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Introduction to Accounting

Introduction to Accounting. Standard Costing Session 31 February 21,2002. Agenda for Today. Discuss problems assigned and other practice problems Outline approaches to future problems. Unit cost standards. Specification of unit cost standards: Direct material sp × sq

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Introduction to Accounting

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  1. Introduction to Accounting Standard Costing Session 31 February 21,2002 A&MIS 212

  2. Agenda for Today • Discuss problems assigned and other practice problems • Outline approaches to future problems. A&MIS 212

  3. Unit cost standards Specification of unit cost standards: Direct material sp × sq Direct labor sr × sh Variable OH sr × sq Fixed OH sr × sq Total unit std. cost A&MIS 212

  4. Unit costs incurred Characterization of actual costs: Direct material ap × aq Direct labor ar × ah Variable OH ar × aq Fixed OH ar × aq Total cost incurred per unit A&MIS 212

  5. Other terminology Total quantities: AQ represents total actual quantity AQU represents the total quantity actually used or produced. AQP represents the total quantity purchased A&MIS 212

  6. A budget view of variances Flexible Flexible Budget Budget Actual(AQ input)(SQ input) Cost sp × AQ sp × SQ incurred Actual cost - sp × AQ sp × AQ - sp × SQ A&MIS 212

  7. A Formula View of Variances Total variance = actual – standard cost Total variance = ap × AQ – sp× SQ Price variance = (ap – sp) × AQ Quantity variance = sp(AQ – SQ) A&MIS 212

  8. Algebra of Variances Price variance + quantity variance = total variance = [(ap – sp) × AQ] + [sp × (AQ – SQ)] = ap × AQ – sp × AQ + sp × AQ – sp × SQ = [ap × AQ] – [sp × SQ], the total variance A&MIS 212

  9. Exercise 10-1: Materialsp Cost per 15-gal. Container $115.00 Less 2% discount 2.30 Net cash cost $112.70 Add freight cost ($130/100) 1.30 Total cost per container $114.00 Divide by quarts per container* 60.00 Standard cost per quart $ 1.90 *15 gallons  4 quarts per gallon = 60 quarts A&MIS 212

  10. Exercise 10-1: Materialsq Content per bill of materials 7.6 qts. Allowance for evaporation and spoilage (7.6 qts./0.95 = 8 qts.) 0.4 Total quantity per bottle 8.0 qts. Allowance for rejected bottles (8.0 qts./40 saleable bottles) 0.2 Standard quantity per bottle 8.2 qts. A&MIS 212

  11. Standard Cost of Materials Standard Standard Std. Cost Item Quantity Price Per Bottle Echol 8.2 qts. $1.90/qt. $15.58 A&MIS 212

  12. E10-3: Quantities • AQ (DM) = 20,000 lbs. • AQ (output) = 4,000 units • SQ (DM) = 4,000 units  4.6 lbs./unit = 18,400 lbs. • SQ (DL) = 4,000 units  0.2 hrs.*/unit = 800 labor hours A&MIS 212

  13. E10-3: Formula Method - DM Materials price variance = AQ (ap – sp) MPV = 20,000 lbs. ($2.35 – $2.50 per lb.) = - $3,000 F Materials quantity variance = sp (AQ – SQ) MQV = $2.50/lb. (20,000 lbs. – 18,400 lbs.) = $4,000 U Total variance = - $3,000 + $4,000 = $1,000 U A&MIS 212

  14. E10-3: Flexible Budget Method Flexible Flexible Budget Budget Actual (AQ input)(SQ input) Cost incurredsp × AQsp × SQ 20,000 lbs. 20,000 lbs. 18,400 lbs. @ $2.35 = @ $2.50 = @ $2.50 = $47,000 $50,000 $46,000 -$3,000 F$4,000 U Price variance Quantity variance A&MIS 212

  15. E10-3: Formula Method - DL Labor rate variance = AQ (ar– sr) LRV = 750 hrs. ($13.90 – $12.00 per hr.) = $1,425 U Labor quantity variance = sr (AQ – SQ) LQV= $12.00/hr. (750 – 800 hrs.) = - $600 F Total variance = $1,425 – $600 = $825 U A&MIS 212

  16. Flexible Budget Method - DL Flexible Flexible Budget Budget Actual (AQ input)(SQ input) Cost incurredsp × AQsp × SQ 750 hrs. 750 hrs. 800 hrs. @ $13.90 = @ $12.00 = @ $12.00 = $10,425 $9,000 $9,600 $1,425 U - $600 F Price variance Quantity variance A&MIS 212

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