Week 10: Standard Costs & Variance Analysis

11-1
Week 10
Standard Costs
&
Variance analysis
Standard Costs
Standards are benchmarks or “norms” for
measuring performance. In managerial accounting,
two types of standards are commonly used.
Quantity standards Price standards

specify how much of an specify how much
input should be used to should be paid for
make a product or each unit of the
provide a service. input.
Examples: Firestone, Sears, McDonald’s, hospitals,

construction and manufacturing companies.
Slide 2
11-2
Standard Costs
Deviations from standards deemed significant
are brought to the attention of management, a
practice known as management by exception.
Standard
Amount
Direct
Material
Direct Manufacturing
Labor Overhead
Type of Product Cost

Slide 3
Variance Analysis Cycle
Take
Identify Receive corrective
questions explanations actions
Conduct next
Analyze period’s
variances operations
Prepare standard
Begin
cost performance
report
Slide 4
11-3
Setting Standard Costs
Accountants, engineers, purchasing

agents, and production managers
combine efforts to set standards that encourage
efficient future operations.
Slide 5
Setting Standard Costs

Should we use I recommend using practical
ideal standards that standards that are currently
require employees to attainable with reasonable
work at 100 percent and efficient effort.
peak efficiency?
Engineer Managerial Accountant

Slide 6
11-4
Setting Direct Material Standards
Price Quantity
Standards Standards
Final, delivered Summarized in

cost of materials, a Bill of Materials.
net of discounts.
Slide 7
Setting Direct Labor Standards
Rate Time
Standards Standards
Often a single Use time and

rate is used that reflects motion studies for
the mix of wages earned. each labor operation.
Slide 8
11-5
Setting Variable Manufacturing Overhead

Standards
Rate Quantity
Standards Standards
The rate is the The quantity is

variable portion of the the activity in the
predetermined overhead allocation base for
rate. predetermined overhead.
Slide 9
Standard Cost Card – Variable Production

Cost
A standard cost card for one unit of

product might look like this:
A B AxB
Standard Standard Standard
Quantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. $ 4.00 per lb. $ 12.00
Direct labor 2.5 hours 14.00 per hour 35.00
Variable mfg. overhead 2.5 hours 3.00 per hour 7.50
Total standard unit cost $ 54.50
Slide 10
11-6
Price and Quantity Standards
Price and quantity standards are

determined separately for two reasons:
 The purchasing manager is responsible for raw

material purchase prices and the production manager
is responsible for the quantity of raw material used.
 The buying and using activities occur at different times.

Raw material purchases may be held in inventory for a
period of time before being used in production.
Slide 11
A General Model for Variance Analysis
Variance Analysis
Price Variance Quantity Variance
Difference between Difference between

actual price and actual quantity and
standard price standard quantity
Slide 12
11-7
Variance Analysis
Materials price variance Materials quantity variance

Labor rate variance Labor efficiency variance
VOH rate variance VOH efficiency variance
Slide 13
Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price
Slide 14
11-8

× × ×
Actual quantity is the amount of direct

materials, direct labor, and variable
manufacturing overhead actually used.
Slide 15

× × ×
Standard quantity is the standard quantity

allowed for the actual output of the period.
Slide 16
11-9

× × ×
Actual price is the amount actually

paid for the input used.
Slide 17

× × ×
Standard price is the amount that should

have been paid for the input used.
Slide 18
11-10

× × ×
(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)

AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity
Slide 19
Material Variances – An Example
Glacier Peak Outfitters has the following direct

material standard for the fiberfill in its mountain
parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month 210 kgs. of fiberfill were purchased and

used to make 2,000 parkas. The material cost a
total of $1,029.
Slide 20
11-11
Material Variances Summary

× × ×
210 kgs. 210 kgs. 200 kgs.
× × ×
$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000
Price variance Quantity variance

$21 favorable $50 unfavorable
Slide 21

× × ×
210 kgs. 210 kgs. 200 kgs.
× $1,029  ×
210 kgs ×
$4.90 per kg. $5.00 perkg
= $4.90 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Slide 22
11-12

