Scribd
Upload
69 views22 pages

Standard Costing: Tutorial 6 Summary

Standard costing involves setting benchmarks called standards to measure performance. There are price and quantity standards for materials and labor rates and time standards. When actual costs differ from standards, variances occur which are analyzed. Variance analysis involves comparing actual costs to standard costs using a columnar model to identify causes of variances and assign responsibility. Management uses variance analysis for cost control and to take corrective actions.

Uploaded by

rachmmm
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
69 views22 pages

Standard Costing: Tutorial 6 Summary

Standard costing involves setting benchmarks called standards to measure performance. There are price and quantity standards for materials and labor rates and time standards. When actual costs differ from standards, variances occur which are analyzed. Variance analysis involves comparing actual costs to standard costs using a columnar model to identify causes of variances and assign responsibility. Management uses variance analysis for cost control and to take corrective actions.

Uploaded by

rachmmm
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 22

Standard Costing

Tutorial 6 summary

Standard Costs
Standards are benchmarks or norms for measuring performance. In managerial accounting, two types of standards are commonly used.
Price standards specify how much should be paid for each unit of the input. Quantity standards specify how much of an input should be used to make a product or provide a service.

Examples: Retail, consumer, hospitality, hospitals, construction and manufacturing companies.

Why a Standard Costing system can strengthen cost management


Standard costing allows for management by exception. Timely reporting of variances allows management to take corrective action before costs get out of hand. The breakdown of variances into various components helps management trace the source of potential cost problems. Standard costing may also motivate employees to operate more efficiently if they are allowed to participate in setting the standards.

Material and Labour Standards


Material Standards: Price standards Qty standards Labour Standards: Rate standards Time standards

Often Actual costs differ from Standards and this deviation is called VARIANCE. Deviations deemed significant are brought to managements attention, a practice known as management by exception.

Types of Variances
Variance Analysis

Types of Price Variance

Types of Quantity Variance

Materials Price Variance Labor Rate Variance VOH Rate/Spending Variance

Materials Quantity Variance Labor Efficiency Variance VOH Efficiency Variance

A Columnar Model for Variance Analysis


Actual Quantity Actual Price Actual Quantity Standard Price Standard Quantity Standard Price

Price Variance

Quantity Variance

Actual quantity is the amount of direct materials, direct labor, and Variable manufacturing overhead actually used.

A Columnar Model for Variance Analysis


Actual Quantity Actual Price Actual Quantity Standard Price Standard Quantity Standard Price

Price Variance

Quantity Variance

Standard quantity is the standard quantity allowed for the actual output of the period.

A Columnar Model for Variance Analysis


Actual Quantity Actual Price Actual Quantity Standard Price Standard Quantity Standard Price

Price Variance

Quantity Variance

Actual price is the amount actually paid for the purchased input.

A Columnar Model for Variance Analysis


Actual Quantity Actual Price Actual Quantity Standard Price Standard Quantity Standard Price

Price Variance

Quantity Variance

Standard price is the amount that should have been paid for the input used.

Direct Material Variance Analysis


Actual Quantity X Actual Price Actual Qty Purchased/ Used X Standard Price Standard Quantity X Standard Price

Price Variance
MPV is based on Qty Purchased (not used)
because it relates to purchasing function.

Quantity Variance
MQV is based on amount of material used (not purchased)
in production because it relates to production function.

Direct Material Variances - formulae


Price Variance
= (AQP AP) (AQP SP) or AQP (AP - SP)

Quantity Variance
= (AQU SP) (SQ SP) or SP(AQU SQ)

AQU = Actual Quantity Used; SP = Standard Price AQP = Actual Quantity Purchased; AP = Actual Price; SQ = Standard Quantity

Note: Material Variances


The price variance is computed on the entire quantity purchased. (MPV) The quantity variance is computed only on the quantity used. (MQV) Total Material variance = MPV + MQV

Direct Labour Variance Analysis


Actual Hours Actual Rate Actual Hours Standard Rate Standard Hours Standard Rate

Rate Variance
(AH AR) (AH SR) or AH(AR - SR) AH = Actual Hours AR = Actual Rate

Efficiency Variance
(AH SR) (SH SR) or SR(AH SH) SR = Standard Rate SH = Standard Hours

Direct Labour Variances


Total Direct Labour Variance = LRV + LEV
DL Rate variance (LRV) changes in labour rate. DL Efficiency variance (LEV) actual labour hours is less than budget based on the actual production output. So, the workers are deemed more/less efficient

Investigating the Cost Variances


Size of variance as in $ amount or % of total cost Recurring variances Trends what are the patterns? Controllability investigate costs which are controllable Favorable variances to find out if need to adjust the standards or apply in other units, are the standards set realistic? Costs and benefits considerations

Responsibility for Material Variances, who should it be?


Materials Quantity Variance Materials Price Variance

Usually Production Manager

Generally the Purchasing Manager

The standard price is used to compute the quantity variance so that the production manager is not held responsible for the purchasing managers performance.

Cross-Responsibility for Material Variances


I am not responsible for this unfavorable material quantity variance. You purchased sub-quality cheap material, so people had to use more of it. Maintenance dept. also did not service the machines and caused various breakdowns resulting in material spoilage. Your poor scheduling sometimes requires me to rush order material at a higher price, causing unfavorable price variances.

Purchasing Manager
We regularly serviced the machines, but these equipment are very old so they breakdown often. We already suggested to management to replace them with new equipment.

Production Manager

Maintenance Manager

Responsibility for Labour Variances


Production managers are usually held accountable for labour variances because they can influence the: Mix of skill levels assigned to work tasks. Level of employee motivation. Quality of production supervision. Quality of training provided to employees.

Production Managers

Responsibility for Labour Variances


I am not responsible for the unfavorable labor efficiency variance! You purchased cheap material, so it took more time to process it. HR recruited the wrong skill sets. I think it took more time to process the materials because the Maintenance Department has poorly maintained your equipment.

Purchasing Manager
Its a tight labour market and it is difficult to recruit desired workers, so I expected you to conduct on the job training

Production Manager

HR Manager

Important point to note in Standard costing for product costing vs traditional costing: WIP - use only std material cost and std labour cost instead of actual costs. i.e. std qty at std price or std rate at std hrs

All variances are closed off to the COGS


(Pls refer journal entries in lecture notes & textbk.)

Other points
(refer Lecture notes)

Advantages and potential problems with standard costs Disposal of Variances to the COGS account. This is often reflected in the Income Statement as Adjusted COGS Journal entries to record the variances

Tut 7 - Flexible Budgets, Managing MOH costs


Group K15, & K17 Team 1 = Qn 1 & Qn 2, Prob.12-12 & 12-14 Team 2 = Qn 3, Problem 12- 20 Team 3 = Qn 4, Problem 12A-10, Team 4 = Qn 5 & Qn 6, Prob. 11 25 & 11-26 Group K 16 Teams 1 = Qn 1 & 2 Teams 2 to 5 = Question 3 to 6 respectively

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy