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STANDARD COSTING:
A MANAGERIAL CONTROL TOOL
QUESTIONS FOR WRITING AND DISCUSSION
1. Standard costs are essentially budgeted
amounts on a per-unit basis. Unit standards
serve as inputs in building budgets.
11.
Managers generally tend to have more control over the quantity of an input used rather
than the price paid per unit of input.
12.
A standard cost variance should be investigated if the variance is material and if the
benefit of investigating and correcting the
deviation is greater than the cost.
13.
14.
The materials price variance is often computed at the point of purchase rather than
issuance because it provides control information sooner. When this is done, the variance may be called the materials purchase
price variance, and it is the responsibility of
the purchasing manager rather than the
production manager.
15.
16.
17.
18.
19.
5. Engineering studies can serve as an important input to standard setting. Many feel that
this approach by itself may produce standards that are too rigorous.
6. Ideal standards are perfection standards,
representing the best possible outcomes.
Currently attainable standards are standards
that are challenging but allow some waste.
Currently attainable standards are often
chosen because many feel they tend to motivate rather than frustrate.
7. Standard costing systems improve planning
and control and facilitate product costing.
8. By identifying standards and assessing deviations from the standards, managers can
locate areas where change or corrective behavior is needed.
9. Actual costing assigns actual manufacturing
costs to products. Normal costing assigns
actual prime costs and estimated overhead
costs to products. Standard costing assigns
estimated manufacturing costs to products.
10.
275
20.
21.
276
EXERCISES
91
1. d
2. e
3. d
4. c
5. e
6. a
92
1.
2.
In principle, before formal responsibility is assigned, the causes of the variances must be known. To be responsible, a manager must have the ability to
control or influence the variance. The following assignments of responsibility
are general in nature and have exceptions:
MPV:
MUV:
LRV:
LEV:
OH variances:
Purchasing manager
Production manager
Production manager
Production manager
Departmental managers
277
93
1.
2.
94
1.
2.
SH direct labor hours per unit = 10,000/40,000 = 0.25 hrs. per bunny
3.
Standard
Usage
8.50 oz.
0.25 hr.
Standard
Cost
$2.55
2.25
$4.80
95
1.
2.
3.
96
1.
2.
The installation and repair manager. If the new workers are now properly
trained, no corrective action is required. If they are not, further training will be
required to return to the direct labor hours normally used.
278
97
1.
2.
The purchasing agent. Corrective action would require a return to the purchase of the higher-quality material normally used.
3.
Production engineering is responsible. If the relationship is expected to persist, then the new labor method should be adopted, and standards for materials and labor need to be revised.
98
1.
2.
LRV
= (AR SR)AH
= ($12.50 $12.00)2,000 = $1,000 U
LEV
= (AH SH)SR
= (2,000 1,976*)$12.00 = $288 U
279
99
1.
Budgeted VOH
$3.00 52,000
$4,000 U
Spending
Applied VOH
$3.00 54,750*
$8,250 F
Efficiency
Budgeted FOH
$14 50,000
$10,000 U
Spending
Applied FOH
$14 54,750
$66,500 U
Volume
280
910
1.
2.
Materials
Labor
Actual Cost*
$1,183,270
687,150
Budgeted Cost
$1,190,000
714,000
Variance
$ 6,730 F
26,850 F
SP AQ
$7 173,500
$31,230 F
Price
4.
$24,500 U
Usage
LRV
= (AR SR)AH
= ($13.50 $14.00)50,900 = $25,450 F
LEV
= (AH SH)SR
= (50,900 51,000)$14 = $1,400 F
AR AH
$13.50 50,900
SP SQ
$7 170,000
SR AH
$14 50,900
$25,450 F
Rate
SR SH
$14 51,000
$1,400 F
Efficiency
281
911
1.
2.
SR AH
$9.40 79,900
$7,990 U
Rate
SR SH
$9.40 80,400
$4,700 F
Efficiency
1,768,875
22,250
1,757,745
755,760
7,990
e
f
282
1,791,125
5,565
1,752,180
4,700
759,050
912
1.
Fixed overhead rate = $0.55/(1/2 hr. per unit) = $1.10 per DLH
SH = 786,000 0.5 = 393,000
Applied FOH = $1.10 393,000 = $432,300
2.
Budgeted FOH
$1.10 400,000*
Applied FOH
$1.10 393,000
$9,700 F
Spending
$7,700 U
Volume
4.
Budgeted VOH
$1.70 390,000
$32,000 U
Spending
Applied VOH
$1.70 393,000
$5,100 F
Efficiency
283
913
1.
2.
Fixed:
120,600 3 $2.40 = $868,320
Variable: 120,600 3 $4.00 = $1,447,200
Total FOH variance
= $72,000 U
= $940,320 $868,320
Budgeted FOH
$864,000
$76,320 U
Spending
Applied FOH
$868,320
$4,320 F
Volume
The spending variance is the difference between planned and actual costs.
Each items variance should be analyzed to see if these costs can be reduced.
The volume variance is the incorrect prediction of volume, or alternatively, it
is a signal of the loss or gain that occurred because of producing at a level
different from the expected level.
4. Variable overhead analysis:
Actual VOH
$1,443,500
Budgeted VOH
$4 361,800
$3,700 F
Spending
Applied VOH
$1,447,200
$0
Efficiency
The variable overhead spending variance is the difference between the actual
variable overhead costs and the budgeted costs for the actual hours used.
The variable overhead efficiency variance is the savings or extra cost attributable to the efficiency of labor usage.
284
914
1.
2.
SR AH
$18 515,000
$51,500 U
Rate
3.
SR SH
$18 504,000
$198,000 U
Efficiency
Budgeted FOH
$8 518,400
$7,000 F
Spending
Applied FOH
$8 504,000
$115,200 U
Volume
Budgeted VOH
$1.50 515,000
$99,500 U
Spending
Applied VOH
$1.50 504,000
$16,500 U
Efficiency
285
915
1. Materials Inventory ...................................
MPV ............................................................
Accounts Payable ................................
10,782,080
336,940
10,752,000
25,600
9,072,000
51,500
198,000
4,788,000
11,119,020
10,777,600
9,321,500
4,032,000
756,000
612,040
336,940
25,600
51,500
198,000
Overhead disposition:
Cost of Goods Sold ...................................
Fixed Overhead Control ......................
108,200
116,000
286
108,200
116,000
916
1.
Tom purchased the large quantity to obtain a lower price so that the price
standard could be met. In all likelihood, given the reaction of Jackie Iverson,
encouraging the use of quantity discounts was not an objective of setting
price standards. Usually, material price standards are to encourage the purchasing agent to search for sources that will supply the quantity and quality
of material desired at the lowest price.
2.
It sounds like the price standard may be out of date. Revising the price standard and implementing a policy concerning quantity purchases would likely
prevent this behavior from reoccurring.
3.
Tom apparently acted in his own self-interest when making the purchase. He
surely must have known that the quantity approach was not the objective.
Yet, the reward structure suggests that there is considerable emphasis
placed on meeting standards. His behavior, in part, was induced by the reward system of the company. Probably, he should be retained with some additional training concerning the goals of the company and a change in emphasis and policy to help encourage the desired behavior.
917
Materials:
AP AQ
$38,295
SP AQ
$2.00 20,700
$3,105 F
Price
SP SQ
$2.00 20,650
$100 U
Usage
Labor:
AR AH
$57,226
SR AH
$9 6,200 = $55,800
$1,426 U
Rate
SR SH
$9 6,195 = $55,755
$45 U
Efficiency
287
918
1. Materials Inventory ...................................
MPV .......................................................
Accounts Payable ................................
41,400
41,300
100
55,755
1,426
45
100
MPV ............................................................
LRV .............................................................
LEV .............................................................
Cost of Goods Sold .............................
3,105
1,426
45
288
3,105
38,295
41,400
57,226
100
4,576
919
1.
2.
3.
