Chapter 10.docx

Chapter 10: standard cost and overhead analysis Standard costs-management by exception  A standard is a benchmark or more for measuring performance  Quantity and cost standards are set for each major input such as raw materials and labor time where quantity standards specify how much of an input should be used to make a unit of product or provided a unit of service and cost or price standards specify how much should be paid for each unit of the input  Management by exception: a system of management and rights standards are set for various operating activities that are then periodically compared to actual results. Any differences that are deemed significant are brought to the attention of management as “ exceptions”  *** exhibit 10.1 the various analysis cycle*** - The cycle begins with the preparation of standard costs performance reports in accounting department which highlights the variances which is the difference between the actual results and what should have occurred according to the standards. - The significant variances are investigated to discover then promote causes and corrective actions are taken and then the next period is operations are carried out Setting standard costs Who uses the standard cost?  Manufacturing companies often have highly developed standard costing systems in which standards relating to materials, labor, and overhead are deadlocked in detail for each separate product  Standard cost of record: a detailed listing of the standard amounts of material, labor, and overhead that should go into a unit of product, multiplied by the standard price or rate that has been set for each cost element Ideal verses practical standards  Ideal standards: standards that allow for no machine breakdowns or other work interactions and that require peak efficiency at all times Large variances from the ideal standards are normal and it is difficult to “manage by exceptions”  Practical standards: standards that allow for normal machine down time and other work interactions and can be obtained through reasonable, although highly efficient, affords by the average employee Variances from practical standards typically signal a need for management attention because they represent deviations that fall outside normal operating conditions and signaling a normal conditions, they can also be used in forecasting cash flows and inclining inventory  Ideal standards cannot be used in normal budgets or plans; they do not allow for normal inefficiencies, and therefore they result in unrealistic planning and forecasting figures Setting direct materials standards  Standard price per unit: the price that should be paid for a single unit of materials, including shipping, receiving, and other such costs, net of any discounts allowed  Standard quantity per unit: the amount of materials that should be required to complete a single unit of product, including allowances for normal waste, spoilage, and other inefficiencies.  A bill of materials details that type and quantity of each item of that should be used in a product and it should be adjusted for waste and other factors when determining the standard cost per unit of product.  “ waste and spoilage” refers to materials that are wasted as a normal part of the production process and that’s well before they are used “rejected” refers to the direct materials contained in the units that are defective and must be scrapped  *** read the example under this section***  If allowances for waste, spoilage, and rejects are built into the standard cost, the level of those a lines is should be periodically reviewed and reduced overtime to reflect improved process, better training and better equipment.  What’s the price and quantity standards have been set, the standard cost of material per unit of finished product can be computed by multiplying the standard quantity per unit with the standard price per unit. Setting direct labor standards  Standard rate are hour : the labor rate that should be incurred per hour for labor time, including employment insurance, employee benefits, and other labor cost  Standard hours per unit: the amount of labor time that should be a required to complete a single unit of product, including allowance for breaks, may she downtime, cleaning up, and rejects, and other normal inefficiencies  Once the standard rate and hours have been set, the standard labor cost per unit of product can be computed by multiplying standard hours per unit with standard rate per hour  *** read the example under this section*** Setting variable manufacturing overhead standards  Developing the variable portion of the predetermined overhead rate requires an estimate of both the unit cost of the variable overhead items used in production such as indirect supplies, indirect labor etc, as well as the quantity required for the plan level of production  the unit costs and the quantities for variable overhead items can be estimated using actual results from prior periods  standard cost per hour: the standard cost of a unit of product as shown in the standard cost card; it is computed by multiplying the standard quantity or hours by the standard price or rate for each cost element  *** exhibit 10.2 standard cost record—variable production cost*** Our standards the same as budgets  The major distinction between standards and budgets that a standard is a unit amount, whereas and budget is a total amount  A standards can be viewed as the budgeted cost for one unit of product A general model for various analyses  As important that we separate discrepancies due to deviations from price standards from those due to deviations from quantities standards because different managers are usually responsible for buying and for using inputs and these two activities of current and different point of time  variances: the difference between standard prices and quantities and actual prices and quantities  *** exhibit 10.3 and general model for variance