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Chapter 16

Chapter 16. Standard Costing, Variance Analysis, and Kaizen Costing. STANDARD COST a budget for the production of one unit of product or service. ACTUAL COST used in the production of the product or service. Using Standard-Costing Systems for Control. COST VARIANCE the difference

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Chapter 16

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  1. Chapter 16 Standard Costing, Variance Analysis, and Kaizen Costing

  2. STANDARD COST a budget for the production of one unit of product or service ACTUAL COST used in the production of the product or service Using Standard-Costing Systems for Control COST VARIANCE the difference between the actual cost and the standard cost

  3. Take the time to investigate only significant cost variances Management by Exception What is significant? Depends on the Size of the Organization Depends on the Production Process Depends on the Type of the Organization

  4. Perfection Vs. Practical Standards PERFECTION STANDARDS PRACTICAL OR ATTAINABLE STANDARDS Can only be attained under near perfect conditions Tight as practical, but still are expected to be attained • Peak efficiency • Lowest possible input prices • best-quality material • no disruption in • production • Occasional machine • breakdowns • Normal amounts • of raw material • waste

  5. Use Of Standards Standards can be used by service firms, nonprofit organizations, and governmental units COST BENEFITS Implementing and maintaining cost standards can be time-consuming, labor-intensive, and expensive.

  6. Cost Variance Analysis DIRECT MATERIAL STANDARDS The total amount of material normally required to produce a finished product including allowances for normal waste or efficiency Koala Camp Gear Company The total delivered cost, after subtracting any purchase discounts

  7. Cost Variance Analysis DIRECT LABOR STANDARDS Koala Camp Gear Company

  8. Standard Costs Given Actual Output The standard cost for the direct-material and direct-labor inputs is based upon Koala’s actual output of 3,000 tents They should incur a cost of $396,000 ($288,000 + $108,000) to make 3,000 tents Koala Camp Gear Company

  9. Actual quantity Actual price Actual quantity Standard price Standard quantity Standard price x x x Analysis Of Material Variances 40,000 sq. meters purchased $8.15 per sq. meter 40,000 sq. meters purchased $8.00 per sq. meter 36,000 sq. meters allowed $8.00 per sq. meter x x x $326,000 $320,000 $288,000 $6,000U Direct-material price variance 36,400 sq. meters used $8.00 per sq. meter Direct- material quantity variance $291,200 $3,200U

  10. Direct-Material Variances What caused Koala to spend more than the anticipated amount on direct material? First, the company purchased fabric at a higher price ($8.15 per square meter) than the standard price ($8.00 per square meter). Direct-material price variance = (PQ X AP) - (PQ X SP) = PQ(AP - SP) where: PQ = Quantity purchased AP = Actual price SP = Standard price Koala’s direct- material price variance for June is computed as follows: Direct-material price variance = PQ(AP - SP) = 40,000 ($8.15 - $8.00) = $6,000 unfavorable

  11. Direct-Material Variances What caused Koala to spend more than the anticipated amount on direct material? Second, the company used more fabric than the standard price. (36,400 sq. meters actually used, instead of the standard amount of 36,000 sq. meters) Direct-material quantity variance = (AQ X SP) - (SQ X SP) = SQ(AQ - SQ) where: AQ = Actual quantity used SQ = Standard quantity allowed Koala’s direct- material quantity variance for June is computed as follows: Direct-material quantity variance = SP(AQ - SQ) = $8.00(36,400 - 36,000) =$3,200 unfavorable

  12. Analysis of Direct-Labor Variances Actual Labor Cost Standard Labor Cost Actual hours Actual rate Actual hours Standard price Standard rate Standard rate X X X 5,900 hours used $19 per hour 5,900 hours used $18 per hour 6,000 hours allowed $18 per hour X X X $112,100 $106,200 $108,000 $5,900 Unfavorable $1,800 Favorable Direct-labor rate variance Direct-labor efficiency variance $4,100 Unfavorable Direct-labor variance

  13. Direct-Labor Variances What caused Koala to spend more than the anticipated amount on direct labor? First, the company incurred a cost of $19 per hour for direct labor instead of the standard amount of $18 per hour Direct-labor rate variance = (AH X AR) - (AH X SR) = AH(AR - SR) where: AH = Actual hours used AR = Actual rate per hour SR = Standard rate per hour Koala’s direct-labor rate variance for June is computed as follows: Direct-labor rate variance = AH(AR - SR) = 5,900 ($19 - $18) =$5,900 unfavorable

  14. Direct-Labor Variances What caused Koala to spend more than the anticipated amount on direct labor? Koala used only 5,900 hours of direct labor, which is < standard quantity of 6,000 hours, given actual output of 3,000 tents. The increased efficiency does not fully offset the unexpectedly high wage rate. Direct-labor efficiency variance = (AH X SR) - (SH X SR) = SR(AH - SH) where: AH = Actual hours used SH = Standard hours allowed Koala’s direct - labor efficiency variance for June is computed as follows: Direct - labor efficiency variance = SR(AH - SH) = $18 (5,900 - 6,000) = $1,800 favorable

  15. Multiple Types Of Direct Material Or Direct Labor When there are several types of direct material or direct labor, price and quantity variances are computed for each type, and then added to obtain a total price variance and a total quality variance

  16. Additional Issues Controllability A manager is more likely to investigate a variance that is controllable by someone in the organization than one that is not Favorable Variances It is as important to investigate significant favorable variances as well as significant unfavorable variances Cost and Benefits of Investigation The decision whether to investigate a variance is a cost - benefit decision

  17. Behavioral Effects Of Standard Costing Standard costs, budgets, and variances are used to evaluate the performance of individuals and departments They can profoundly influence behavior when they are used to determine salary increases, bonuses, and promotions

  18. Which Managers Generally Influence Cost Variances? Direct-material price variance The purchasing manager Get the best prices available for purchased goods and services through skillful purchasing practices Direct-material quantity variance The production supervisor Skillful supervision and motivation of production employees, coupled with the careful use and handling of materials, contribute to minimal waste Direct-labor rate variance The production supervisor Generally results from using a different mix of employees than that anticipated when the standard were set Direct- labor efficiency variance The production supervisor Motivating employees toward production goals and effective work schedules improves efficiency

  19. Disposition Of Variances Cost of Goods Sold Variances are temporary accounts, like revenue and expense accounts, and they are closed out at the end of the accounting period. Unfavorable variances represent costs of operating inefficiently, relative to the standards, and thus cause the Cost of Goods Sold to be higher Favorable variances represent costs of operating efficiently, relative to the standards, and thus cause the Cost of Goods Sold to be lower

  20. Cost per product unit Current year cost base Actual cost reduction achieved Kaizen goal: cost reduction rate Actual cost performance of the current year Cost base for next year Time 12/31/x0 12/31/x1 Kaizen Costing KAIZEN COSTING is the process of cost reduction during the manufacturing phase of a product. Improvement is the goal and responsibility of each worker.

  21. Chapter 17 Flexible Budgets, Overhead Cost Management, and Activity-Based Budgeting

  22. What Are Flexible Overhead Budgets? A flexible budget is valid for a range of activity A static budget is based on a particular planned level of activity This range of activity is the relevant range A flexible overhead budget is defined as a detailed plan for controlling overhead cost valid in the firm’s relevant range of activity

  23. 彈性預算 V.S. 靜態預算 • 彈性預算不是只以一個作業水準為基礎，而係在公司作業的攸關範圍內，估計不同產量下的預算，進而有效控制製造費用的詳細計畫。 • 靜態預算則是以特定的預計作業水準為基礎來編製製造費用預算。

  24. Static Budget Versus Flexible Budget Based on planned June production of 4,000 tents, at 1.5 machine hours per tent. We cannot tell from this budget what it would cost to make 3,000 tents. Based on only ONE anticipated activity level Includes several possible activity levels

