Professional Documents
Culture Documents
of Managerial Accounting, 6e
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CHAPTER 10:
STANDARD COSTING: A
MANAGERIAL CONTROL TOOL
Cornerstones of Managerial
Accounting, 6e
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Unit Standards
Budgets set standards that are used to control
and evaluate managerial performance.
To determine the unit standard cost for a
particular input, two decisions must be made:
The quantity decision: The amount of input that should
be used per unit of output
The pricing decision: The amount that should be paid
for the quantity of the input to be used
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Quantity and Price Standards
The quantity decision produces quantity
standards.
The pricing decision produces price standards.
The unit standard cost can be computed by
multiplying these two standards:
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How Standards Are Developed
Three potential sources of quantitative standards
are as follows:
Historical experience: Can provide an initial guideline
for setting standards, but should be used with caution
because they can perpetuate existing inefficiencies.
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How Standards Are
Developed (cont.)
Engineering studies: Engineering studies can identify
efficient approaches rigorous guidelines, but engineered
standards often are too rigorous.
Input from operating personnel: Since operating
personnel are accountable for meeting standards, they
should have significant input in setting standards.
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Types of Standards
Standards are generally classified as either ideal
or currently attainable.
Ideal standards demand maximum efficiency and can
be achieved only if everything operates perfectly. No
machine breakdowns, slack, or lack of skill (even
momentarily) are allowed.
Currently attainable standards can be achieved under
efficient operating conditions. Allowance is made for
normal breakdowns, interruptions, less than perfect
skill, and so on.
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Types of Standards (cont.)
Of the two types, currently attainable standards
offer the most behavioral benefits.
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Why Standard Cost Systems
Are Adopted
Two reasons for adopting a standard cost system
are frequently mentioned:
To improve planning and control
Comparing actual costs with budgeted costs identifies
variances, the difference between the actual and planned
costs for the actual level of activity.
Overall variances can be further broken down into a price
variance or a usage or efficiency variance if unit price or
quantity standards have been developed.
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Why Standard Cost Systems
Are Adopted (cont.)
To facilitate product costing
Costs are assigned to products using quantity and price
standards for all three manufacturing costs: direct
materials, direct labor, and overhead.
Standard costing and variance analysis for
controlling cost and evaluating performance can
have strong ethical implications.
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Cost Assignment Approaches
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Standard Product Costs
In manufacturing firms, standard costs are
developed for direct materials, direct labor, and
overhead.
Using these costs, the standard cost per unit is
computed.
The standard cost sheet provides the
production data needed to calculate the standard
unit cost.
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The Standard Cost Sheet
The standard cost sheet also shows the quantity
of each input that should be used to produce one
unit of output.
A manager should be able to compute the
standard quantity of materials allowed (SQ) and
the standard hours allowed (SH) for the actual
output, where
and
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The Standard Cost Sheet
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Variance Analysis:
General Description
Actual input cost can be calculated as:
Actual cost = AP x AQ
where
AP = Actual price per unit
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Variance Analysis:
General Description (cont.)
It is also possible to calculate the costs that
should have been incurred for the actual level of
activity.
Planned cost = SP x SQ
where
SP = Standard price per unit
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Total Budget Variance
The total budget variance is the difference
between the actual cost of the input and its
planned cost:
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Total Budget Variance (cont.)
Separate the total variance into price and usage
(quantity) variances:
Deviations from planned prices tends to be located in
the purchasing or personnel department
Deviations from planned usage of inputs tends to be
located in the production department, it is important to
separate the total variance into price and usage
(quantity) variances.
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Price and Usage Variances
For labor, the price variance is usually called a
rate variance.
Price (rate) variance is the difference between the
actual and standard unit price of an input
multiplied by the number of inputs used:
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Price and Usage Variances (cont.)
The usage (quantity) variance is called an
efficiency variance.
Usage (efficiency) variance is the difference
between the actual and standard quantity of
inputs multiplied by the standard unit price of the
input:
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The Decision to Investigate
Investigation should be undertaken only if the
expected benefits are greater than the expected
costs.
Managers determine whether variances are
significant based on an acceptable range that has
top and bottom measures called control limits.
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The Analysis of Variances
The first step in variance analysis is to decide
whether the variance is significant.
If so, what is its cause?
Once the reason is known, corrective action can be
taken if necessary—and if possible.
If it is due to a supply shortage, no action is
needed and the company will have to wait until
market conditions improve.
If the variance is judged insignificant, no further
steps are needed.
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Accounting and Disposition of
Materials Variances
Recognizing the price variance for materials at
the point of purchase also means that the raw
materials inventory is carried at standard cost.
In general, materials variances are not
inventoried.
Materials variances are added to cost of goods
sold if unfavorable and are subtracted from cost
of goods sold if favorable.
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Additional Cost
Management Practices
In addition to standard costing, some companies
choose to employ other cost management
practices, such as kaizen costing and target
costing.
Kaizen costing focuses on the continuous reduction of
the manufacturing costs of existing products and
processes.
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Additional Cost
Management Practices
Target costing focuses on the reduction of the
design costs of existing and future products and
processes.
A target cost is the difference between the sales price
needed to capture a predetermined market share and
the desired per-unit profit:
Target cost per unit = Expected sales price per unit -
Desired profit per unit
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Appendix:
Accounting for Variances
The accounts containing the variances between
applied standard costs and actual costs are
closed
Allows the amount of actual costs to impact the final
cost of goods sold number that appears in the financial
statements.
In recording variances, unfavorable variances
always are debits, and favorable variances
always are credits.
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Disposition of
Materials and Labor Variances
At the end of the year, the variances for materials
and labor usually are closed to Cost of Goods
Sold.
If the variances are material, they must be prorated
among various accounts.
Materials variances are prorated on the basis of the
materials balances in each of these accounts
Labor variances are prorated on the basis of the labor
balances in the accounts.
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