ACCT-241 Lecture Notes - Lecture 10: Purchasing Manager, Pewter, Carburetor
21 Aug 2018
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CHAPTER 10
Standard Costs and Variances
A standard is a benchmark for measuring performance. Standards are found everywhere. Auto
service centers like Firestone and Sears, for example, often set specific labor time standards for
the completion of certain tasks, such as installing a carburetor or doing a valve
job, and then measure actual performance against these standards. Fast-food outlets such as
McDonald’s and Subway have exacting standards for the quantity of meat going into a
sandwich, as well as standards for the cost of the meat. Your doctor evaluates your weight using
standards for individuals of your age, height, and gender. The buildings we live in conform to
standards set in building codes.
Quantity standards specify how much of an input should be used to make a product or provide a
service. Price standardsspecify how much should be paid for each unit of the input.
The standard quantity per unit defines the amount of direct materials that should be used for
each unit of finished product, including an allowance for normal inefficiencies, such as scrap and
spoilage.
The standard price per unit defines the price that should be paid for each unit of direct materials
and it should reflect the final, delivered cost of those materials.
The standard hours per unit defines the amount of direct labor-hours that should be used to
produce one unit of finished goods. One approach used to determine this standard is for an
industrial engineer to do a time and motion study, actually clocking the time required for each
task. Throughout the chapter, we’ll assume that “tight but attainable” labor standards are used
rather than “ideal” standards that can only be attained by the most skilled and efficient
employees working at peak effort 100% of the time. Therefore, after consulting with the
production manager and considering reasonable allowances for breaks, personal needs of
employees, cleanup, and machine downtime, Terry set the standard hours per unit at 0.50 direct
labor-hours per statue.
The standard rate per hour defines the company’s expected direct labor wage rate per hour,
including employment taxes and fringe benefits. Using wage records and in consultation with the
production manager, Terry Sherman established a standard rate per hour of $22.00. This standard
rate reflects the expected “mix” of workers, even though the actual hourly wage rates may vary
somewhat from individual to individual due to differing skills or seniority.
As with direct labor, the quantity and price standards for variable manufacturing overhead are
usually expressed in terms of hours and a rate. The standard hours per unit for variable overhead
measures the amount of the allocation base from a company’s predetermined overhead rate that
is required to produce one unit of finished goods. In the case of Colonial Pewter, we will assume
that the company uses direct labor-hours as the allocation base in its predetermined overhead
rate. Therefore, the standard hours per unit for variable overhead is