  25. Advantages Of Flexible Budgets Actual Electricity Cost Budgeted Electricity Cost (static budget) Cost Variance $1,050 $1,200 $150 Favorable The manager is comparing the electricity cost incurred at the ACTUAL activity level (3,000 tents) with the budgeted electricity cost at the PLANNED activity level (4,000 tents). These activity levels are different, therefore we would expect the electricity cost to be different

  26. Advantages Of Flexible Budgets Actual Electricity Cost Budgeted Electricity Cost (flexible budget) Cost Variance $1,050 $900 $150 Unfavorable The manager is comparing the electricity cost incurred at the ACTUAL activity level, 3,000 tents with the budgeted electricity cost at the ACTUALactivity level, (3,000 tents x 1.5 machine hours) = 4,500 machine hours Electrical cost was greater than it should have been, given the actual level of output

  27. . Formula Flexible Budget EXAMPLE Assume that the company needs flexible budget numbers for three activity levels: 4,500 hours, 6,000 hours, and 7,500 hours. Also, assume that the Predetermined Budgeted Variable-Overhead Cost per Activity Unit is $6 per hour. Budgeted Fixed-Overhead Cost for the month is $30,000. If you recall, this is similar to the Predetermined Cost-Driver Rate discussed in Chapter 4. Flexible Budget?

  28. Formula Flexible Budget The flexed total budgeted monthly overhead for each activity level can now be used effectively in planning and variance analysis.

  29. Overhead Cost Variances Koala manufactured 3,000 tree line tents X 1.5 machine hours per tent = standard allowed 4,500 machine hours For standard allowed 4,500 machine hours the budget overhead (from Exhibit 17-3) for June = Variable overhead $27,000 Fixed overhead $30,000 From the cost accounting records, the actual overhead for June = Variable overhead $30,480 Fixed overhead $32,500 $62,980 The total variable overhead variance for June = Actual variable overhead $30,480 Budget variable overhead $27,000 $ 3,480 U Actual machine hours for June = 4,800

  30. 4,800 machine hours ? $6.35 per machine hour ? 4,800 machine hours ? $6.00 per machine hour ? $30,480 $28,800 $1,680 Unfavorable Variable-overhead spending variance Variable Overhead Variances The VARIABLE-OVERHEAD SPENDING VARIANCE is the difference between the actual variable overhead cost and the product of the standard variable -overhead rate and the actual hours of an activity base (or cost driver) Actual variable overhead Actual machine hours × the standard rate Actual machine hours (AH) Actual rate (AVR) Actual machine hours (AH) Standard rate (SVR)

  31. 4,800 machine hours $6.00 per machine hour 4,500 machine hours $6.00 per machine hour ? ? ? ? $27,000 $28,800 $1,800 Unfavorable Variable-overhead efficiency variance Variable Overhead Variances The VARIABLE-OVERHEAD EFFICIENCY VARIANCE is the difference between the actual and the standard hours of an activity base (or cost driver) multiplied by the standard variable overhead rate Actual machine hours times the standard rate Flexible budget: variable overhead Actual machine hours (AH) Standard rate (SVR) Standard allowed machine hours (SH) Standard rate (SVR)

  32. 4,500 machine hours ? $6.00 per machine hour ? 4,500 machine hours ? $6.00 per machine hour ? $27,000 $27,000 No difference Variable Overhead Variances The flexible budget amount for variable overhead $27,000 is the amount that will be applied to Work-in-Process for product-costing purposes Flexible budget: variable overhead Variable overhead applied to work in process Standard allowed machine hours (SH) Standard rate (SVR) Standard allowed machine hours (SH) Standard rate (SVR)

  33. How To Interpret The Variable Overhead Variances Efficiency variance Spending variance The actual labor rate per hour differs from the standard rate ? The unfavorable variance resulting from using more machine hours than the standard quantity, given actual output An unfavorable variance means that the total actual cost of variable overhead is > expected, after adjusting for the actual quantity of machine hours used The variable overhead efficiency variance has nothing to do with efficient or inefficient use of variable overhead items The spending variance is the real control variance for variable overhead

  34. VOH Efficiency Variance • VOH efficiency variance has nothing to do with efficient or inefficient usage of electricity, indirect material, and other VOH items. This variance simply reflects an adjustment in the cost-management analyst’s expectation about total VOH cost because the company used more than the standard quantity of machine hours.

