted Fixed Overhead Rate BudgetedFixed Overhead Budgeted Volume = ÷ Cold Stone budgeted $6,000 for fixed manufacturing overhead for a budgeted volume of 15,000 units. Cold Stone’s budgetedfixed manufacturing overhead rate is:
  33. Fixed Manufacturing Overhead Variances Cold Stone’s Standard Cost Informationfor Fixed Manufacturing Overhead Cold Stone’s budget for fixed overhead was: 15,000 units to be produced and sold. Budgeted FOH costs were $6,000. Cold Stone’s actual results for the period were: 18,000 units produced and sold. Actual FOH costs were $6,300.
  34. Computing Fixed Overhead Spending and Volume Variances
  35. Fixed Manufacturing Overhead Spending Variance
  36. Fixed Overhead Rate Based on Practical Capacity Practical capacity is the number of units that could be produced under normal operating conditions. FixedOverhead Rate BudgetedFixed Overhead PracticalCapacity = ÷ Cold Stone budgeted $6,000 for fixed manufacturing overhead andhas a practical capacity of 20,000 units. Cold Stone’s fixed manufacturing overhead rate is:
  37. Fixed Manufacturing Overhead Spending and Capacity Variances Cold Stone’s Cost Informationfor Fixed Manufacturing Overhead Practical capacity is 20,000 units. Cold Stone’s budget for fixed overhead was: 15,000 units to be produced and sold. Budgeted FOH costs were $6,000. Cold Stone’s actual results for the period were: 18,000 units produced and sold. Actual FOH costs were $6,300.
  38. Fixed Overhead Capacity Variances The expected capacity variance is computed before the period begins. The unexpected capacity variance iscomputed after the period is over.
  39. Learning Objective 9S-2 Prepare journal entries to record standard costs and variances.
  40. Supplement 9B – Recording Standard Costs and Variances in a Standard Cost System Common Rules • The initial debit to an inventory account (Raw Materials, Work in Process, or Finished Goods) and the eventual debit to Cost of Goods Sold should be based on the standard cost, not the actual cost. • Cash, payables, or other accounts, such as accumulated depreciation or prepaid assets, should be credited for the actual cost incurred. • The difference between the standard cost (a debit) and the actual cost (a credit) should be recorded as the cost variance. • Unfavorable variances should appear as debit entries; favorable variances should appear as credit entries. • At the end of the accounting period, all the variances should be closed to the Cost of Goods Sold account to adjust the standard cost up or down to the actual cost.
  41. Recording Standard Costs for Cold Stone Creamery Standard Direct MaterialCost Standard Direct Laborand ManufacturingOverhead Costs No Work in Process or Finished Goods Inventory RawMaterialsInventory Cost of Goods Sold
  42. Direct Materials Costs Cold Stone’s Standard Cost Information for Direct Materials Cold Stone’s actual results for the period were: 200,000 ounces of ingredients were purchased on account for a total of $8,000,at an average actual price of $0.04 per ounce. All 200,000 ounces of ingredients were used to make and sell 18,000 units. The journal entry to record the direct materials purchase is:
  43. Direct Materials Costs Cold Stone’s Standard Cost Information for Direct Materials Cold Stone’s actual results for the period were: 200,000 ounces of ingredients were purchased on account for a total of $8,000,at an average actual price of $0.04 per ounce. All 200,000 ounces of ingredients were used to make and sell 18,000 units. The journal entry to record the direct materials useis:
  44. Direct Labor and Manufacturing Overhead Costs Cold Stone’s Standard Cost Information for Direct Labor Cold Stone’s actual results for the period were: 18,000 units produced and sold. Direct labor costs were $20,500 for 2,000 hours worked. The journal entry to record direct labor is:
  45. Direct Labor and Manufacturing Overhead Costs Standard Cost Information for Variable Manufacturing Overhead Cold Stone’s actual results for the period were: 18,000 units produced and sold. Actual VOH costs were $1,800 for 2,000 direct labor hours. The journal entry to record variable manufacturing overhead is:
  46. Direct Labor and Manufacturing Overhead Costs Cold Stone’s Standard Cost Information for Fixed Manufacturing Overhead Cold Stone’s budget for fixed overhead: 15,000 units to be produced and sold. Budgeted FOH costs were $6,000. Cold Stone’ actual results for the period: 18,000 units produced and sold. Actual FOH costs were $6,300. The journal entry to record fixed manufacturing overhead costs is:
  47. Cost of Goods Sold and Cost Variance Summary The cost of goods sold balance is $36,000 before closingthe variances accounts. By closing the varianceaccounts, we will increase cost of goods sold to $36,600.
  48. Cost of Goods Sold and Cost Variance Summary The entry to close the variance accounts to the Cost of Goods Sold is:
  49. End of Chapter 9
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