Managerial Accounting

Weygandt, Kieso, & Kimmel

Prepared by
Karleen Nordquist..
The College of St. Benedict...
and St. John’s University...

with contributions by
Marianne Bradford..
The University of Tennessee...
Gregory K. Lowry….
Macon Technical Institute…..

John Wiley & Sons, Inc.

 Chapter 8

Performance Evaluation Through

Standard Costs
 Chapter 8
Performance Evaluation Through
Standard Costs
After studying this chapter, you should be able to:
1 Distinguish between a standard and a budget.
2 Identify the advantages of standard costs.
3 Describe how standards are set.
4 Indicate the formulas for determining direct materials and
direct labor variances.
5 State the formulas for determining manufacturing overhead
variances.
6 Discuss the reporting of variances.
7 Identify the features of a standard cost accounting system.
 Preview of Chapter 8

Need for Standards

• Standards vs. Budgets
PERFORMANCE • Why Standard Costs?
EVALUATION
THROUGH
STANDARD
COSTS Setting Standards
• Ideal vs. Normal
• Case Study
 Preview of Chapter 8

Variances from Standards

• Analyzing
• Reporting
PERFORMANCE
EVALUATION
THROUGH Standard Cost Accounting
STANDARD System
COSTS • Journal Entries
• Ledger Accounts
• Statement Presentation
 The Need for Standards
 Standards are common in business; those imposed
by government agencies are often called
regulations.
 In managerial accounting, standard costs are
predetermined unit costs, which are used as
measures of performance.
 The focus in this text is on manufacturing standards;
however, standards are applicable to many types of
businesses.
 Study Objective 1

Distinguish between a standard and

a budget.
 Distinguishing Between
Standards and Budgets
 Conceptually, standards and budgets are essentially the
same. Both are pre-determined costs and both
contribute significantly to management planning and
control.
 A standard is a unit amount, whereas a budget is a
total amount.
 A standard is concerned with each individual cost
component that makes up the entire budget.
 Standard costs may be incorporated into a cost
accounting system.
Study Objective 2

Identify the advantages of

standard costs.
 Why Standard Costs?
Carefully established and prudently used standard costs offer
the following advantages to an organization:
 They facilitate management planning.
 They promote greater economy by making employees more
“cost conscious.”
 They are useful in setting selling prices.
 They contribute to management control by providing a basis
for the evaluation of cost control.
 They are useful in highlighting variances in management by
exception.
 They simplify the costing of inventories and reduce clerical
costs.
 Study Objective 3

Describe how standards are set.

 Setting Standard Costs
 The setting of standard costs to produce a unit of
product is a difficult task.
 Setting standards requires input from all persons who
have responsibility for costs and quantities.
 To be effective in controlling costs, standard costs
need to be current at all times. Thus, standards
should be under continuous review and should be
changed whenever it is determined that the existing
standards are not a good measure of performance.
 Ideal versus Normal
Standards
Standards may be set at one of two levels:
 Ideal standards represent optimum levels of
performance under perfect operating conditions.
 Normal standards represent efficient levels of
performance that are attainable under expected
operating conditions.
Most companies that use standards set them at a
normal level. Properly set normal standards
should be rigorous but attainable.
 Setting Standard Costs:
A Case Study
 To establish the standard cost of producing a product, it is
necessary to establish standards for each manufacturing
cost element - direct materials, direct labor, and
manufacturing overhead.
 The standard for each element is derived from a
consideration of the standard price to be paid and the
standard quantity to be used.
 To illustrate, assume that Xonic, Inc., wishes to use
standard costs to measure performance in filling an order
for 1,000 gallons of Weed-O, a liquid weed killer.
WEED-O
 Direct Materials Price
Standard
 The direct materials price standard is
the cost per unit of direct materials that
should be incurred.
 This standard is based on the purchasing
department’s best estimate of the cost of
raw materials.
 This standard should include an amount
for related costs such as receiving,
storing, and handling.
 Direct Materials Quantity
Standard
 The direct materials quantity standard is the
quantity of direct materials that should be used
per unit of finished goods.
 This standard is expressed as a physical
measure, such as pounds, barrels, or board feet.
 This standard should include allowances for
unavoidable waste and normal spoilage.
 A Case Study:
Direct Materials
 The direct materials price standard per pound of
material for Xonic’s weed killer is:
Unit Price
Purchase price, net of discounts $2.70
Freight .20
Receiving and handling .10
Standard direct materials price per pound $3.00 Illustration 8-2

