10-1

Standard Costs and Overhead Analysis

Chapter Ten

10-2

Massa, Inc.

Product: Pizza Sales April (Forecast): 1,500 pizzas Direct Material: cheese Standard Price per kg of cheese: $10/kg Standard Quantity per pizza: 0.4kg/pizza

10-3

Standard Costs
Standards are benchmarks or norms for measuring performance. Two types of standards are commonly used.
Quantity standards specify how much of an input should be used to make a product or provide a service. Cost (price) standards specify how much should be paid for each unit of the input.

10-4

Massa, Inc.
Product: Pizza Sales April (Forecast): 1,500 pizzas Direct Material: cheese Standard Price per kg of cheese: $10/kg Standard Quantity per pizza: 0.4kg/pizza April: 1,500 pizzas sold 750 kg of cheese. Direct Material cost: $6,750 1) More cheese per pizza 2) Cheese more expensive

10-5

Standard Cost Card Variable Production Cost A standard cost card for one unit of product might look like this:
A
Standard Quantity or Hours
3.0 lbs. 2.5 hours 2.5 hours

B
Standard Price or Rate

AxB
Standard Cost per Unit
12.00 35.00 7.50 54.50

Inputs
Direct materials Direct labor Variable mfg. overhead Total standard unit cost

$ 4.00 per lb. $ 14.00 per hour 3.00 per hour $

10-6

Standards vs. Budgets

Are standards the same as budgets? A budget is set for total costs.

A standard is a per unit cost. Standards are often used when preparing budgets.

10-7

A General Model for Variance Analysis

Variance Analysis

Price Variance

Quantity Variance

Difference between actual price and standard price

Difference between actual quantity and standard quantity

10-8

A General Model for Variance Analysis

Variance Analysis

Price Variance

Quantity Variance

Materials price variance Labour rate variance VOH spending variance

Materials quantity variance Labour efficiency variance VOH efficiency variance

10-9

A General Model for Variance Analysis

Actual Quantity Actual Price

Actual Quantity Standard Price

Standard Quantity Standard Price

Price Variance

Quantity Variance

10-10

A General Model for Variance Analysis

Actual Quantity Actual Price

Actual Quantity Standard Price

Standard Quantity Standard Price

Price Variance

Quantity Variance

Actual quantity is the amount of direct materials, direct labour, and variable manufacturing overhead actually used.

10-11

A General Model for Variance Analysis

Actual Quantity Actual Price

Actual Quantity Standard Price

Standard Quantity Standard Price

Price Variance

Quantity Variance

Standard quantity is the standard quantity allowed for the actual output of the period.

10-12

A General Model for Variance Analysis

Actual Quantity Actual Price

Actual Quantity Standard Price

Standard Quantity Standard Price

Price Variance

Quantity Variance

Actual price is the amount actually paid for the input used.

10-13

A General Model for Variance Analysis

Actual Quantity Actual Price

Actual Quantity Standard Price

Standard Quantity Standard Price

Price Variance

Quantity Variance

Standard price is the amount that should have been paid for the input used.

10-14

A General Model for Variance Analysis

Actual Quantity Actual Price

Actual Quantity Standard Price

Standard Quantity Standard Price

Price Variance
(AQ AP) (AQ SP) AQ (AP SP) AQ = Actual Quantity AP = Actual Price

Quantity Variance
(AQ SP) (SQ SP) SP x (AQ SQ) SP = Standard Price SQ = Standard Quantity

10-15

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.

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Quick Check

Hansons material price variance (MPV) for the week was: a. $170 unfavourable. b. $170 favourable. c. $800 unfavourable. d. $800 favourable.

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Quick Check

Hansons material quantity variance (MQV) for the week was: a. $170 unfavourable. b. $170 favourable. c. $800 unfavourable. d. $800 favourable.

10-18

Quick Check

Actual Quantity Actual Price 1,700 lbs. $3.90 per lb. = $6,630

Actual Quantity Standard Price 1,700 lbs. $4.00 per lb. = $ 6,800

Standard Quantity Standard Price 1,500 lbs. $4.00 per lb. = $6,000

Price variance $170 favourable

Quantity variance $800 unfavourable

10-19

Variance Analysis Cycle

Take corrective actions

Exhibit 10-1

Identify questions

Receive explanations

Analyze variances Prepare standard cost performance report

Conduct next periods operations

Begin

10-20

Material Variances

Hanson purchased and used 1,700 pounds. How are the variances computed if the amount purchased differs from the amount used?

The price variance is computed on the entire quantity purchased. The quantity variance is computed only on the quantity used.

10-21

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.

10-22

Quick Check Continued

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

Price variance $280 favourable

10-23

Quick Check Continued

Actual Quantity Used Standard Price 1,700 lbs. $4.00 per lb. = $6,800 Quantity variance is unchanged because actual and standard quantities are unchanged.

Standard Quantity Standard Price 1,500 lbs. $4.00 per lb. = $6,000

Quantity variance $800 unfavourable

10-24

Labour Variances Summary

Actual Hours Actual Rate Actual Hours Standard Rate Standard Hours Standard Rate

Rate variance

Efficiency variance

(AH AR) (AH SR) AH (AR SR) AH = Actual Hours AR = Actual Rate

(AQ SP) (SQ SP) SP x (AQ SQ) SR = Standard Rate SH = Standard Hours

10-25

Quick Check

Hanson Inc. has the following direct labour standard to manufacture one Zippy:
1.5 standard hours per Zippy at $12.00 per direct labour hour

Last week, 1,550 direct labour hours were worked at a total labour cost of $18,910 to make 1,000 Zippies.

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Quick Check

Hansons labour rate variance (LRV) for the week was: a. $310 unfavourable. b. $310 favourable. c. $300 unfavourable. d. $300 favourable.

10-27

Quick Check

Hansons labour efficiency variance (LEV) for the week was: a. $590 unfavourable. b. $590 favourable. c. $600 unfavourable. d. $600 favourable.

10-28

Quick Check

Actual Hours Actual Rate 1,550 hours $12.20 per hour = $18,910

Actual Hours Standard Rate 1,550 hours $12.00 per hour = $18,600

Standard Hours Standard Rate 1,500 hours $12.00 per hour = $18,000

Rate variance $310 unfavourable

Efficiency variance $600 unfavourable

10-29

Responsibility for Labour Variances

Production managers are usually held accountable for labour variances because they can influence the: Mix of skill levels assigned to work tasks. Level of employee motivation. Quality of production supervision. Quality of training provided to employees.

10-30

Variance Analysis and Management by Exception

How do I know which variances to investigate?

Larger variances, in dollar amount or as a percentage of the standard, are investigated first.

10-31

Standard Costs
Deviations from standards deemed significant are brought to the attention of management, a practice known as management by exception.

Amount

Standard Direct Material

Direct Labour

Manufacturing Overhead

Type of Product Cost

10-32

A Statistical Control Chart

Exhibit 10-9

Warning signals for investigation Favourable Limit Desired Value

Unfavourable Limit

8 9

Variance Measurements