× × ×
210 kgs. 210 kgs. 200 kgs.
× 0.1 kg per parka× 2,000 parkas ×
$4.90 per kg. $5.00
= 200 per
kgskg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Slide 23
Material Variances:
Using the Factored Equations
Materials price variance

MPV = AQ (AP - SP)
= 210 kgs ($4.90/kg - $5.00/kg)
= 210 kgs (-$0.10/kg)
= $21 F
Materials quantity variance
MQV = SP (AQ - SQ)
= $5.00/kg (210 kgs-(0.1 kg/parka  2,000 parkas))
= $5.00/kg (210 kgs - 200 kgs)
= $5.00/kg (10 kgs)
= $50 U
Slide 24
11-13
Isolation of Material Variances

I need the price variance I’ll start computing
sooner so that I can better the price variance
identify purchasing problems. when material is
You accountants just don’t purchased rather
understand the problems that than when it’s used.
purchasing managers have.
Slide 25
Material Variances
The price variance is

Hanson purchased and
used 1,700 pounds. computed on the entire
quantity purchased.
How are the variances
computed if the amount The quantity variance
purchased differs from is computed only on
the amount used? the quantity used.
Slide 26
11-14
Responsibility for Material Variances
Materials Quantity Variance Materials Price Variance
Production Manager Purchasing Manager
The standard price is used to compute the quantity variance

so that the production manager is not held responsible for
the purchasing manager’s performance.
Slide 27
Responsibility for Material Variances
Your poor scheduling

I am not responsible for sometimes requires me to
this unfavorable material rush order material at a
quantity variance. higher price, causing
You purchased cheap unfavorable price variances.
material, so my people
had to use more of it.
Slide 28
11-15
Zippy
Quick Check 
Hanson Inc. has the following direct material

standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 1,700 pounds of material were
purchased and used to make 1,000 Zippies. The
material cost a total of $6,630.
Slide 29
Zippy
Quick Check 
Hanson’s material price variance (MPV)

for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Slide 30
11-16
Zippy
Quick Check 
Hanson’s material price variance (MPV)

for the week was:
b. $170 favorable.
d. $800 favorable. MPV = AQ(AP - SP)
MPV = 1,700 lbs. × ($3.90 - 4.00)
MPV = $170 Favorable
Slide 31
Zippy
Quick Check 
Hanson’s material quantity variance (MQV)

for the week was:
b. $170 favorable.
d. $800 favorable.
Slide 32
11-17
Zippy
Quick Check 
Hanson’s material quantity variance (MQV)

for the week was:
b. $170 favorable.
d. $800 favorable.
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs - 1,500 lbs)
MQV = $800 unfavorable
Slide 33
Zippy
Quick Check 

× × ×
1,700 lbs. 1,700 lbs. 1,500 lbs.
× × ×
$3.90 per lb. $4.00 per lb. $4.00 per lb.
= $6,630 = $ 6,800 = $6,000

Slide 34
11-18
Zippy
Quick Check  Continued
Hanson Inc. has the following material standard to

manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 2,800 pounds of material were

purchased at a total cost of $10,920, and 1,700
pounds were used to make 1,000 Zippies.
Slide 35
Zippy
Actual Quantity Actual Quantity

Purchased Purchased
× ×
Actual Price Standard Price
2,800 lbs. 2,800 lbs.
× ×
$3.90 per lb. $4.00 per lb.
= $10,920 = $11,200
Price variance increases

Price variance because quantity
$280 favorable purchased increases.
Slide 36
11-19
Zippy
Actual Quantity
Used Standard Quantity
× ×
Standard Price Standard Price
1,700 lbs. 1,500 lbs.
× ×
$4.00 per lb. $4.00 per lb.
= $6,800 = $6,000
Quantity variance is
unchanged because
actual and standard Quantity variance
quantities are unchanged. $800 unfavorable
Slide 37
Labor Variances – An Example
Glacier Peak Outfitters has the following direct labor

standard for its mountain parka.
1.2 standard hours per parka at $10.00 per hour
Last month, employees actually worked 2,500 hours

at a total labor cost of $26,250 to make 2,000
parkas.
Slide 38
11-20
Labor Variances Summary

Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× × ×
$10.50 per hour $10.00 per hour. $10.00 per hour
= $26,250 = $25,000 = $24,000
Rate variance Efficiency variance