 The direct materials quantity standard per unit of weed

killer is: Quantity
Item (Pounds)
Required materials 3.5
Allowance for waste .4
WEED-O Allowance for spoilage .1
Standard direct materials quantity per unit 4.0 Illustration 8-3
 A Case Study: Standard
Materials Cost per Unit
 The standard direct materials cost per unit
is the standard direct materials price times the
standard direct materials quantity.
 For Xonic, Inc., the standard direct
materials cost per gallon of Weed-O is
$12.00 ($3.00 x 4.0 pounds).

WEED-O
 Direct Labor Price Standard
 The direct labor price standard is the rate
per hour that should be incurred for direct
labor.
 This standard is based on current wage rates
adjusted for anticipated changes, such as
cost of living adjustments included in many
union contracts.
 This standard generally includes employer
payroll taxes and fringe benefits, such as
paid holidays and vacations.
 Direct Labor Quantity
Standard
 The direct labor quantity standard is
the time that should be required to make
one unit of the product.
 This standard is especially critical in
labor-intensive companies.
 In setting this standard, allowances
should be made for rest periods, cleanup,
machine setup, and machine downtime.
 A Case Study:
Direct Labor
 The direct labor price standard per direct labor hour for
Xonic, Inc., is:
Item Price
Hourly wage rate $7.50
COLA .25
Payroll taxes .75
Fringe benefits 1.50
Standard direct labor rate per pound $10.00 Illustration 8-4

 For Xonic, Inc., the direct labor quantity standard is:

Quantity
Item (Hours)
Actual production time 1.5
WEED-O Rest periods and cleanup .2
Setup and downtime .3
Standard direct labor hours per unit 2.0 Illustration 8-5
 A Case Study: Standard
Labor Cost per Unit
 The standard direct labor cost per unit is
the standard direct labor rate times the
standard direct labor hours.
 For Xonic, Inc., the standard direct labor
cost per gallon of Weed-O is $20.00 ($10.00
x 2.0 hours).

WEED-O
 Manufacturing Overhead
Standard
 For manufacturing overhead, a standard
predetermined overhead rate is used in setting
the standard.
 This overhead rate is determined by dividing
budgeted overhead costs by an expected
standard activity index.
 A Case Study:
Manufacturing Overhead
 Xonic, Inc., uses standard direct labor hours as the activity index. The company expects to
produce 13,200 gallons of Weed-O. Since it takes two direct labor hours for each gallon, total
standard direct labor hours are 26,400 (13,200 x 2). At this level of activity, overhead costs are
expected to be $132,000, of which $79,200 are variable and $52,800 are fixed.

 Xonic’s standard predetermined overhead rates are computed

as shown below:
Budgeted Standard Overhead Rate
Overhead Direct per Direct
Costs Amount  Labor Hours = Labor Hour
WEED-O Variable $ 79,200 26,400 $3.00
Fixed 52,800 26,400 2.00
Total $132,000 26,400 $5.00
Illustration 8-6
 A Case Study: Standard
Overhead Cost per Unit
 The standard manufacturing overhead rate per
unit is the predetermined overhead rate times the
activity index quantity standard.
 For Xonic, Inc., which uses direct labor hours as
its activity index, the standard manufacturing
overhead rate per gallon of Weed-O is $10.00
($5.00 x 2.0 hours).

WEED-O
 Total Standard Cost per
Unit
 The total standard cost per unit is the sum of the standard costs of
direct materials, direct labor, and manufacturing overhead.
 For Xonic, Inc., the total standard cost per gallon of Weed-O is $42, as
shown on the following standard cost card:

