Cost Accounting Traditions and Innovations Barfield, Raiborn, Kinney

1. Chapter 10
Standard Costing
Cost Accounting
Traditions and Innovations
Barfield, Raiborn, Kinney

2. Learning Objectives (1 of 2)
• Explain why standard cost systems are used
• Describe how standards are set for material,
labor, and overhead
• List the documents that are associated with
standard cost systems
• Explain the information that those
documents provide
• Calculate and record material, labor, and
overhead variances

3. Learning Objectives (2 of 2)
• Explain how variance analysis can be used
for control and performance evaluation
• Contrast the traditional labor and overhead
elements to a single conversion element
• (Appendix) Explain how multiple material
and labor categories affect variances

4. Standard Cost Systems
• Manufacturing
• Service
• Not-for-Profit
• Record standard and actual costs
in the accounting records
Actual
Costs
Incurred

5. Standards
• Standard costs are budgeted costs to
– manufacture a single unit of product, or
– perform a single service
• To develop standards identify
– material and labor types, quantities, and prices
– overhead types and behavior

6. Material Standards
• Types, quantity, quality of materials used
– Product specifications, observation, inquiry
– Bill of Materials
– Balance cost, quality, and projected sales price
Standard
Material = Quantity * Unit Purchase Price
Cost

7. Labor Standards
• Types, quantity, cost of labor used
– Production, setup, cleanup, and rework
– Time and motion studies, industrial engineering
studies
– Operations Flow Document
– Include wages, taxes, and fringe benefits
Standard
Labor = Hours * Wage Rate
Cost

8. Overhead Standards
• Predetermined factory overhead application
rates
Standard Standard Direct Materials
Cost Standard Direct Labor
Card Manufacturing Overhead

9. Total Variance
Total actual cost incurred minus
total standard cost applied to output produced
Standard price of
standard
production
inputs
Actual price of
actual
production
inputs
Total Variance*
*Favorable or unfavorable

10. SP x SQ
AP x AQ
Total Variance
Total Variance
AP = actual price per unit of materials or hours of
labor
AQ = actual quantity of materials or hours of labor
SP = standard price per unit of materials or hours of
labor
SQ = standard quantity of materials or hours of labor
Inputs Outputs

11. Price Variance
AP x AQ SP x SQ
Total Variance
SP x AQ
Price
Variance
(AP - SP) x AQ*
*Favorable or unfavorable
What
was
paid
What should
have been
paid

12. Usage Variance
AP x AQ SP x SQ
Total Variance
SP x AQ
Usage
Variance
(AQ - SQ) x SP*
*Favorable or unfavorable
What should
have been
used for
level of output
What
was
used

13. Material Price Variance
AP x AQ SP x SQ
Total Variance
SP x AQ
MPV
(AP - SP) x AQ*
*Favorable or unfavorable
What
was
paid
What should
have been
paid

14. Material Price Variance
• Calculate Material Price Variance at
– point of purchase, or
– when materials used

15. Material Quantity Variance
AP x AQ SP x SQ
Total Variance
SP x AQ
MQV
(AQ - SQ) x SP*
*Favorable or unfavorable
What should
have been
used for
level of output
What
was
used

16. Labor Rate Variance
AP x AQ SP x SQ
Total Variance
SP x AQ
LRV
(AP - SP) x AQ*
*Favorable or unfavorable
What
was
paid
What should
have been
paid

17. Labor Efficiency Variance
AP x AQ SP x SQ
Total Variance
SP x AQ
LEV
(AQ - SQ) x SP*
*Favorable or unfavorable
What should
have been
used for
level of output
What
was
used

18. Overhead Rates
• Capacity Levels
– Theoretical capacity
– Practical capacity
– Normal capacity
– Expected capacity
• Flexible budgets
– Expected overhead costs at different activity levels

19. Overhead Variances
Variable Overhead
Actual variable overhead
is total of various
ledger accounts
SP = Predetermined
variable overhead rate
Fixed Overhead
Actual fixed overhead is
total of various ledger
accounts
SP = Predetermined
fixed overhead rate

20. Variable Overhead Variances
What should have been
used for level of output
For
actual
hours
used
VOH
Spending
Variance
VOH
Efficiency
Variance
Total VOH Variance
SP x SQ
SP x AQ
Actual
VOH
Budgeted
VOH
Applied
VOH
AP X AQ

21. VOH Spending Variance
• Caused by price differences
– managers have little control over prices
• Caused by shrinkage or waste
– managers should be held accountable

22. Fixed Overhead Variances
SP x SQ
Actual
FOH
Budgeted
FOH
Applied
FOH
FOH
Spending
Variance
FOH
Volume
Variance
Total FOH Variance
What should have been
used for level of output
Constant
Amount

