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Chapter 10 - Standard costing and analysis of direct costs. After completing this chapter, you should be able to: Describe the elements of a cost control system, describe two ways to set cost standards and distinguish between perfection and practical standards, compute and interpret the direct-material price and quantity variances and the direct-labor rate and efficiency variances,...
Chapter 10 Standard Costing and Analysis of Direct Costs Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education McGrawHill/Irwin Managing Costs Standard cost Actual cost Comparison between standard and actual performance level Cost variance 102 Perfection versus Practical Standards: A Behavioral Issue Should we use practical standards or perfection standards? Practical standards should be set at levels that are currently attainable with reasonable and efficient effort 103 Perfection versus Practical Standards: A Behavioral Issue I agree Perfection standards are unattainable and therefore discouraging to most employees 104 Cost Variance Analysis Standard Cost Variances Price Variance Quantity Variance The difference between the actual price and the standard price The difference between the actual quantity and the standard quantity 105 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance Materials price- SP) variance AQ(AP Labor rate variance AQ =Variable Actual overhead Quantity AP =spending Actual Price variance Standard Quantity × Standard Price Quantity Variance Materials quantity variance SP(AQ - SQ) Labor efficiency variance SP = Standard Price Variable overhead SQ = Standard Quantity efficiency variance 106 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance Standard Quantity × Standard Price Quantity Variance Standard price is the amount that should have been paid for the resources acquired 107 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance Standard Quantity × Standard Price Quantity Variance Standard quantity is the quantity that should have been used 108 Significance of Cost Variances Size of variance Dollar amount Percentage of standard What clues help me to determine the variances that I should investigate? Recurring variances Trends Controllability Favorable variances Costs and benefits of investigation 109 Behavioral Impact of Standard Costing If I buy cheaper materials, my directmaterials expenses will be lower than what is budgeted Then I’ll get my bonus But we may lose customers because of lower quality 1010 Interaction among Variances I am not responsible for the unfavorable labor efficiency variance! You purchased cheap material, so it took more time to process it You used too much time because of poorly trained workers and poor supervision 1011 Standard Costs and Product Costing Standard Standard material material and and labor labor costs costs are are entered entered into into Work-in-Process Work-in-Process inventory inventory instead instead of of actual actual costs costs Standard Standard cost cost variances variances are are closed closed directly directly to to Cost Cost of of Goods Goods Sold Sold 1012 Advantages of Standard Costing Sensible Cost Comparisons Performance Evaluation Management by Exception Advantages Employee Motivation Stable Product Costs 1013 Criticisms of Standard Costing Too aggregate, too late Too much focus on direct-labor Disadvantages Shorter life cycles Not specific Stable production required Narrow definition Focus on cost minimization 1014 Use of Standard Costs for Product Costing Accounts Payable Raw-material Inventory Actual quantity at standard cost Actual quantity at actual cost Direct-Material Price Variance Unfavorable variance Favorable variance 1015 Use of Standard Costs for Product Costing Raw-material Inventory Work-in-Process Inventory Actual quantity at standard cost Standard quantity at standard price Direct-Material Quantity Variance Unfavorable variance Favorable variance 1016 Use of Standard Costs for Product Costing Work-in-Process Inventory Wages Payable Standard quantity at standard price Actual quantity at actual cost Direct-Labor Rate Variance Unfavorable variance Favorable variance Direct-Labor Efficiency Variance Unfavorable variance Favorable variance 1017 Use of Standard Costs for Product Costing Cost of Goods Sold Unfavorable variance Favorable variance 1018 ... Costing Raw-material Inventory Work -in- Process Inventory Actual quantity at standard cost Standard quantity at standard price Direct-Material Quantity Variance Unfavorable variance Favorable variance... Payable Raw-material Inventory Actual quantity at standard cost Actual quantity at actual cost Direct-Material Price Variance Unfavorable variance Favorable variance 10? ?15 Use of Standard Costs... × Standard Price Price Variance Materials price- SP) variance AQ(AP Labor rate variance AQ =Variable Actual overhead Quantity AP =spending Actual Price variance Standard Quantity × Standard Price