Illustration 8-7
Product: Weed-O Unit Measure: Gallon

Manufacturing Standard Standard Standard

Cost Elements Quantity x Price = Cost
Direct materials 4 pounds $ 3.00 $12.00
Direct labor 2 hours $10.00 $20.00
Manufacturing overhead 2 hours $ 5.00 $10.00
$42.00
 A standard cost card is prepared for each product. This card
WEED-O
provides the basis for determining variances from standards.
 Variances from Standards
 A variance is the difference between total actual costs and
total standard costs.
 When actual costs exceed standard costs, the variance is
unfavorable. An unfavorable variance suggests that too
much was paid for materials and labor or that there were
inefficiencies in using materials and labor.
 If actual costs are less than standard costs, the variance is
favorable. Favorable variances indicate efficiencies in
incurring costs and in using materials and labor. However,
be careful: a favorable variance could be obtained by using
inferior materials.
 Variances Illustrated
 To illustrate variances, assume that in producing 1,000
gallons of Weed-O in the month of June, Xonic, Inc.,
incurred the following costs:
Direct materials $13,020
Direct labor 20,580
Variable overhead 6,500
Fixed overhead 4,400
Total actual costs $44,500 Illustration 8-8

 The total standard cost of Weed-O is $42,000 (1,000

gallons x $42). Thus, the total variance is $2,500, as
shown:
Actual costs $44,500
Standard costs 42,000
Total variance $ 2,500
Illustration 8-9
 Analyzing Variances
 To properly interpret the significance of a
variance, you must analyze it to determine
the underlying factors. Analyzing variances
begins with a determination of the cost
elements that comprise the variance.
 For each manufacturing cost element, a
total dollar variance is computed. Then
this variance is analyzed into a price
variance and a quantity variance.
 Relationships of Variances

Total Materials Materials

= Materials = Price + Quantity
Variance Variance Variance

Total Labor Labor

Total
Variance = Labor = Price + Quantity
Variance Variance Variance

Total Overhead Overhead

= Overhead = Controllable + Volume
Variance Variance Variance

Illustration 8-10
 Study Objective 4

Indicate the formulas for

determining direct materials and
direct labor variances.
 Direct Materials Variances:
Total
 The total materials variance is computed from the
following formula:
Actual Quantity Standard Quantity Total Materials
x Actual Price – x Standard Price = Variance
(AQ) x (AP) (SQ) x (SP) (TMV)
Illustration 8-25
 In completing the order for 1,000 gallons of Weed-O, Xonic used
4,200 pounds of direct materials purchased at a cost of $3.10 per
unit.
 For Xonic, Inc., the total materials variance is $1,020 ($13,020 -
$12,000) unfavorable as shown below:

(4,200 x $3.10) – (4,000 x $3.00) = $1,020 U

 Direct Materials Variances:
Price
 The materials price variance is computed from the
following formula:
Actual Quantity Actual Quantity Materials
x Actual Price – x Standard Price = Price Variance
(AQ) x (AP) (AQ) x (SP) (MPV)
Illustration 8-25

 For Xonic, Inc., the materials price variance is $420

($13,020 - $12,600) unfavorable as shown below:

(4,200 x $3.10) – (4,200 x $3.00) = $420 U

 Direct Materials Variances:
Quantity
 The materials quantity variance is computed from the
following formula:
Actual Quantity Standard Quantity Materials
x Standard Price – x Standard Price = Quantity Variance
(MQV)
(AQ) x (SP) (SQ) x (SP)
Illustration 8-13

 For Xonic, Inc., the materials quantity variance is $600

($12,600 - $12,000) unfavorable as shown below:

(4,200 x $3.00) – (4,000 x $3.00) = $600 U

 Direct Materials Variances:
Summary
The total materials variance of $1,020 (U),
therefore, consists of the following:

Materials price variance $ 420 U

Materials quantity variance 600 U
Total materials variance $1,020 U
Illustration 8-14
 Matrix for Direct
Materials Variance
A matrix is sometimes used to determine and analyze a variance.
1 Actual Quantity 2 Actual Quantity 3 Standard Quantity
x Actual Price x Standard Price x Standard Price
(AQ) x (AP) (AQ) x (SP) (SQ) x (SP)
4,200 x $3.10 = $13,020 4,200 x $3.00 = $12,600 4,000 x $3.00 = $12,000

