Professional Documents
Culture Documents
Standard Costs
and
Variance Analysis
2
Price and Quantity
Standards
Price and quantity standards are
determined separately for two reasons:
TheThe purchasing
purchasing manager
manager is is responsible
responsible for
for the
the price
price of
of
the
the raw
raw material
material purchased
purchased andand thethe production
production manager
manager
is
is responsible
responsible for
for the
the quantity
quantity of
of raw
raw material
material used.
used.
The
The buying
buying and
and using
using activities
activities occur
occur at
at different
different times,
times,
so
so the
the price
price and
and quantity
quantity variances
variances areare also
also calculated
calculated at
at
different
different times.
times.
3
Types of Standard
Costs
Ideal standards: Can only be attained under the best
circumstances. Everything has to be done at 100% efficiency to
achieve these standards.
Seldom used, because the variances are always unfavourable and
therefore less useful demotivating and often dismissed as being
inevitable.
Differences or variances
between the actual costs and the
standard costs are calculated,
and any that are significant
are reported to management.
6
General Model for
Variance Analysis
Variance Analysis
9
General Model for
Variance Analysis
10
Materials Variances
Example 1
Glacier Outfitters has the following standards for the
direct material, fibrefill, used to produce its mountain
parkas:
0.2 kg of fibrefill per parka, at $5.00 per kg.
11
Materials Variances
12
Responsibility
for Materials Variances
The Production Manager is usually responsible for the Materials
Quantity Variance.
However, if the purchasing department buys cheap material and more of
it has to be used in production, then the Purchasing Manager should be
held responsible for the unfavourable quantity variance.
15
Materials Variances Example
2
Actual Quantity Actual Quantity
Purchased Purchased
______
Actual kgs.
Price ______Price
Standard kgs.
$____ per kg. $____ per kg.
= $______ = $______
18
Labour Variances
Example
Actual Hours Actual Hours Standard Hours
Actual Rate Standard Rate Standard Rate
______ hours ______ hours ______ hours
$_____ per hour $_____ per hour $_____ per hour
= $_______ = $_______ = $_______
Rate variance
Efficiency variance
$__________________ $__________________
19
Responsibility for
Labour Variances
Mix of skill levels
Production assigned to tasks
managers are (which affects the
usually held average cost per hour).
responsible
for labour Level of employee
variances, motivation.
because they can
influence the Quality of production
supervision.
Quality of training
provided to employees.
20
Lets practice
Exercises 10-9
and 10-10
Variable Overhead
Variances Example
Glacier Outfitters uses direct labour hours as the basis for
applying manufacturing overhead to its products, and has
the following variable overhead standard for its mountain
parkas:
1.2 direct labour hours per parka, at $4.00 per hour
22
Variable Overhead
Variances
Actual Hours Actual Hours Standard Hours
Actual Rate Standard Rate Standard Rate
______ hours ______ hours ______ hours
$_____ per hour $_____ per hour $_____ per hour
= $_______ = $_______ = $_______
23
Fixed Overhead
Analysis
24
Overhead Rates and
Fixed Overhead
Analysis
For the fixed manufacturing overhead costs:
Volume Variance
reflects whether the activity level was higher
or lower than what was budgeted
does not represent good or bad cost control
27
Fixed Overhead
Variances Example
ColaCo manufactured 1,600 units last month.
The standard machine time to produce each unit is
2 hours, while the actual time was 2.1 hours.
The budgeted activity level was 3,000 machine hours.
The budgeted fixed overhead was $9,000, and the actual fixed overhead was $8,450.
28
Fixed Overhead
Variances
Actual Budgeted Applied Fixed
Fixed Fixed
Overhead Overhead Overhead
PFOHR x
Standard Hours
Allowed for
Actual Output
30
Overhead Variances and
Under- or Overapplied
Overhead
In a standard cost
Unfavourable system: Favourable
overhead variances overhead variances
are equivalent to are equivalent to
underapplied overhead. overapplied overhead.
Exercise 10-13
Exhibit
10-9
Investigating Variances
33
Advantages of
Standard Costing
Promotes efficiency and control
Facilitates management by exception; only
the significant variances are brought to
managements attention
Facilitates determining who or what is
responsible for the cost variances
Simplifies bookkeeping
Inventories and cost of goods sold are
recorded at their standard costs 34
Potential Problems
with Standard Costing
Too much emphasis on negative aspects (i.e., unfavourable
variances) could impact morale.
36
Lets practice
Problem 10-19