analysis—variable production costs***  This model consulate price variances from quantity variances and allows how each of these variances is computed  A price variance and the quantity variance can be computed for all three variable cost elements—direct materials, indirect labor, and variable manufacturing overhead  A price earrings is called in materials price variance in case of direct materials but in labor rates variance in the case of direct labor and an overhead spending variance in the case of variable manufacturing overhead  The inputs to represent the actual quantity of direct materials, direct labor, and variable Manufacturing overhead used; the output of represents the goods production of the period, expressed in the standard quantity or the standard hours allowed for the actual output  standard quantity allowed: the amount of materials that should have been used to complete the period’s output, as computed by multiplying the actual number of units produced by the standard quantity part unit  standard hours allowed: the time that should have been taken to complete the period’s output, as computed by multiplying the actual number of units produced by the standard hours per unit  When a standard costing system is being used, the flexible budget is based on the standard quantity allowed for the actual output achieved multiplied by the standard price per unit Using standard costs—direct materials variances  *** read on sample under this section very carefully***  *** exhibit 10.4 variance analysis—direct materials***  *** exhibit 10.5 variance analysis—direct materials, when the amount purchased differs from the amount used Materials price variance—a closer look  Materials price variance: a measure of the difference between the actual unit price paid for an item and the standard price, multiplied by the quantity purchased  Materials price variance= {actual quantity purchased (AQ) x actual price (AP)} – {actual quantity purchased(AP) x standard price (SP)} = AQ (AP-SP)  Negative variance is all is labeled favourable (F) because the actual price was lower than the standard price  Positive variance is all is labeled as unfavorable (U) because the actual price was higher than the standard price  *** read the example under this section**  Isolation of variances: - Most significant variances should be viewed as a red flag; an exception has occurred that requires explanation by the responsible manager and perhaps follow up effort and the performance report itself may contain explanations for the variances.  Responsibility of the variance: - The purchasing manager has control over the price paid for materials and is there for responsible for in the variance is however, many factors influence the prices paid for goods, including how many units are ordered in a lot, how the order is delivered, whether the order is a rush order, and the quantity of materials purchased - Sometimes production managers would be a responsibility for the resulting price variance is due to the formation of production schedule Materials quantity variance—a closer look  Materials quantity variance: a measure of the difference between the actual quantity of materials used in production and the standard quantity a loud, multiplied by the standard price per unit of materials  Materials quantity variance= {actual quantity used (AQ) x standard price (SP)} – {standard quantity allowed for actual output (SQ) x standard price (SP)} = SP (AQ – SQ)  *** read the example under this section***  The material quantity variance is pressed isolated at the time that materials are placed into production so materials can be questions for the number of units to be produced, according to the standard bill of materials for each unit  A positive material quantity variance means that acts as a usage of materials which can result from many factors, including faulty machines, inferior quality of materials, untrained workers, and poorly supervision  If the purchasing department uses inferior quality materials in an effort to reduce cost, the materials may be unsuitable for use and may result in excessive waste therefore, purchasing department can be responsible for positive material quantity variance  Production departments can be responsible for positive quantity variance is the use excessive materials Using standard costs—direct labor variances Labor rates variance—a closer look  Labour rate variance: a measure of the difference between the actual target the verve rate and the standard great, multiplied by the number of hours worked during the period  The labor rate variance= {actual hours (AH) x actual rate (AR)} – {actual hours (AH) x Standard rate (SR)} = AH (AR – SR)  Exhibit a 10.6 variance analysis—direct labor**  Skilled workers with high hourly rates of pay may be a given duties that requires less skill and call for lower hourly rates for pay which can result in unfavorable labor rates variances, since the actual hourly rate of pay will exceed the standard rates specified for the particular cost being performed  Unskilled and untrained workers are assigned to jobs that requires higher level of skills or trainees can also result in unfavorable labor rates variances therefore they should be given in the low pay scale to result in favourable rate variances  Unfavorable maintenance can arise from overtime work page at premium rates if any portion of the overtime premium is added to the direct labor account  Production supervisors can bear responsibility for unfavorable rates variances because they’re the one who creates their labour schedule Labour efficiency variance—a closer look  Labour efficiency variance: a measure of the difference between the actual hours taken to complete a task and the standard hours a loud, multiplied by the standard on the labor rate  Labour efficiency variance: (AH x SR) – (standard hours a loud for actual output (SH) x (SR)) = SR (AH – SH)  *** read the example under this section**  Possible ca