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Module 2_Std Costing & Variance Analysis(0)

Module 2 covers standard costs and variance analysis, defining standard costs as predetermined benchmarks for performance measurement in production. It discusses the uses, advantages, and limitations of standard cost systems, as well as types of standards and the process of variance analysis. Additionally, it outlines the causes of variances, responsibility for variances, and how to dispose of them based on their significance.

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raine.bautista19
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7 views

Module 2_Std Costing & Variance Analysis(0)

Module 2 covers standard costs and variance analysis, defining standard costs as predetermined benchmarks for performance measurement in production. It discusses the uses, advantages, and limitations of standard cost systems, as well as types of standards and the process of variance analysis. Additionally, it outlines the causes of variances, responsibility for variances, and how to dispose of them based on their significance.

Uploaded by

raine.bautista19
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Module 2: STANDARD COSTS & VARIANCE ANALYSIS

Basic Concepts:
Definition
 Standard is a measure of acceptable performance established by management as a guide in making decisions. It is a
benchmark or “norm” for measuring performance.
 Standard costs are predetermined or target unit cost of production which should be attained under efficient conditions
 Standard cost system is an accounting system which uses standard costs rather than actual costs to account for units as they
flow through the manufacturing processes.
Uses of Standard Costs (PIMPIMB)
1. Planning and controlling costs
2. Instrument of coordination
3. Measurement of performance
4. Price Setting
5. Inventory valuation
6. Motivating employees
7. Budget preparation
Standard Cost System.
A. Advantages of Standard Costs
 Standard costs serve as a key element in the application of management by exception, management by objectives and
responsibility accounting.
 Standard costs promote economy and efficiency among employees.
 The use of standard costs simplifies bookkeeping and costing procedures.
B. Limitations of Standard Costs
 Difficulty in determining which variances is material.
 Other useful information may not be noticed since attention is focused on variances.
 Subordinates may be tempted to cover-up unfavorable exceptions or not report them at all.
 Costly to implement.
C. Users of Standard Costs
Standard costs are used by manufacturing firms, service firms and non-profit organizations. Standard cost system may be
used in both job order and process costing systems.
Types of Standards
 Basic Standards are standards that are unchanged year after year.
 Ideal/Perfect/Theoretical Standards is the highest and optimum level of performance under perfect operating conditions.
 Currently Attainable/Normal Standards is the efficient level of performance that are attainable under expected operating
conditions.
Management by exception
It is the practice of giving attention only to those situations in which large variances occur, so that management may have
more time for more important problems of the business, not just routine supervision of subordinates.
Standard Setting:
To set standard costs, the following are its components:
1. Standard price or rate is the amount that should be paid for one unit of input factor.
2. Standard quantity is the amount of input factor that should be used to make a unit of product.
Note: both standards relate to the input factors: materials, direct labor and factory overhead.
Variance Analysis:
It is the DIFFERENCE between STANDARD and ACTUAL costs.
Actual costs > Standard Cost = Unfavorable variance or debit variance; added to COGS.
Actual costs<Standard Cost = Favorable variance or credit variance; deducted from COGS.

A. Direct Material Variances


AQ * AP = xx
Price Variance
AQ * SP = xx
Quantity Variance
SQ * SP = xx
B. Direct Labor Variances
AH * AR = xx
Rate Variance
AH * SR = xx
Efficiency Variance
SH * SR = xx
C. Factory Overhead Variances
 Two-way Analyses
Actual Overhead (AH * AR) xx
BASH (Budgeted Allowed for Standard Hours): Controllable Variance
Budgeted Fixed Overhead (NC * Std. FOH rate) xx
Variable Overhead (SH * Std. VOH rate) xx xx
Standard Overhead (SH * SR) xx Volume Variance

 Three-way Analyses
Actual Overhead (AH * AR) xx
BAAH (Budgeted Allowed for Actual Hours): Spending Variance
Budgeted Fixed Overhead (NC * Std. FOH rate) xx
Variable Overhead (AH * Std. VOH rate) xx xx
BASH (Budgeted Allowed for Standard Hours):
Budgeted Fixed Overhead (NC * Std. FOH rate) xx Efficiency Variance
Variable Overhead (SH * Std. VOH rate) xx xx
Standard Overhead (SH * SR) xx Volume Variance

 Four-way Analyses
Variable Overhead
AH * AR = xx
Spending Variance
AH * SR = xx
SH * SR = xx Efficiency Variance

Fixed Overhead
Actual Fixed Overhead xx Spending Variance
Budgeted Fixed Overhead (NC * Std. FOH rate) xx
Applied Fixed Overhead (SH * Std. FOH rate) xx Volume Variance

Causes of Variance
A. Material Price Variances
1. Fluctuations in market prices of materials.
2. Purchasing from distant suppliers, which result in additional costs.
3. Failure to take cash discounts.
4. Purchasing materials from substandard quality.
5. Purchase contract terms.
B. Material Quantity Variances
1. Waste and loss material in handling and processing.
2. Substitution of defective or non-standard materials.
3. Spoilage or production of excess scrap because of inexperienced workers or poor supervisors.
4. Lack of proper tools or machines.
5. Variation in yields from materials.
C. Direct Labor Rate Variances
1. Inexperienced workers hired
2. Change in labor rate particularly peak season.
3. Use of an employee having a wage classification other than that assumed when the standard for a job was set.
4. Use of a great number of higher paid employees in the group than anticipated.
D. Direct Labor Efficiency Variances
1. Good or poor training of workers.
2. Poor materials or faculty equipment.
3. Good or poor supervision and scheduling of work.
4. Experienced or lack of experience on the job.
5. Machine breakdowns.
E. Variable Overhead Variance
1. Increase in energy costs.
2. Waste in using supplies.
3. Avoidable machine breakdowns.
4. Lack of operators.
5. Wrong grade of indirect material and indirect labor.
F. Volume Variance
1. Poor production scheduling.
2. Unusual machine breakdowns.
3. Storms or strikes.
4. Fluctuations over time.
5. Decrease in customer demand.
6. Excess plant capacity.
7. Shortage of skilled workers.
Responsibility for Variances
The ultimate officer accountable for the production cost variances is the Chief Executive Officer (CEO).
Cost Variances Officer Responsible
Material Price Variance Purchasing Head
Material Quantity Variance Production Head
Labor Rate Variance HR Head/ Production Head
Labor Efficiency Variance Production Head
Variable OH Variance HR Head/ Production Head
Fixed OH Variance Production Head

Disposing Variances
 If the variance is INSIGNIFICANT, it should be close or charged to COGS.
 If the variance is SIGNIFICANT, it should be closed or charged proportionately to COGS, WIP and FG.

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