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Class 11

The document discusses standard costs and variances in managerial accounting. It defines standard costs and distinguishes them from budgets. It also explains how to calculate variances for direct materials, direct labor, and manufacturing overhead costs. The document concludes by discussing variance reporting and the balanced scorecard approach.

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10 views10 pages

Class 11

The document discusses standard costs and variances in managerial accounting. It defines standard costs and distinguishes them from budgets. It also explains how to calculate variances for direct materials, direct labor, and manufacturing overhead costs. The document concludes by discussing variance reporting and the balanced scorecard approach.

Uploaded by

carla
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Class 11

1.Describe standard costs.

In managerial accounting, standard costs are predetermined unit costs, which companies use as
measures of performance.

Distinguishing Between Standards and Budgets

Both standards and budgets are predetermined costs, and both contribute to management
planning and control. A standard is a unit amount. A budget is a total amount.

Ideal versus Normal Standards


Companies set standards at one of two levels: ideal or normal. 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.

When standards are set too high, employees sometimes feel pressure to consider unethical
practices to meet these standards.
Direct Materials. The direct materials price standard is the cost per finished unit of product of
direct materials that should be incurred. This standard is based on the purchasing department’s
best estimate of the cost of raw materials.

The direct materials quantity standard is the quantity of direct materials that management
determines should be used per unit of finished goods.

The standard direct materials cost per unit is the standard direct materials price times the
standard direct materials quantity.

Direct Labor. The direct labor price standard is the rate per hour that should be incurred for
direct labor.

The direct labor price standard is also called the direct labor rate standard.

The direct labor quantity standard is the time that management determines should be required to
make one unit of the product.

The direct labor quantity standard is also called the direct labor efficiency standard.
The standard direct labor cost per unit of finished product is the standard direct labor rate times
the standard direct labor hours.

Manufacturing Overhead. For manufacturing overhead, companies use a standard predetermined


overhead rate in setting the standard.

The standard manufacturing overhead cost per unit is the predetermined overhead rate times the
activity index quantity standard.

Total Standard Cost per Unit. After a company has established the standard quantity and price
per unit of finished product for each cost element, it can determine the total standard cost.

2.Determine direct materials variances.

Analyzing and Reporting Variances

One of the major management uses of standard costs is to identify variances from standards.
Variances are the differences between total actual costs and total standard costs.
In business, the term variance is also used to indicate differences between total budgeted and
total actual costs.

Calculating Direct Materials Variances

Illustration 11.12 shows that the total materials variance is computed as the difference between
the amount paid (actual quantity times actual price) and the amount that should have been paid
based on standards (standard quantity times standard price of materials).

The materials price and materials quantity variances help managers determine if they have met
their price and quantity objectives regarding materials.
Illustration 11.14 shows that the materials price variance is computed as the difference between
the actual amount paid (actual quantity of materials times actual price) and the standard amount
that should have been paid for the materials used (actual quantity of materials times standard
price).

As shown in Illustration 11.15, the materials quantity variance is computed as the difference
between the standard cost of the actual quantity (actual quantity times standard price) and the
standard cost of the amount that should have been used (standard quantity times standard price
for materials).
Companies sometimes use a matrix to analyze a variance. When the matrix is used, a company
computes the amounts using the formulas for each cost element first and then computes the
variances.

Causes of Materials Variances

The investigation of a materials price variance usually begins in the purchasing department. The
starting point for determining the cause(s) of a significant materials quantity variance is in the
production department.

3.Determine direct labor and total manufacturing overhead variances.

Direct Labor Variances

Labor price and labor quantity variances help managers to determine if they have met their price
and quantity objectives regarding labor.
Causes of Labor Variances
Labor price variances usually result from two factors: (1) paying workers different wages than
expected, and (2) misallocation of workers.

Labor quantity variances relate to the efficiency of workers. These causes are the responsibility
of the production department.

Manufacturing Overhead Variances


The total overhead variance is the difference between the actual overhead costs and overhead
costs applied based on standard hours allowed for the amount of goods produced.

The total manufacturing overhead variance helps managers to determine if they have met their
objectives regarding manufacturing overhead.
The name usually given to the price variance is the overhead controllable variance; the quantity
variance is referred to as the overhead volume variance.

Causes of Manufacturing Overhead Variances


One reason for an overhead variance relates to over- or underspending on overhead items.

4.Prepare variance reports and balanced scorecards.

Reporting Variances

In using variance reports, top management normally looks for significant variances.

Income 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 disclosed separately.

Balanced Scorecard

As a result, many companies now use a broad-based measurement approach, called the balanced
scorecard, to evaluate performance.
The balanced scorecard incorporates financial and nonfinancial measures in an integrated system
that links performance measurement with a company’s strategic goals.

1. The financial perspective is the most traditional view of the company.


2. The customer perspective evaluates the company from the viewpoint of those people who
buy its products or services.
3. The internal process perspective evaluates the internal operating processes critical to
success.
4. The learning and growth perspective evaluates how well the company develops and
retains its employees.

In summary, the balanced scorecard does the following:

1. Employs both financial and nonfinancial measures.


2. Creates linkages so that high-level corporate goals can be communicated all the way down to
the shop floor.
3. Provides measurable objectives for nonfinancial measures such as product quality, rather than
vague statements such as “We would like to improve quality.”
4. Integrates all of the company’s goals into a single performance measurement system, so that
an inappropriate amount of weight will not be placed on any single goal.

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