Price Variance Quantity Variance

1 – 2 2 – 3
$13,020 – $12,600 = $420 U $12,600 – $12,000 = $600 U

Total Variance
1 – 3
$13,020 – $12,000 = $1,020 U

Illustration 8-15
 Causes of Materials
Variances
 The causes of variances may relate to both internal and
external factors.
 The investigation of a materials price variance usually
begins in the purchasing department.
– A variance may be beyond the control of purchasing
such as with inflation or actions by groups over which
the company has no control.
 The starting point for determining the cause(s) of a
materials quantity variance is in the production
department.
– A variance may be beyond the control of production,
such as with inferior materials bought by purchasing.
 Direct Labor Variances:
Total
 The total labor variance is computed from the following
formula:
Actual Hours Standard Hours Total Labor
x Actual Rate – x Standard Rate = Variance
(AH) x (AR) (SH) x (SR) (TLV)
Illustration 8-16
 In completing the order for 1,000 gallons of Weed-O, Xonic incurred
2,100 direct labor hours at an average hourly rate of $9.80. The
standard hours allowed for the units produced were 2,000 (1,000 x 2
hours) and the standard rate was $10 per hour.
 The total labor variance is $580 ($20,580 - $20,000) unfavorable as
shown below:

(2,100 x $9.80) – (2,000 x $10.00) = $580 U

 Direct Labor Variances:
Price
 The labor price variance is computed from the
following formula:
Actual Hours Actual Hours Labor
x Actual Rate – x Standard Rate = Price Variance
(AH) x (AR) (AH) x (SR) (LPV)
Illustration 8-17

 For Xonic, Inc., the labor price variance is $420 ($20,580 -

$21,000) favorable as shown below:

(2,100 x $9.80) – (2,100 x $10.00) = $420 F

 Direct Labor Variances:
Quantity
 The labor quantity variance is computed from the
following formula:
Actual Hours Standard Hours Labor
x Standard Rate – x Standard Price = Quantity Variance
(LQV)
(AH) x (SR) (SH) x (SR)
Illustration 8-18

 For Xonic, Inc., the labor quantity variance is $1,000

($21,000 - $20,000) unfavorable as shown below:

(2,100 x $9.80) – (2,000 x $10.00) = $1,000 U

 Direct Labor Variances:
Summary
The total labor variance of $580 unfavorable,
therefore, consists of the following:

Labor price variance $ 420 F

Labor quantity variance 1,000 U
Total labor variance $ 580 U
Illustration 8-19
 Matrix for Direct
Labor Variance
1 Actual Hours 2 Actual Hours 3 Standard Hours
x Actual Rate x Standard Rate x Standard Rate
(AH) x (AR) (AH) x (SR) (SH) x (SR)
2,100 x $9.80 = $20,580 2,100 x $10.00 = $21,000 2,000 x $10.00 = $20,000

Price Variance Quantity Variance

1 – 2 2 – 3
$20,580 – $21,000 = $420 F $21,000 – $20,000 = $1,000 U

Total Variance
1 – 3
$20,580 – $20,000 = $580 U

Illustration 8-20
 Causes of Labor Variances
 Labor price variances usually result from two factors:
– paying workers higher than expected wages, and
– misallocation of workers.
 When companies are not unionized, there is a higher
likelihood of these variances.
 The responsibility of these variances usually rests with the
manager that authorized the wage increase or the production
department.
 Labor quantity variances relate to the efficiency of the
workers.
 These variances are usually the responsibility of the
production department.
 Study Objective 5

State the formulas for determining

manufacturing overhead variances.
 Manufacturing Overhead
Variances
 The computation of the manufacturing
overhead variances is conceptually the same
as the computation of the materials and labor
variances.
 However, the task is more challenging for
manufacturing overhead because both
variable and fixed overhead costs must be
considered.
 Actual and Applied
Overhead Costs
As indicated earlier, Weed-O’s manufacturing overhead costs
incurred were $10,900, as follows:
Variable overhead $ 6,500
Fixed overhead 4,400
Total actual overhead $10,900 Illustration 8-21

With standard costs, manufacturing overhead costs are applied to

work in process on the basis of the standard hours allowed, which
are the hours that should have been worked for the units produced.
 For the Weed-O order, the standard hours allowed are 2,000 and
the predetermined overhead rate is $5 per direct labor hour. Thus,
overhead applied is $10,000 (2,000 x $5). Note that actual hours
of direct labor (2,100) are not used in applying manufacturing
overhead.
 Overhead Variances: Total
 The formula for the total overhead variance is:

Total Overhead
Actual Overhead – Overhead Applied = Variance

Illustration 8-22
 Thus, for Xonic, Inc., the total overhead variance is $900
unfavorable as shown below:
$10,900 – $10,000 = $900 U