SH = 4 Units produced
20,000 = 4 Units produced
Units produced = 5,000
289
PROBLEMS
920
1.
Materials:
AP AQ
$1.72 38,500
SP AQ
$1.70 38,500
$770 U
Price
SP SQ
$1.70 40,000
$2,550 F
Usage
The new process saves 0.25 4,000 $1.70 = $1,700. Thus, the net savings
attributable to the higher-quality material are (2,550 $1,700) $770 = $80.
Keep the higher-quality material.
2.
SR AH
$10 2,500
$1,500 U
Rate
SR SH
$10 2,400
$1,000 U
Efficiency
The new process gains $80 in materials (see Requirement 1) but loses $2,500
from the labor effect, giving a net loss of $2,420. If this pattern is expected to
persist, then the new process should be abandoned.
3.
SR AH
$10 2,200
$400 U
Rate
SR SH
$10 2,400
$2,000 F
Efficiency
If this is the pattern, then the new process should be continued. It will save
$87,360 per year ($1,680 52 weeks). The weekly savings of $1,680 is the materials savings of $80 plus labor savings of $1,600.
290
921
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
e
h
k
n
d
g
o
b
m
l
j
c
a
i
f
922
1.
$4.50
0.20
3.92
$8.62
291
922
Concluded
2.
3.
4.
Lumber:
MPV = (AP SP)AQ
= ($3.10 $3.00)16,000 = $1,600 U
MUV = (AQ SQ)SP
= (16,000 15,000)$3 = $3,000 U
Rubber pads:
MPV = (AP SP)AQ
= ($0.048 $0.05)51,000 = $102 F
MUV = (AQ SQ)SP
= (51,000 40,000)$0.05 = $550 U
Labor:
LRV = (AR SR)AH
= ($8.05 $8.00)5,550 = $277.50 U
LEV = (AH SH)SR
= (5,550 4,900)$8 = $5,200 U
292
923
1.
The cumulative average time per unit is an average. It includes the 2.5 hours
per unit when 40 units are produced as well as the 1.024 hours per unit when
640 units are produced. As more units are produced, the cumulative average
time per unit will decrease.
2.
The standard should be 0.768 hour per unit as this is the average time taken
per unit once efficiency is achieved:
[(1.024 640) (1.28 320)]/(640 320)
3.
Direct materials
Direct labor
Variable overhead
Fixed overhead
Standard cost per unit
Std. Price
$ 4
15
8
12
Std. Usage
25.000
0.768
0.768
0.768
Std. Cost
$100.00
11.52
6.14
9.22*
$126.88*
*Rounded
4.
There would be unfavorable efficiency variances for the first 320 units because the standard hours are much lower than the actual hours at this level.
Actual hours would be approximately 409.60 (320 1.28), and standard hours
would be 245.76 (320 0.768).
924
1.
293
924
2.
Continued
SR AH
$12 150,000
$150,000 U
Rate
SR SH
$12 140,000
$120,000 U
Efficiency
Budgeted VOH
$10 150,000
$30,000 F
Spending
Applied VOH
$10 140,000
$100,000 U
Efficiency
Formula approach:
VOH spending variance = Actual VOH (SVOR AH)
= $1,470,000 ($10 150,000)
= $30,000 F
VOH efficiency variance = (AH SH)SVOR
= (150,000 140,000)$10
= $100,000 U
10,000 $10 = $100,000
294
924
4.
Continued
Budgeted FOH
$6 2 75,000
$13,000 U
Spending
Applied FOH
$6 2 70,000
$60,000 U
Volume
6.
(Appendix required)
Materials Inventorya ..................................
MPV .......................................................
Accounts Payableb ..............................
2,790,000
2,940,000
8,400
465,000 $6 = $2,790,000
490,000 $6 = $2,940,000
295
93,000
2,697,000
2,948,400
924
Concluded
1,680,000
150,000
120,000
278,400
MPV ............................................................
Cost of Goods Sold .............................
93,000
1,470,000
913,000
1,400,000
Work in Processg.......................................
FOH Control .........................................