  35. Fixed-overhead budget variance Actual Fixed overhead Budgeted fixed overhead = - Fixed-overhead budget variance Actual Fixed overhead = $32,500 Budgeted fixed overhead = $30,000 = - Fixed Overhead Budget Variance The FIXED-OVERHEAD BUDGET VARIANCE is the difference between actual fixed overhead and budgeted fixed overhead Unfavorable variance of $2,500, because we spent more than budgeted

  36. Fixed-overhead volume variance Budgeted fixed overhead Applied fixed overhead = - Budgeted fixed overhead = $30,000 Applied fixed overhead = $22,500 Fixed-overhead volume variance - = Fixed Overhead Volume Variance The FIXED-OVERHEAD VOLUME VARIANCE is the difference between budgeted fixed overhead and applied fixed overhead. Assume that the predetermined fixed overhead per machine hour = $5 and that it is based on 4,500 machine hours. Variance = $7,500 U, because we produced less than budgeted.

  37. Managerial Interpretation Of Fixed-Overhead Variances Budget Variance Volume Variance Reconciles the two different purposes of the cost accounting system The real control variance for fixed overhead because it compares actual expenditures with budgeted fixed overhead costs For cost-management purposes, the cost- accounting system recognizes that fixed overhead does not change as production activity varies For product-costing purposes, budgeted fixed overhead is divided by planned activity to obtain a predetermined or standard fixed-overhead rate 係因『實際生產水準』與『擬定預算固定費用率之基準產能水準』不同

  38. 4,500 machine hrs $5.00 per machine hr X $22,500 Fixed Overhead Budget And Volume Variances (1) Actual fixed O/H (2) Budgeted fixed O/H (3) Fixed overhead applied to work in process Standard allowed machine hours Standard fixed overhead rate X $32,500 $30,000 Fixed-overhead budget variance = $2,500 U Fixed-overhead volume variance = $7,500 U

  39. Applied fixed overhead ($5.00 per standard allowed machine hour) Fixed overhead $30,000 Budgeted fixed overhead Volume variance $7,500 $22,500 Applied fixed overhead in June Machine hours 4,500 Standard allowed hours, given actual output 6,000 Planned monthly activity 0 Budgeted Versus Applied Fixed Overhead

  40. 4-, 3-, & 2-way Variance Analysis Variable- overhead spending variance Fixed- overhead budget variance Variable- overhead efficiency variance Fixed- overhead volume variance Four-way analysis $1,680 U $2,500 U $1,800 U $7,500 U Combined spending variance Three-way analysis $4,180 U $1,800 U $7,500 U Combined budget variance Two-way analysis $5,980 U $7,500 U $62,980 actual overhead - overhead applied to WIP, 49,500 = $13,480 Underapplied overhead

  41. Actual $62,980 $49,500 Applied Debit: Cost of goods sold $13,480 Debit: Work-in-process inventory Applied overhead: $11.00 (predetermined overhead rate) X 4,500 (standard allowed hours $13,480 Credit: Indirect-material inventory Wages payable Utilities payable Accumulated depreciation Prepaid insurance and property taxes Engineering salaries payable $49,500 19,350 32,610 2,170 1,300 1,050 6,500 Using Standard Costs InProduct Costing Manufacturing Overhead

  42. Activity-Based Flexible Budget An activity-based flexible budget may provide more useful cost management information than a conventional flexible budget The traditional budget Activity-based flexible budget Costs are categorized as variable based on volume measures Costs are categorized as variable based on several cost drivers Cost that may seem fixed with respect to a single volume-based cost driver may be variable with respect to other non-volume related cost drivers Machine hours Direct labor hours

  43. Homework • Backflush costing • Exhibit 17-20

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