 The total overhead variance is generally analyzed through a price variance and a quantity
variance. The name usually given to the price variance is the overhead controllable
variance, whereas the quantity variance is referred to as the overhead volume variance.
 Overhead Variances:
Controllable
 The formula for the overhead controllable variance is:
Overhead
Actual Overhead
Overhead – Budgeted = Controllable
Variance
Illustration 8-24

Budgeted overhead is determined from the flexible manufacturing overhead budget for the
standard hours allowed.
 For Xonic, budgeted overhead at the 2,000 standards hours is $10,400 ($4,400 fixed + [$3
variable cost per unit x 2,000]).
 Thus, Xonic’s overhead controllable variance is $500 unfavorable as shown below:

$10,900 – $10,400 = $500 U

 Overhead Variances:
Volume
 The overhead volume variance indicates whether plant facilities
were efficiently used during the period. The formula for computing
the variance is as follows:

Overhead
Overhead Overhead
Budgeted – Applied = Volume
Variance
Illustration 8-25

 For Xonic, Inc., the overhead volume variance is $400

unfavorable as shown below:

$10,400 – $10,000 = $400 U

 Detailed Analysis of Overhead
Volume Variance
 The flexible overhead budget shows that of the budgeted overhead of
$10,400, $6,000 of that amount is variable and $4,400 is fixed. The
predetermined overhead rate of $5 consists of $3 variable and $2
fixed. Therefore:
Overhead budgeted
Variable costs $6,000
Fixed costs 4,400 $10,400
Overhead applied
Variable costs (2,000 x $3) 6,000
Fixed costs (2,000 x $2) 4,000 10,000
Overhead volume variance – unfavorable $ 400 Illustration 8-26

 A more detailed analysis shows that the overhead volume

variance relates solely to fixed costs (fixed costs budgeted $4,400
- fixed costs applied $4,000). Thus the volume variance measures
the amount that fixed overhead costs are under- or overapplied.
 Alternative Formula for
Overhead Volume Variance
Since total fixed costs remain the same at every level of activity within the relevant range and a predetermined
overhead rate based on normal capacity is used in applying overhead, it follows that if the standard hours allowed
are less than the standard hours at normal capacity, fixed overhead costs will be underapplied. In contrast, if
production exceeds normal capacity, fixed overhead costs will be overapplied. Thus, an alternative formula is:

Normal Capacity
Overhead
Fixed Hours –
Overhead Rate – Standard Hours = Volume
Variance
Allowed
 In Xonic, Inc., normal capacity is 26,400 hours for the year or 2,200
hours for a month (26,400  12), and the fixed overhead rate is $2 per
hour. Thus, the $400 unfavorable overhead volume variance can be
computed as shown below:
$2 x (2,200 – 2,000) = $400 U
 Overhead Variances:
Summary
The total overhead variance of $900 (U), therefore,
consists of the following: Overhead controllable variance $500
Overhead volume variance 400 U
Illustration 8-28 Total overhead variance $900 U

In computing overhead variances, it is important to remember the following:

 Standard hours allowed are used in each of the variances.
 Budgeted costs for the controllable variance are derived from the flexible
budget.
 The controllable variance generally pertains to variable costs.
 The volume variance pertains solely to fixed costs.
 Matrix for Manufacturing
Overhead Variance
1 2 Overhead Budgeted for
3
Overhead Applied on
Actual Overhead Standard Hours Allowed
Standard Hours Allowed
$10,900 Variable $6,000 + Fixed
2,000 x $5.00 = $10,000
$4,400 = $10,400

Controllable Variance Volume Variance

1 – 2 2 – 3
$10,900 – $10,400 = $500 U $10,400 – $10,000 = $400 U

Total Variance
1 – 3
$10,900 – $10,000 = $900 U

Illustration 8-29
 Causes of Manufacturing
Overhead Variances
 Since the controllable variance relates to variable
manufacturing costs, the responsibility for this variance
usually rests with the production department. The cause
of an unfavorable variance may be
– higher than expected use of indirect materials, indirect
labor, and factory supplies, or
– increases in indirect manufacturing costs, such as fuel
costs or maintenance.
 The overhead volume variance is the responsibility of the
production department if the cause is inefficient use of
direct labor or breakdowns. If the cause is a lack of sales
orders, the responsibility rests elsewhere.
 Study Objective 6

Discuss the reporting of variances.

 Reporting Variances
 All variances should be reported to
appropriate levels of management as soon as
possible so that corrective action can be
taken.
 The form, content, and frequency of variance
reports vary considerably among companies.
 Variance reports facilitate the principle of
management by exception. In using
variance reports, top management normally
looks for significant variances.
 Study Objective 7

Identify the features of a standard

cost accounting system.
 Standard Cost Accounting
System
 A standard cost accounting system is a double-entry
system of accounting in which standard costs are used in
making entries and variances are formally recognized in
the accounts.
 A standard cost, job order cost accounting system
includes two important assumptions:
– variances from standards are recognized at the
earliest opportunity, and
– the Work in Process account is maintained
exclusively on the basis of standard costs.
 Standard Cost Accounting
System: Journal Entries
 The transactions of Xonic, Inc., will
be used to illustrate the journal entries
in a standard cost accounting system.
 Note that the the major difference
between the entries here and those for
the job order cost accounting system
in Chapter 2 is the variance accounts.
 Standard Cost Accounting
System: Journal Entries
1 Purchased raw materials on account for $13,200 when
the standard cost is $12,600.
Raw
RawMaterials
MaterialsInventory
Inventory 12,600
12,600
Materials
MaterialsPrice
PriceVariance
Variance 420
420
Accounts
AccountsPayable
Payable 13,020
13,020
(To
(Torecord
recordpurchase
purchaseofofmaterials)
materials)

The inventory account is debited for actual quantities at

standard cost. This enables the perpetual materials records
to show actual quantities. The price variance, which is
unfavorable, is debited to Materials Price Variance.
 Standard Cost Accounting
System: Journal Entries
2 Incur direct labor costs of $20,580 when the standard
labor cost is $21,000.
Factory
FactoryLabor
Labor 21,000
21,000
Labor
LaborPrice
PriceVariance
Variance 420
420
Wages
WagesPayable
Payable 20,580
20,580
(To
(Torecord
recorddirect
directlabor
laborcosts)
costs)

Like the raw materials inventory account, Factory Labor

is debited for the actual hours worked at the standard
hourly rate of pay. In this case, the labor variance is
favorable. Thus, Labor Price Variance is credited.
 Standard Cost Accounting
System: Journal Entries
3 Incur actual manufacturing overhead costs of $10,900.

Manufacturing
ManufacturingOverhead
Overhead 10,900
10,900
Accounts
AccountsPayable/Cash/Acc.
Payable/Cash/Acc.Depreciation
Depreciation 10,900
10,900
(To
(Torecord
recordoverhead
overheadincurred)
incurred)

The controllable overhead variance is not recorded at this

time. It depends on standard hours applied to work in
process, which is not known at the time overhead is
incurred.
 Standard Cost Accounting
System: Journal Entries
4 Issue raw materials for production at a cost of $12,600
when the standard cost is $12,000.
Work
WorkininProcess
ProcessInventory
Inventory 12,000
12,000
Materials
MaterialsQuantity
QuantityVariance
Variance 600
600
Raw
RawMaterials
MaterialsInventory
Inventory 12,600
12,600
(To
(Torecord
recordissuance
issuanceofofraw
rawmaterials)
materials)

Work in Process Inventory is debited for standard materials

quantities used at standard prices. The variance account is
debited because the variance is unfavorable. Raw Materials
Inventory is credited for actual quantities at standard prices.
 Standard Cost Accounting
System: Journal Entries
5 Assign factory labor to production at a cost of $21,000
when standard cost is $20,000.
Work
WorkininProcess
ProcessInventory
Inventory 20,000
20,000
Labor
LaborQuantity
QuantityVariance
Variance 1,000
1,000
Factory
FactoryLabor
Labor 21,000
21,000
(To
(Toassign
assignfactory
factorylabor
laborto
tojobs)
jobs)

Work in Process Inventory is debited for standard hours

at standard rates, and the unfavorable variance is debited
to Labor Quantity Variance. The credit to Factory Labor
produces a zero balance in this account.
 Standard Cost Accounting
System: Journal Entries
6 Applying manufacturing overhead to production,
$10,000.