840,000
e
f
2 $6 70,000 = $840,000
296
1,950,000
8,400
150,000
120,000
93,000
1,470,000
913,000
1,400,000
840,000
20,000
20,000
73,000
73,000
925
1.
2.
Budgeted FOH
$2,400,000
$100,000 U
Spending
Applied FOH
$4 480,000
$480,000 U
Volume
Athens plant:
Actual FOH
$2,500,000
Budgeted FOH
$2,400,000
$100,000 U
Spending
Applied FOH
$4 600,000
$0
Volume
297
925
Concluded
3.
4.
For each plant, the standard fixed overhead rate is $4 per direct labor hour.
Since each subassembly should use two hours, the fixed overhead cost per
unit is $8, regardless of where they are produced. Should they differ? Some
may argue that the rate for the Little Rock plant needs to be recalculated. For
example, one possibility is to use expected actual capacity, instead of practical capacity. In this case, the Little Rock plant would have a fixed overhead
rate of $2,400,000/480,000 hours = $5 per hour and a cost per subassembly of
$10. The question is: Should the subassemblies be charged for the cost of the
unused capacity? ABC suggests a negative response. Products should be
charged for the resources they use, and the cost of unused capacity should
be reported as a separate itemto draw managements attention to the need
to manage this unused capacity.
298
926
1.
Standard
Price
$10.00
16.00
30.00
40.00
Standard
Usage
8.00 lb.
2 hr.
2 hr.
2 hr.
Standard
Cost
$ 80.00
32.00
60.00
80.00
$252.00
Standard
Price
$10.00
16.00
30.00
40.00
Standard
Usage
20.00 lb.
4 hr.
4 hr.
4 hr.
Standard
Cost
$200.00
64.00
120.00
160.00
$544.00
1,720,000
1,680,000
40,000
MPV ............................................................
MUV ............................................................
Cost of Services Sold ..........................
86,000
299
86,000
1,634,000
1,720,000
40,000
46,000
926
3.
Continued
560,000*
24,000
3,650
580,350
20,350
3,650
24,000
Budgeted VOH
$40 36,500
$245,000 F
Spending
Applied VOH
$40 35,000
$60,000 U
Efficiency
Budgeted FOH
$720,000
$20,000 F
Spending
Applied FOH
$30 35,000
$330,000 F
Volume
300
926
5.
Concluded
1,400,000
1,050,000
1,215,000
700,000
185,000
350,000
1,400,000
1,050,000
1,215,000
700,000
185,000
350,000
927
1.
The budgeted overhead costs are broken down into fixed and variable costs
by the high-low method:
Standard VOH rate = Change in cost/Change in activity
= $288,000/24,000
= $12/hour
FOH rate = Total rate VOH rate
= $18 $12
= $6
301
927
2.
Concluded
3.
To find the VOH spending variance, we need to find the actual hours. To find
AH, we first need to find the standard hours, SH:
Fixed OH volume variance = Budgeted fixed overhead (Fixed
overhead rate SH)
$36,000 = $360,000 ($6.00 SH)
$324,000 = $6.00 SH
SH = 54,000
Next, the actual hours need to be found:
VOH efficiency variance
$24,000
2,000
AH
= (AH SH)SVOR
= (AH 54,000)$12
= AH 54,000
= 52,000
5.
302
928
1.
2.
303
928
3.
Concluded
4.
Budgeted VOH
$4.70 48,250
$12,225 U
Spending
Applied VOH
$4.70 50,000
$8,225 F
Efficiency
Budgeted FOH
$50,000
$500 U
Spending
Applied FOH
$1 50,000
$0
Volume
304
929
1.
Performance Report
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total
Actual
Costs
$ 775,000
590,000
310,000
180,000
$1,855,000
Budgeted
Costs*
$ 750,000
600,000
300,000
165,000
$1,815,000
Variance
$25,000 U
10,000 F
10,000 U
15,000 U
$40,000 U
*Uses the variable unit standard costs for materials, labor and variable overhead (e.g., DM = $15 50,000); fixed overhead = $3.00 55,000 (the FOH rate
is based on expected production).
