Standard Costing“Cow Cream” ACC 202 Daphne Sanchez Lois Andersson
Standard Costing • About: Who, What, When, Where, Why & How • Identifying • Cost Variance Computation • Materials Cost Variance • Labor Cost Variance • Overhead Cost Variance • Sales Variance
About Standard Costing Who: Can be used internally by all, though not always the preferred method. What: Preset costs for delivering a product/service under normal conditions. When: Establishing a budget.Where:Within the organization in every department.Why: It is especially useful when directed at controllable items, enabling top management to affect the actions of lower managers responsible for the company's revenue and cost.How: Used to base against Actual Costs.
Identifying Standard Costs • A comparison of standard costs to actual costs should help management identify unexpected differences. In order to accomplish this, a FixedBudget (aka Standard)must first be created. Managers will then be able to assess the variance between the standard costs and the actual costs. This is necessary in order to seek out explanations as to why actual cost varied from the standard.
Cost Variance Computations Cost Variance Computation- Simply stated, Cost Variance (CV) is the difference between Actual Cost (AC) and Standard Costs (SC). Fixed and Variable costs need to be identified at the beginning of the process. • Favorable: When compared to the budget, the actual cost or revenue contributes to a higher income; actual revenue is higher than budgeted revenue, or actual cost is lower than budgeted cost. • Unfavorable: When compared to the budget the actual cost or revenue contributes to a lower income; actual revenue is lower than budgeted revenue, or actual cost is higher than budgeted cost. AC = AQ x AP SC = SQ x SP CV = AC – SC
Calculations Direct Materials: $975,000/15,000 Units = $65.00 Direct Labors: $225,000/15,000 Units = $15.00 Machinery Repairs: $60,000/15,000 Units = $4.00 Utilities: $45,000/15,000 Units = $3.00 Packaging: $75,000/15,000 Units = $5.00 Shipping: $105,000/15,000 Units = $7.00 Total Variable Cost: $99.00 Contribution* Margin= $101.00 (*amount being contributed toward fixed costs) ($200.00/unit cost (less) total variable cost $99.00)
Cost Variance Computations Price Variances- difference between actual and budgeted revenue or costs caused by the difference between the actual price per unit and the budgeted price per unit. (PV)=(AQ x AP) - (AQ x SP) Quantity Variance- difference between actual and budgeted revenue or costs caused by the difference between the actual number of units and the budgeted number of units. (QV) = (AQ x SP) - ( SQ x SP)
Problem 28-2A (#2) Prepare flexible budgets (see Exhibit 28.2) for the company at sales volumes of 14,000 and 16,000 units.
Problem 28-2A (#3) The company’s business conditions are improving. One possible result is a sales volume of approximately 18,000 units. The company president is confident that this volume is within the relevant range of existing capacity. How much would operating income increase over the 2010 budgeted amount of $159,000 if this level is reached without increasing capacity?
Problem 28-2A (#4) An Unfavorable change in business is remotely possible; in this case, production and sales volume for 2010 could fall to 12,000 units. How much income (or loss) from operations would occur if sales volume falls to this level?
Material, Labor & Overhead Cost Variance Overhead Cost Variance- difference between the total overhead cost applied to products and the total overhead cost actually incurred. Applied manufacturing overhead (ApMO) = Direct labor hours x rate per hourActual manufacturing overhead AcMO) = fixed costs + variable costs Overhead Cost Variance= ApMO - AcMO
Journal entries A debit balance in a variance account is always unfavorable—it shows that the total of actual costs is higher than the total of the expected standard costs. In other words, your company's profit will be $50 less than planned unless you take some action.
Journal Entries cont’d A credit to the variance account indicates that the actual cost is less than the standard cost. A price variance account with a credit balance is always Favorable.
Standard Costing is user friendly • Ice cream parlor • Hair Stylist • Motorcycle Shops • Any manufacturing company • All individuals who want to budget
Connections • http://cowcream.weebly.com/