Work
Workin
inProcess
ProcessInventory
Inventory 10,000
10,000
Manufacturing
ManufacturingOverhead
Overhead 10,000
10,000
(To
(Toassign
assignoverhead
overheadto
tojobs)
jobs)

Work in Process Inventory is debited for standard hours

allowed multiplied by the standard overhead rate.
 Standard Cost Accounting
System: Journal Entries
7 Transfer completed work to finished goods, $42,000.

Finished
FinishedGoods
GoodsInventory
Inventory 42,000
42,000
Work
Workin inProcess
ProcessInventory
Inventory 42,000
42,000
(To
(Torecord
recordtransfer
transferof
ofcompleted
completedwork
workto
to
finished
finishedgoods)
goods)

Both inventory accounts are at standard cost.

 Standard Cost Accounting
System: Journal Entries
8 The 1,000 gallons of Weed-O are sold for $60,000.

Accounts
AccountsReceivable
Receivable 60,000
60,000
Cost
CostofofGoods
GoodsSold
Sold 42,000
42,000
Sales
Sales 60,000
60,000
Finished
FinishedGoods
GoodsInventory
Inventory 42,000
42,000
(To
(Torecord
recordsale
saleof
offinished
finishedgoods
goodsand
andthe
theCOGS)
COGS)

Cost of Goods Sold is debited at standard cost. Gross

profit, in turn, is the difference between sales and the
standard cost of goods sold.
 Standard Cost Accounting
System: Journal Entries
9 Recognize unfavorable overhead variances:
controllable, $500; volume, $400.
Overhead
OverheadControllable
ControllableVariance
Variance 500
500
Overhead
OverheadVolume
VolumeVariance
Variance 400
400
Manufacturing
ManufacturingOverhead
Overhead 900
900
(To
(Torecognize
recognizeoverhead
overheadvariances)
variances)

Prior to this entry, a debit balance of $900 existed in

Manufacturing Overhead. The above entry therefore
produces a zero balance in the Manufacturing Overhead
account. The information needed for this entry is often not
available until the end of the accounting period.
 Ledger Accounts
 The ledger accounts used in a standard job
cost accounting system are the same as for the
job order cost accounting system illustrated in
Chapter 2, with the exception of adding ledger
accounts for the variances.
 All debit balances in variance accounts
indicate unfavorable variances; all credit
balances indicate favorable variances.
 Statement Presentation of
Variances
 In income statements prepared for management
under a standard cost accounting system, cost of
goods sold is stated at standard cost and the
variances are separately disclosed, as shown on the
following slide.
 In financial statements prepared for stockholders and
other external users, standard costs may be used when
there are no significant differences between actual
costs and standard costs. Otherwise, inventories and
cost of goods sold must be reported at actual costs.
 Variances in Income
Statement for Management
Xonic, Inc.
Income Statement (for Management)
For the Month Ended June 30, 1999
Sales
Sales $60,000
$60,000
Cost
Costofofgoods
goodssold
sold(at
(atstandard)
standard) 42,000
42,000
Gross profit (at standard)
Gross profit (at standard) 18,000
18,000
Variances
Variances
Materials
Materialsprice
price $$ 420
420
Materials quantity
Materials quantity 600
600
Labor
Laborprice
price (420)
(420)
Labor quantity
Labor quantity 1,000
1,000
Overhead
Overheadcontrollable
controllable 500
500
Overhead
Overheadvolume
volume 400
400
Total
Total varianceunfavorable
variance unfavorable 2,500
2,500
Gross profit (actual)
Gross profit (actual) 15,500
15,500
Selling
Sellingand
andadministrative
administrativeexpenses
expenses 3,000
3,000
Net
Netincome
income $12,500
$12,500

Illustration 8-32
 Copyright
Copyright © 1999 John Wiley & Sons, Inc. All rights
reserved. Reproduction or translation of this work
beyond that named in Section 117 of the 1976 United
States Copyright Act without the express written
permission of the copyright owner is unlawful.
Request for further information should be addressed
to the Permissions Department, John Wiley & Sons,
Inc. The purchaser may make back-up copies for
his/her own use only and not for distribution or
resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of
these programs or from the use of the information
contained herein.
 Chapter 8
Performance Evaluation Through
Standard Costs