2.
305
929
Continued
d. FOH variances:
Spending variance = Actual FOH Budgeted FOH
= $180,000 $165,000
= $15,000 U
Volume variance = Budgeted FOH (FOH rate SH)
= $165,000 ($2.50 60,000)
= $15,000 U
Note: FOH rate is calculated as follows:
Hours allowed
306
929
Concluded
3.
(a)
Materials
770,000 770,000
(b)
(a)
MPV
5,000 5,000
(h)
Accrued Payroll
590,000
(b)
(c)
(d)
(e)
Finished Goods
1,800,000 1,800,000
(f)
MUV
20,000 20,000
(b)
(c)
Work in Process
750,000 1,800,000
600,000
300,000
150,000
(j)
(g)
Accounts Payable
775,000 (a)
(i)
LRV
40,000 40,000 (c)
(f)
LEV
(c) 30,000 30,000 (k)
307
(j)
930
1.
April (UCL = Upper control limit, and LCL = Lower control limit)
Materials:
Price standard: $0.25 723,000 = $180,750
UCL: 0.08 $180,750 = $14,460
LCL: ($14,460)
Quantity standard: 8 90,000 $0.25 = $180,000
UCL: 0.08 $180,000 = $14,400
LCL: ($14,400)
Labor:
Price standard: $7.50 36,000 = $270,000
UCL: 0.08 $270,000 = $21,600
LCL: ($21,600)
Quantity standard: 0.4 90,000 $7.50 = $270,000
UCL: 0.08 $270,000 = $21,600
LCL: ($21,600)
May
Materials:
Price standard: $0.25 870,000 = $217,500
UCL: 0.08 $217,500 = $17,400
LCL: ($17,400)
Quantity standard: 8 100,000 $0.25 = $200,000
UCL: 0.08 $200,000 = $16,000
LCL: ($16,000)
Labor:
Price standard: $7.50 44,000 = $330,000
UCL: 0.08 $330,000 = $26,400
LCL: ($26,400)
Quantity standard: 0.4 100,000 $7.50 = $300,000
UCL: 0.08 $300,000 = $24,000
LCL: ($24,000)
308
930
Continued
June
Materials:
Price standard: $0.25 885,000 = $221,250
UCL: 0.08 $221,250 = $17,700
LCL: ($17,700)
Quantity standard: 8 110,000 $0.25 = $220,000
UCL: 0.08 $220,000 = $17,600
LCL: ($17,600)
Labor:
Price standard: $7.50 46,000 = $345,000
UCL: 0.08 $345,000 = $27,600
LCL: ($27,600)
Quantity standard: 0.4 110,000 $7.50 = $330,000
UCL: 0.08 $330,000 = $26,400
LCL: ($26,400)
2.
April
MPV
MUV
LRV
LEV
May
MPV
MUV
LRV
LEV
17,400
16,000**
26,400
24,000**
June
MPV
MUV
LRV
LEV
17,700
17,600
27,600
26,400
Limit
$ 14,460
14,400
21,600
21,600
309
Actual*
4.6%
0.4%
0.0
0.0
0.3%
8.8%
(2.3%)
10.0%
4.0%
0.6%
4.5%
4.5%
930
3.
Continued
Control charts allow us to see when the variances are outside an acceptable
range. They may also show a pattern that may help in pinpointing when the
problem began.
Control charts: To simplify the presentation, the variances are expressed as a
percentage of the total quantity or price standard, and the Y-axis is used for
variances. These percentages were calculated in Requirement 2.
MPV:
%
10.0
8.0
x
x
0.0
8.0
APRIL
MAY
310
JUNE
930
Continued
MUV:
%
10.0
x
8.0
0.0
8.0
APRIL
MAY
311
JUNE
930
Continued
LRV:
%
10.0
8.0
x
0.0
x
x
8.0
APRIL
MAY
312
JUNE
930
Concluded
LEV:
%
10.0
8.0
x
0.0
8.0
APRIL
MAY
JUNE
931
1.