$1,250 unfavorable $1,000 unfavorable
Slide 39

× × ×
× ×
$26,250  2,500 hours ×
$10.50 per hour $10.00 per hour.
= $10.50 per hour $10.00 per hour
= $26,250 = $25,000 = $24,000

Slide 40
11-21

× × ×
× 1.2 hours per ×parka  2,000 ×
$10.50 per hour parkas
$10.00 per hour.
= 2,400 hours $10.00 per hour
= $26,250 = $25,000 = $24,000

Slide 41
Labor Variances:
Using the Factored Equations
Labor rate variance

LRV = AH (AR - SR)
= 2,500 hours ($10.50 per hour – $10.00 per hour)
= 2,500 hours ($0.50 per hour)
= $1,250 unfavorable
Labor efficiency variance
LEV = SR (AH - SH)
= $10.00 per hour (2,500 hours – 2,400 hours)
= $10.00 per hour (100 hours)
= $1,000 unfavorable
Slide 42
11-22
Responsibility for Labor Variances
Production managers are Mix of skill levels

usually held accountable assigned to work tasks.
for labor variances
because they can
Level of employee
influence the:
motivation.
Quality of production
supervision.
Quality of training
provided to employees.
Production Manager
Slide 43
Responsibility for Labor Variances

I think it took more time
to process the
I am not responsible for materials because the
the unfavorable labor Maintenance
efficiency variance! Department has poorly
maintained your
You purchased cheap equipment.
material, so it took more
time to process it.
Slide 44
11-23
Zippy
Quick Check 
Hanson Inc. has the following direct labor

standard to manufacture one Zippy:
1.5 standard hours per Zippy at
$12.00 per direct labor hour
Last week, 1,550 direct labor hours were
worked at a total labor cost of $18,910
to make 1,000 Zippies.
Slide 45
Zippy
Quick Check 
Hanson’s labor rate variance (LRV) for the

week was:
b. $310 favorable.
d. $300 favorable.
Slide 46
11-24
Zippy
Quick Check 
Hanson’s labor rate variance (LRV) for the

week was:
b. $310 favorable.
LRV = AH(AR - SR)
LRV = 1,550 hrs($12.20 - $12.00)
d. $300 favorable.LRV = $310 unfavorable
Slide 47
Zippy
Quick Check 
Hanson’s labor efficiency variance (LEV)

for the week was:
b. $590 favorable.
d. $600 favorable.
Slide 48
11-25
Zippy
Quick Check 
Hanson’s labor efficiency variance (LEV)

for the week was:
b. $590 favorable.
d. $600 favorable.
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable
Slide 49
Zippy
Quick Check 

× × ×
× × ×
$12.20 per hour $12.00 per hour $12.00 per hour
= $18,910 = $18,600 = $18,000

$310 unfavorable $600 unfavorable
Slide 50
11-26
Variable Manufacturing Overhead Variances

– An Example
Glacier Peak Outfitters has the following direct variable

manufacturing overhead labor standard for its mountain
parka.
1.2 standard hours per parka at $4.00 per hour
Last month, employees actually worked 2,500 hours to
make 2,000 parkas. Actual variable manufacturing
overhead for the month was $10,500.
Slide 51

Summary
× × ×
× × ×
= $10,500 = $10,000 = $9,600

Slide 52
11-27

Summary
× × ×
× $10,500×  2,500 hours ×
$4.20 per hour $4.00 per per
= $4.20 hourhour $4.00 per hour
= $10,500 = $10,000 = $9,600

Slide 53

Summary
× × ×
× 1.2 hours per ×parka  2,000 ×
$4.20 per hour parkas$4.00 per hour
= 2,400 hours $4.00 per hour
= $10,500 = $10,000 = $9,600

Slide 54
11-28
Variable Manufacturing Overhead Variances:

Using Factored Equations
Variable manufacturing overhead rate variance

VMRV = AH (AR - SR)
= 2,500 hours ($4.20 per hour – $4.00 per hour)
= 2,500 hours ($0.20 per hour)
= $500 unfavorable
Variable manufacturing overhead efficiency variance
VMEV = SR (AH - SH)
= $4.00 per hour (2,500 hours – 2,400 hours)
= $4.00 per hour (100 hours)
= $400 unfavorable
Slide 55
Zippy
Quick Check 
Hanson Inc. has the following variable

manufacturing overhead standard to
manufacture one Zippy:
1.5 standard hours per Zippy at
$3.00 per direct labor hour
Last week, 1,550 hours were worked to make
1,000 Zippies, and $5,115 was spent for
variable manufacturing overhead.
Slide 56
11-29
Zippy
Quick Check 
Hanson’s rate variance (VMRV) for variable

manufacturing overhead for the week was:
b. $400 favorable.
d. $300 favorable.
Slide 57
Zippy
Quick Check 
Hanson’s rate variance (VMRV) for variable

manufacturing overhead for the week was:
b. $400 favorable.
VMRV = AH(AR - SR)
VMRV = 1,550 hrs($3.30 - $3.00)
d. $300 favorable. VMRV = $465 unfavorable
Slide 58
11-30
Zippy
Quick Check 
Hanson’s efficiency variance (VMEV) for

variable manufacturing overhead for the week
was:
b. $435 favorable.
d. $150 favorable.
Slide 59
Zippy
Quick Check 
Hanson’s efficiency variance (VMEV) for

variable manufacturing overhead for the week
was:
b. $435 favorable. 1,000 units × 1.5 hrs per unit
d. $150 favorable.
VMEV = SR(AH - SH)
VMEV = $3.00(1,550 hrs - 1,500 hrs)
VMEV = $150 unfavorable
Slide 60
11-31
Zippy
Quick Check 

× × ×
× × ×
= $5,115 = $4,650 = $4,500

Slide 61
Variance Analysis and Management by

Exception
Larger variances, in
How do I know dollar amount or as
which variances to a percentage of the
investigate? standard, are
investigated first.
Slide 62
11-32
A Statistical Control Chart
Warning signals for investigation
Favorable Limit
• •
• • •
Desired Value
• •
Unfavorable Limit •
•
1 2 3 4 5 6 7 8 9
Variance Measurements
Slide 63
Advantages of Standard Costs
Management by Promotes economy

exception and efficiency
Advantages
Enhances
Simplified responsibility
bookkeeping accounting
Slide 64
11-33
Potential Problems with Standard Costs

Emphasizing standards Favorable
may exclude other variances may
important objectives. be misinterpreted.
Potential
Problems
Standard cost Emphasis on
reports may negative may
not be timely. impact morale.
Invalid assumptions Continuous

about the relationship improvement may
between labor be more important
cost and output. than meeting standards.
Slide 65

Week 10: Standard Costs & Variance Analysis

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Week 10: Standard Costs & Variance Analysis

Uploaded by

Copyright:

Available Formats

11-1

Quantity standards Price standards

Examples: Firestone, Sears, McDonald’s, hospitals,

Type of Product Cost

Variance Analysis Cycle

Setting Standard Costs

Accountants, engineers, purchasing

Setting Standard Costs

Engineer Managerial Accountant

Setting Direct Material Standards

Final, delivered Summarized in

Setting Direct Labor Standards

Often a single Use time and

Setting Variable Manufacturing Overhead

The rate is the The quantity is

Standard Cost Card – Variable Production

A standard cost card for one unit of

Price and Quantity Standards

Price and quantity standards are

 The purchasing manager is responsible for raw

 The buying and using activities occur at different times.

A General Model for Variance Analysis

Price Variance Quantity Variance

Difference between Difference between

A General Model for Variance Analysis

Price Variance Quantity Variance

Materials price variance Materials quantity variance

A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Actual quantity is the amount of direct

A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Standard quantity is the standard quantity

A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Actual price is the amount actually

A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Standard price is the amount that should

A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)

Material Variances – An Example

Glacier Peak Outfitters has the following direct

Last month 210 kgs. of fiberfill were purchased and

Material Variances Summary

Price variance Quantity variance

Material Variances Summary

Price variance Quantity variance

Material Variances Summary

Price variance Quantity variance

Materials price variance

Isolation of Material Variances

The price variance is

Responsibility for Material Variances