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Jzanzig acc 512 chapter 11

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• 1. Chapter 11 Standard Costs and Variance Analysis
• 2. Presentation Outline
• Types of Standards
• Variance Calculations
• Investigation of Standard Cost Variances
• 3. I. Types of Standards
• Ideal Standards
• Can only be attained under the best circumstances. No allowance for machine breakdowns or work interruptions
• Attainable Standards
• Tight but attainable standards. Allows for machine downtime and employee rest periods.
• 4. II. Variance Calculations
• Material Price Variance
• Material Price Variance Journal Entry
• Material Quantity Variance
• Material Quantity Variance Journal Entry
• Labor Rate Variance
• Labor Efficiency Variance
• Journal Entry for Direct Labor Variances
• 5. A. Material Price Variance MPV = (AP – SP) AQ where: MPV = Material price variance AQ = Actual quantity of materials purchased AP = Actual unit price of materials SP = Standard unit price of materials Decision Rule: AP > SP Unfavorable AP < SP Favorable
• 6. B. Material Price Variance Journal Entry (Recorded at Time of Purchase) Raw Materials (AQ x SP) XXX Materials Price Variance [(AP-SP)AQ] XXX or XXX Accounts Payable (AQ x AP) XXX
• 7. C. Material Quantity Variance MQV = (AQ – SQ) SP where: MQV = Material quantity variance SP = Standard unit price of materials AQ = Actual quantity of materials put into production SQ = Standard quantity allowed for the output produced Decision Rule: AQ > SQ Unfavorable AQ < SQ Favorable
• 8. D. Material Quantity Variance Journal Entry (Recorded when materials are put into production) Work in Process (SQ x SP) XXX Materials Quantity Variance [(AQ-SQ)SP] XXX or XXX Raw Materials (AQ x SP) XXX
• 9. E. Labor Rate Variance LRV = (AR – SR) AH where: LRV = Labor rate variance AH = Actual labor hours worked AR = Actual labor rate SR = Standard labor rate Decision Rule: AR > SR Unfavorable AR < SR Favorable
• 10. F. Labor Efficiency Variance LEV = (AH – SH) SR where: LEV = Labor efficiency variance SR = Standard labor rate AH = Actual labor hours worked SH = Standard hours allowed for the output produced Decision Rule: AH > SH Unfavorable AH < SH Favorable
• 11. G. Journal Entry for Direct Labor Variances Work in Process (SH x SR) XXX Labor Rate Variance [(AR-SR)AH] XXX or XXX Labor Efficiency Variance [(AH-SH)SR] XXX or XXX Wages Payable (AH x AR) XXX
• 12. H. Controllable Overhead Variance Flexible budget level of overhead for the actual level of production Decision Rule: Actual > Flexible budget Unfavorable Actual < Flexible budget Favorable Actual overhead Controllable overhead variance = -
• 13. I. Overhead Volume Variance Overhead applied to production using standard overhead rate Decision Rule: Flexible budget > O/H applied Unfavorable Flexible budget < O/H applied Favorable Flexible budget level of overhead for actual level of production Overhead volume variance = -
• 14. III. Investigation of Standard Cost Variances
• Management by Exception
• “Favorable” Variances May be Unfavorable
• Process Improvements and “Unfavorable Variances
• Variance Evaluation and Excess Production
• Variance Analysis and Performance Evaluation
• 15. A. Management by Exception
• Most managers take a “management by exception” approach and investigate only those variances that they deem to be exceptional.
• The absolute dollar value of the variance or the variance as a percent of actual or standard cost is often used as the criterion.
• 16. B. “Favorable” Variances May be Unfavorable
• The fact that a variance is favorable does not mean that it should not be investigated. Indeed, a favorable variance may be indicative of poor management decisions. For example:
• A favorable material price variance may be arisen from purchasing goods of inadequate quality for production.
• A favorable overhead volume variance could mean that excessive inventory has been produced beyond customer demand.
• 17. C. Process Improvements and Unfavorable Variances
• Production workers suggest a change in the manufacturing process so that the standard for labor time per unit is reduced from 4 to 3 hours. If the company does not need to increase production and keeps the same number of workers, an unfavorable labor efficiency variance will arise.
• (See Illustration on page 397)
• 18. D. Variance Evaluation and Excess Production
• The Theory of Constraints tells us that production departments in front of bottleneck departments should not produce excess work-in-process inventory.
• Evaluation in terms of standard cost variances could result in this dysfunctional behavior.
• For example, rather than lay off workers, a department with a temporary demand slump may produce excess units simply to avoid an unfavorable labor efficiency variance.
• 19. E. Variance Analysis and Performance Evaluation
• Responsibility accounting states that managers should only be held accountable for variance that they can control.
• Unfavorable variances do not imply poor performance. For example, an unfavorable labor efficiency variance could result from the purchase of inferior goods (which by the way resulted in a favorable material price variance).
• 20. Summary
• Ideal vs. Attainable Standards
• Material Variances
• Labor Variances