Hepler Company must put 60,000 units of lower-quality material into production in order to produce 54,000 finished units:
Good units/(1 Rejection rate) = Units required
54,000/0.9 = 60,000 units
2.
In order to produce 60,000 units (54,000 good units and 6,000 rejects), Hepler
Company must utilize the following labor:
New team = 8 Assembler A, 1 Assembler B, 1 Machinist
New team will work at 80 percent of the efficiency of the old team.
Assembler A: 8 hours (60,000/80) = 6,000 hours
Assembler B: 1 hour (60,000/80) = 750 hours
Machinist:
1 hour (60,000/80) = 750 hours
313
931
3.
Concluded
80
11
15
$ 106
80
$ 1.325
314
932
1.
$3.00
1.60
2.00
1.00
$7.60
= $1,000
= $1,000
= $50,000
= $5.00
= ($10,000)
= ($10,000)
= ($10,000)
= $60,000
= 12,000
SQ/unit = 12,000/20,000
= 0.6 lb. per unit
**Actual VOH (Standard VOH rate AH)
$46,000 (Standard VOH rate 4,400)
4,400(Standard VOH rate)
Standard VOH rate
= $2,000
= $2,000
= $44,000
= $10
= $4,000
= $4,000
= $4,000
= $40,000
= 4,000
315
932
Concluded
= $3,200
= $3,200
= $3,200
= $8.00
= $3,000
= $3,000
= $20,000
= $5.00
= $4,000
= $4,000
= $4,000
= $24,000
4.
316
2.
The disadvantages that can result from using a standard costing system include the following:
Cost standards that are too tight can have negative implications which may
cause demotivation.
Standards may ignore qualitative characteristics which may jeopardize
product quality.
Variance analysis at the operational level may limit the emphasis on continual improvement found in the new manufacturing environment.
3.
A standard costing system must be supported by top management to be successful. The parties who should participate in the standard-setting process
include all levels of the organization, e.g., purchasing, engineering, production, and cost accounting.
4.
317
933
Concluded
Standards that are set for routine activities, which can be identifiable and
measurable, can be associated with specific cost factors of uniform products
in long production runs.
Standards promote cost control through the use of variance analysis and performance reports.
5.
There could be negative employee reaction as the employees did not participate in the standard-setting process.
There could be dissatisfaction if the standards contain cost elements that are
not controllable by the production groups who are then held responsible for
any unfavorable variances.
The outside firm may not fully understand the manufacturing process; this
could result in poor management decisions based on faulty information.
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1.
By using a standard cost system, Sabroso Chips can increase control of its
manufacturing inputs. By developing price and quantity standards for each
input, management can compute price and usage variances for each input.
Since a standard cost system provides more information, control is enhanced. For example, since managers have the most control over usage of
inputs, knowing the usage variances provides specific information about
where action is needed. Moreover, by breaking out price variances which are
not as controllable, performance evaluation is improved.
2.
318
934
3.
Concluded
$3.7931
1.9800
1.6500
0.5200
$0.0912
0.2318
0.1652
0.3421
0.1534
$ 7.9431
0.9837
1.1410
1.9349
$12.0027
$ 0.8002
319
935
1.
Pats decision was wrong and not in the best interests of the company. His
concern for his bonus and promotion was apparently more important than his
companys reputation for a quality product. Unfortunately, his assessment of
personal risk was probably a significant input to the decision to buy the inferior component. All too often, individuals decide to take an unethical course
of action based on their assessment of their chances of getting caught. This
obviously should not be a factor. What is right should be the driving concern
for this type of decision.
2.
3.
Purchasing agents have ethical responsibilities similar to accountants. Integrity is a universally desirable characteristic. Pat and other purchasing agents
should refrain from engaging in any activity that would prejudice their abilities to carry out their duties ethically (III-2); and refrain from a conflict of interest, either actual or apparent (III-1). Organizations would be well advised to
adopt a set of ethical standards. All employees should understand that certain behaviors are unacceptable.
RESEARCH ASSIGNMENTS
936
Answers will vary.
937
Answers will vary.
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