Chapter 10 Standard Costs and Overhead Analysis.docx

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Accounting & Financial Management
AFM 102
Tom Vance

10 – standardcosts Chapter 10: Standard Costs & Overhead Analysis Standard Costs – Management by Exception  a standard is a benchmark or the norm for measuring performance  standards are widely used in managerial accounting, where they relate to the quantity and cost of inputs used in manufacturing goods or providing services  quantity and cost standards are set for each major input such as raw materials and labour time  quantity standards specify how much of an input should be used to make a unit of product/provide a unit of service  cost standards specify how much should be paid for each unit of input  actual quantities and costs are compared to these standards  management by exception: a system of management in which standards are set for various operating activities which are then periodically compared to actual results. Any differences that are deemed significant are brought to the attention of management as ‘exceptions’  the basic approach used is the variance analysis cycle  prepare standard cost performance report  take corrective actions  analyze variance  conduct next period’s operations  identify questions  repeat  receive explanations Who Uses Standard Costs?  manufacturing, service, food and non-profit organizations all use standards to some extent  standard cost card: a detailed listing of the standard amounts of materials, labour 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 Setting Standard Costs Ideal vs.Practical Standards  ideal standards: standards that allow for no machine breakdowns or other work interruptions and that require peak efficiency at all times  some managers feel that these standards have motivational value, and they say that even if employees rarely meet these standards, it’s a good reminder that there is room for improvement  but others say that these standards are discouraging and have little meaning  practical standards: standards that allow for normal machine downtime and other work interruptions and that can be attained through reasonable, although highly efficient, efforts by the average employee  variances from practical standards typically signal a need for management attention because they represent deviations hat fall outside of normal operating conditions  idea standards cannot be used for forecasting cash flows and planning inventory while practical standards can be used Setting Direct MaterialsStandards  standard price per unit: the price that should be paid for a single unit of materials, including allowances for quality, quantity purchased, shipping, receiving, and other such costs net of any discounts allowed  the standard price reflect a particular grade of material delivered by a particular type of carrier, and allowances have also been made for handling and discounts  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, rejects and similar inefficiencies  bill of materials: a listing of the quantity of each type of material required to manufacture a unit of product  it should be adjusted for waste and other factors when determining the standard quantity of product  the standard cost of material per unit is: standard quantity × standard cost page 1 of 7 10 – standardcosts Setting Direct Labour Standards  standard rate per hour: the labour rate that should be incurred per hour of labour time, including employment taxes, employee benefits and other such labour costs  standard hours per unit: the amount of labour time that should be required to complete a single unit of product, including allowances for breaks, machine downtime, clean-up , rejects, and other normal inefficiencies  the standard labour cost per unit is computed as: standard rate per hour × standard hours per unit Setting Variable Manufacturing Overhead Standards  generally expressed in terms of rates and hours  the rate represents the variable portion of the predetermined overhead rate  requires an estimate of the unit cost of the variable overhead items use in production and the quantity required  based on prior year amounts or existing contractual agreements  standard variable manufacturing overhead cost/unit = standard rate per hour × standard hours per unit  standard cost per unit: the standard cost of a unit of product as shown on the standard cost card; it is computed by multiplying the standard quantity or hours by the standard price or rate for each cost element Are Standardsthe SameasBudgets?  they are similar but not the same  a standard is a unit amount  a budget is a total amount  a standard can be viewed as the budgeted cost for one unit of product A General Model for Variance Analysis  standards are separated into 2 categories: price and quantity, because diff. managers are responsible for buying and for using inputs and these two activities occur at different points in time  variances: the diff. between standard prices and quantities and actually prices and quantities  a price variance and a quantity variance can be computed for all 3 variable cost elements even if the variance is not called by the same name  even though a price/quantity variance may be called by diff. names, it is computed exactly the same way  the variance analysis is actually a type of input-output analysis; the inputs are the actually quantities used and the output is the goods production of the period  standard quantity allowed: the amount of materials that should have been used to complete the period’s output  actual number of units produced × standard quantity per unit  standard hours allowed: the amount of time that hours have been taken to complete the period’s output  actual number of units produced × standard hours per unit  it is important to look at the diff. between unit cost standards and total cost standards UsingStandard Costs – Direct MaterialsVariances  (1) actual direct materials cost: actually quantity of inputs at actual prices  (2) direct material costs for actual quantity: actual quantity of inputs at standard prices  (3) budgeted direct materials cost: standard quantity of inputs at standard prices  (4) price variance: (2) – (1)  (5) quantity variance: (3) – (2)  negative variances represent unfavourable outcomes  total variance: (4) + (5)  if the amount purchased differs from then amount used:  (1) and (2) are the same page 2 of 7 10 – standardcosts  (3): # of units used times cost per unit times standard price  total variance is not computed because the amount purchased is diff. than the amount used MaterialsPrice 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  (AQ × AP) – (AQ × SP)  AQ: actual quantity purchased; AP: actual price; SP: standard price  variances should be isolated and brought to the attention of management as quickly as possible so that the problem can be fixed immediately  the purchasing manager has control over the price paid for goods and is therefore responsible for any price variances  factors: prices paid for good, # of units ordered, delivery methods, etc MaterialsQuantity Variance – A Closer Look  material quantity variance: a measure of the difference between the actual quantity of materials used in production and the standard quantity allowed, multiplied by the standard price per unit of materials  (AQ × SP) – (SQ × SP)  AQ: actual quantity purchased; SQ: standard quantity allowed for actual output; SP: standard price  best isolated at the time that materials are placed into production  excessive usage of materials can result from many factors, including faulty machines, inferior quality of materials, untrained workers, etc UsingStandard Costs – Direct Labour Variances  (1) actual hours of input at actual price  (2) actual hours of input at the std rate  (3) std hours allows for actual output at the std rate  (4) rate variance: (2) – (1)  (5) efficiency variance: (3) – (2) Labour-Rate Variance –A Closer Look  labour rate variance: a measure of the difference between the actual hourly labour rate and the std. Rate, multiplied by the number of hours worked during a period  (AH × AR) – (AH × SR)  rate variances can arise through the way labour is used  skilled workers with high hourly wages of pay given duties that require little skill = unfavourable rate  unskilled workers have low hourly wages given duties that are usually paid more = favourable rate  production supervisors are responsible for seeing that labour variances are kept under control Labour Efficiency Variance – A Closer Look  labour efficiency variance: a measure of the difference between the actual hours taken to complete the task and the std. Hours allowed, multiplied by the std hourly labour rate  (AH × SR) – (SH × SR)  causes of unfavourable labour efficiency variances:  poorly trained or motivated workers  poor-quality materials  requiring more labour time in processing workers  inaccurate standards  manager in charge of production is responsible for keeping the labour efficiency rate under control  insufficient demand for the company’s products may also case unfavourable labour efficiency variances page 3 of 7 10 – standardcosts  workers don’t get laid off, but ever
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