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Module 10 Standard Costs

Standards are performance goals used to evaluate and control operations in service, merchandising, and manufacturing businesses. Manufacturers use standard costs for direct materials, direct labor, and factory overhead under a standard cost system. Actual costs are compared to standards, and only variances or exceptions are reported. Variance analysis examines differences between actual and standard costs through direct materials, direct labor, and factory overhead variances. This helps management control costs and motivate employees.

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82 views

Module 10 Standard Costs

Standards are performance goals used to evaluate and control operations in service, merchandising, and manufacturing businesses. Manufacturers use standard costs for direct materials, direct labor, and factory overhead under a standard cost system. Actual costs are compared to standards, and only variances or exceptions are reported. Variance analysis examines differences between actual and standard costs through direct materials, direct labor, and factory overhead variances. This helps management control costs and motivate employees.

Uploaded by

i_kostadinovic
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Using Variances

under Standard
Cost System
ACG 2071
Module 10
Chapter 22
Fall 2007

Standards

Are performance goals.


Service, merchandising, and manufacturing
businesses may all use standards to evaluate and
control operations.
Manufacturers normally use standard costs for
each of the three manufacturing costs

Direct materials
Direct labor
Factory overhead

Standard Cost Systems

Accounting systems that use standards for these


costs are called standard cost systems.

Management determines how much a product should


cost Standard Cost
How much it does cost Actual Cost
The causes of any differences Variances
When actual costs are compared with standard costs,
only the exceptions or variances are reported for cost
control. Called Principle of Exceptions.
Standard costs assists management in controlling costs
and in motivating employees to focus on costs.

Types of Standards
Theoretical or ideal standards achieved
only under perfect conditions
Currently attainable or normal standards
attained with reasonable effort

Budgetary Performance
Evaluation

When using standard cost system, direct


materials, direct labor, and factory
overhead are separated into two
components

A price standard
A quantity standard

Example

Assume that Halycon Balloons produced and sold 5,000 hot air balloons.
It incurred direct material costs of $40,150, direct labor costs of
$38,500, and factory overhead costs of $22,400. The standard costs for
the company are listed below:

Manufacturing
Costs

Standard Price

Standard
Quantity per
unit

Standard
Cost per
Unit

Direct materials

$5.00 per yard

1.5 yards

$7.50

Direct labor

$9.00 per hour

0.80 hour per unit

$7.20

Factory overhead

$6.00

0.80 hour per unit

$4.80

Total standard cost


per unit

$19.50

Budget Performance Report


Manufacturing
Costs

Actual Costs

Standard
Cost Variance
Costs at Actual (Favorable)
Volume
Unfavorable

Direct materials

$40,150

$37,500

$2,650

Direct labor

$38,500

$36,000

$2,500

Factory
overhead

$22,400

$24,000

($1,600)

$101, 050

$97,500

$3,550

Total standard
cost per unit

Budget Performance Report


Favorable cost variance occurs when the
actual cost is less than the standard cost
Unfavorable variance occurs when the
actual cost is greater than the standard
cost

Variance Analysis

Types of variances

Direct Materials
Direct Labor
Factory Overhead

Direct Materials Variance


Price variance =
(Actual price Standard Price) X Actual Quantity
Quantity variance =
(Actual Quantity Standard Quantity) X Actual Price
Total Direct Materials Variance =
Quantity Variance + Price Variance

Example

Material used in the production of Z


Cleaner has a standard cost of $3 per lb.
and standard use of 10,000 lbs. Actual
records show 15,000 lbs were used with
an actual cost of $2.50 per lb. Compute
the direct material variances.