23. FOH Spending Variance
• Calculate variance for each component
• Caused by price differences
• May reflect mismanagement of resources

24. FOH Volume Variance
• Measures capacity utilization
• Caused by producing at a level that differs
from the capacity level used to compute the
predetermined overhead rate
• Also called the noncontrollable variance

25. Alternative Overhead Variance
Approaches
• One variance
• Two variance
• Three variance
• Four variance

26. One Variance Approach
SP x SQ
Actual
OH
Standard
Cost of
OH
Total OH Variance

27. Two Variance Approach
SP x SQ
Actual
OH
Budgeted OH
based on
Standard
Quantity
Standard
Cost of
OH
Budget
Variance
Volume
Variance
Total OH Variance

28. Three Variance Approach
SP x SQ
Actual
OH
based on
Standard
Quantity
Standard
OH
Volume
Variance
Total OH Variance
Budgeted OH
based on
Actual Inputs
OH
Spending
Variance
OH
Efficiency
Variance

29. Four Variance Approach
SP x SQ
Actual
OH
based on
Standard
Quantity
Standard
OH
Volume
Variance
Total OH Variance
Budgeted OH
based on
Actual Inputs
VOH &
FOH
Spending
Variances
VOH
Efficiency
Variance

30. Standard Cost Journal Entries
• Variances recorded in accounting system
• Favorable variances
– Credits
– Represent savings in production costs
• Unfavorable variances
– Debits
– Represent excess production costs
• Inventories are recorded at standard costs

31. Purchase of Materials
(Point of Purchase Method)
Materials Accts Pay
Materials
Price
Variance
Debit - Unfavorable
Credit - Favorable
AP x AQ
purchased
SP x AQ
purchased
U F
At
Standard
Cost

32. Use of Materials
WIP Materials
Materials
Quantity
Variance
SP x AQ
used
SP x SQ
allowed
Debit - Unfavorable
Credit - Favorable
U F
At
Standard
Cost

33. Record Labor
Wages Pay
Labor
Efficiency
Variance
AP x AQ
WIP
SP x SQ
allowed
Labor Rate
Variance
Debit - Unfavorable
Credit - Favorable
At
Standard
Cost
U F U F

34. SP x SQ
Allowed
Apply Overhead
Throughout the Year
SP x SQ
Allowed
WIP FOH
VOH
SP x SQ
Allowed

35. Year-End Treatment for VOH
Enter a debit
or credit to
bring balance
to zero
VOH
Efficiency
Variance
VOH
Spending
Variance
Debit - Unfavorable
Credit - Favorable
VOH
Actual Applied
---------------

36. Year-End Treatment for FOH
FOH
Spending
Variance
Volume
Variance FOH
Actual Applied
-------------
Enter a debit
or credit to
bring balance
to zero
Debit - Unfavorable
Credit - Favorable

37. Year-End Treatment of Variances
Material Price Variance
• Raw Materials
• WIP
• Finished Goods
• Cost of Goods Sold
All other variances
• WIP
• Finished Goods
• Cost of Goods Sold
Immaterial - Adjust Cost of Goods Sold
Material - Prorate variances to

38. Why Use Standard Cost Systems
• Clerical Efficiency
• Motivation
• Planning
• Controlling - variance analysis
• Decision Making
• Performance Evaluation

39. Setting Standards
• Appropriateness
• Attainability
– Expected standards
– Practical standards
– Ideal standards

40. Trends in Standards
• Ideal Standards and Theoretical Capacity
• Adjusting standards
• Price variance on purchase versus usage
• Decline in direct labor content

41. Conversion Costs
• Combine direct labor and manufacturing
overhead
• Variances
– Spending variance for overhead
– Efficiency variances for machinery and
production costs
– Volume variances for production

42. Mix and Yield Variances
• Mix Variance measures effect of changing
the mix of materials or labor
• Yield Variance measures the difference
between actual and standard inputs for the
output achieved
• Mix Variance plus Yield Variance equals the
Quantity Variance

43. Material Mix and Yield Variances
AM x
AQ x
AP
AM x
AQ x
SP
SM x
AQ x
SP
SM x
SQ x
SP
Material
Price
Variance
Material
Mix
Variance
Material
Yield
Variance
What should have been
used for level of output
AM - Actual Mix
SM - Standard Mix

44. Labor Mix and Yield Variances
AM x
AH x
AR
AM x
AH x
SR
SM x
AH x
SR
SM x
SH x
SR
Labor
Rate
Variance
Labor
Mix
Variance
Labor
Yield
Variance
What should have been
used for level of output
M - Mix
H - Hours
R - Rate

45. Questions
• How are standards set for material, labor,
and overhead?
• How is variance analysis used for control
and performance evaluation?
• Why are labor and overhead elements
sometimes combined into a single
conversion element?