Example
Price Variance
= (Actual Price Standard Price) X Actual Quantity
= ($2.50 $3) X 15,000 lbs
= -$0.50 X 15,000 lbs
= -$7,500 favorable
Quantity Variance =
(Actual Quantity Standard Quantity) X Standard Price
= (15,000 lbs 10,000 lbs) X $3.00
= 5,000 lbs x $3.00
= $15,000 Unfavorable
Total direct materials variance =
Quantity variance + Price variance
= $15, 000 + (-$7,500)
= $7,500 Unfavorable

Direct Labor Variance


Rate variance =
(Actual Rate Standard Rate) X Actual Hours
Time variance = (
Actual Hours Standard Hours) X Actual Rate
Total Direct Labor Variance =
Time Variance + Rate Variance

Example

Example 4: Factory records show that


each product produced requires 3 direct
labor hours. Production during the period
consisted of 10,000 units with 29,500
hours of labor used. Labor has a standard
cost of $10 per hour and actual cost was
$11 per hour. Compute the direct labor
variances.

Example
Rate Variance =
(Actual Rate Standard Rate) X Actual hours
= ($11 - $10) X 29,500 hours
= $29,500 Unfavorable

Example
Time Variance =
(Actual hrs Standard hrs) X Standard rate
= [29,500 hrs ( 3 x 10,000)] x $10
= -500 hours x $10
= -$5,000 Favorable

Example
Total Direct labor variance =
Rate variance + Time variance
= $29,500 + (-$5,000)
=

$24,500 Unfavorable

Factory Overhead Variance

Determine the impact of changing production on


fixed and variable factory overhead cost.
Variances from standard for factory overhead cost
result from:

Actual variable factory overhead cost greater or less


than budgeted variable factory overhead for actual
production

Controllable variance for variable factory overhead

Actual production at a level above or below 100% of


normal capacity.

Volume variance for fixed factory overhead

Example

Percentofnormalcapacity

80%

90%

100%

110%

Unitsproduced

5,000

5,625

6,250

6,875

Directlaborhours(.8perunit)

4,000

4,500

5,000

5,500

Indirectfactorywages

$8,000

$9,000

$10,000

$11,000

Powerandlight

4,000

4,500

5,000

5,500

2,400

2,700

3,000

3,300

$14,400

$16,200

$18,000

$19,800

$5,500

$5,500

$5,500

$5,500

Depreciation

4,500

4,500

4,500

4,500

Insurance

2,000

2,000

2,000

2,000

$12,000

$12,000

$12,000

$12,000

Budgetedfactoryoverhead
Variablecosts:

Indirectmaterials
Totalvariablecost
Fixedcosts:
Supervisorysalaries

Totalfixedcost

Controllable Variance
Controllable Variance
Deals with variable cost
Actual variable factory overhead
-Budgeted variable factory overhead*
Controllable Variance
*at actual production level

Example

Halycon produced 5,000 balloons and each


unit required 0.80 standard labor hour for
production. Actual variable factory
overhead was $10,400 and fixed factory
overhead was $12,000 Using the
information on Halycon Balloons, compute
the controllable variance.

Standard direct labor hours


5,000 units produced x 0.80 per hour
= 4,000 direct labor
Based on units produced

Variable costs per unit


Variable costs per unit
= Total variable factory overhead
Total hours
= $18,000 = $ 3.60 per hour
5,000

Budgeted Variable Factory


Overhead
Standard direct labor hours for units produced
x Standard variable factory overhead per DLH
Budgeted variable factory overhead

= 4,000 hours x $3.60 = $14,400

Controllable Variance
Actual variable factory overhead
Budgeted variable factory overhead
Controllable variance
UNFAVORABLE

$16,000
14,400
$1,600

Volume Variance Fixed


costs
100% capacity direct labor hours
-Standard direct labor hours at actual
Capacity not used
X standard fixed overhead rate
Volume variance

Example

: Using the information on Halycon Balloons,


assume actual production at 80% capacity.
Compute the volume variance.
From the factory overhead cost budget, we
compute:

Fixed costs per unit


= Total fixed factory overhead

= $12,000 = $ 2.40 per hour


5,000
based on 100% capacity

Total hours

Volume Variance
100% capacity direct labor hours
-Standard direct labor hours at actual
Capacity not used
X standard fixed overhead rate
Volume Variance

5,000 hours
4,000 hours
1,000 hours
x $2.40
$2,400 unfavorable

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