Standard Costing: A FunctionalBased Control Approach

Prepared by

Douglas Cloud
Pepperdine University

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Objectives
1. Describe how unitstudying input standards are After this developed, and explain why standard cost chapter, you should systems are adopted. be able to: 2. Explain the purpose of a standard cost sheet. 3. Compute and journalize the direct materials and direct labor variances, and explain how they are used for control. 4. Compute overhead variances three different ways, and explain overhead accounting.
Continued
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Objectives
5. Calculate mix and yield variances for direct materials and direct labor.

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Unit Standard Cost

To determine the unit standard cost for a particular input, two decisions must be made:
1. How much of the input should be used per unit

of output (quantity decision)?

2. How much should be paid for the quantity of the input to be used (pricing decision)?

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Sources for Setting Standards

Historical experience
Engineering studies

Input from operating

personnel

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Establishing Standards
Ideal standards demand

maximum efficiency and can be achieved only if everything operates perfectly.

Currently attainable standards

can be achieved under efficient operating conditions.

Kaizen standards reflect a

planned improvement and are a type of currently attainable standard.

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Purpose of Standards
To Improve Planning and Control To Facilitate Product Costing

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Cost Assignment Approaches

Manufacturing Costs
Direct Materials Direct Labor Overhead

Actual costing system

Normal costing system

Actual
Actual

Actual
Actual Standard

Actual
Budgeted Standard

Standard costing system Standard

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9-9

Standard Cost Sheet

Deluxe Strawberry Frozen Yogurt

Description Direct materials: Yogurt Strawberries Milk Whipped cream Gelatin Container Total direct materials

Standard Price
$0.020 0.010 0.015 0.025 0.010 0.030 x x x x x x

Standard Standard Usage Cost Subtotal

25 oz. 10 oz. 8 oz. 4 oz. 1 oz. 1 = $0.50 = 0.10 = 0.12 = 0.10 = 0.01 = 0.03 $0.86

Continued
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Description

Standard Price

Standard Usage

Standard Cost

Subtotal

Direct labor: Machine operators $8.00 x 0.01 hr. = $0.08 Total direct labor Overhead: Variable overhead 6.00 x 0.01 hr. = $0.06 Fixed overhead 20.00 x 0.01 hr. = 0.20 Total overhead Total standard unit cost

$0.08

0.26 $1.20

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Standard Usage Allowed

Standard Quantity (SQ) of Materials Allowed for 20,000 quarts: SQ = Unit quantity standard x Actual output = 25 x 20,000 = 500,000 ounces Standard Hours (SH) of Labor Allowed for 20,000 quarts: SH = Unit quantity standard x Actual output = 0.01 x 20,000 = 200 direct labor hours
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Price and Usage Variances

Actual production: 30,000 quarts Actual yogurt usage: 780,000 ounces Actual price per ounce of yogurt: $0.025 Actual direct labor hours: 325 hours Actual wage rate: $8.20 per hour

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Price and Usage Variances

AP x AQ (Actual Quantity at Actual Price) (1) SP x AQ (Actual Quantity at Standard Price) (2) SP x SQ (Standard Quantity at Standard Price) (3)

Price Variance (1) (2)

Usage Variance (2) (3)

Total Variance (1) (3)

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Material Price Variance

MPV = (AP SP)AQ

Actual Actual price Standard pricequantity of direct per unit per unit material used

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Material Price Variance

MPV = (AP SP)AQ = ($0.025 $0.020)780,000 = $0.005 x 780,000 = $3,900 U

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Direct Materials Usage Variance

MUV = (AQ SQ)SP

Standard Actual quantity Standard price quantity of of materials per unit materials used allowed for the actual output

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Direct Materials Usage Variance

MUV = (AQ SQ)SP = (780,000 750,000)$0.02 = 30,000 x $0.02 = $600 U

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The actual price is $0.025 per ounce while the standard price is $0.020 and 780,000 ounces are purchased. Helado Company would make the following entry:
Materials

The receiving report and the invoice are Direct Materials Price Variance 900 00 used to record the receipt of 3 the Accounts Payable merchandise and to control the payment.

15 600 00

19 500 00

Material Price Variance

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The entry to record Helados usage of 780,000 ounces of yogurt during the first week of May would be:

Work in Process

The receiving report and the invoice are Direct Materials Usage Variance 600 00 used to record the receipt of the Materials merchandise and to control the payment.

15 000 00

15 600 00

Material Usage Variance

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Rate and Efficiency Variances

AH x AR (Actual Hours at Actual Rate) (1) AH x SR (Actual Hours at Standard Rate) (2) SH x SR (Standard Hours at Standard Rate) (3)

Rate Variance (1) (2)

Efficiency Variance (2) (3)

Total Variance (1) (3)
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Labor Rate Variances

LRV = (AR SR)AH

Actual direct Standard Actual hourly labor hours hourly wage wage rate rate used

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Labor Rate Variances

LRV = (AR SR)AH = ($8.20 $8.00)325 = $0.20 x 325 = $65 U

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Labor Efficiency Variances

LEV = (AH SH)SR

Actual direct Standard Standard hourly direct wage labor hours labor hours that used rate should have been used

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Labor Efficiency Variances

LEV = (AH SH)SR = (325 300)$8.00 = 25 x $8.00 = $200 U

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During the period Helado Company uses 325 actual direct labor hours, while the standard hours for the units produced is 300 hours. The actual rate incurred is $8.20 per hour while the standard rate is $8.00 per hour.
Work in Process

The receiving report and the invoice are Direct Labor Rate Variance 65 00 used to record the receipt of the Direct Labor Efficiency Variance 200 00 merchandise and to control the payment.
Wages Payable 2 665 00

2 400 00

Labor Variances
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Disposition of Direct Materials and Direct Labor Variances

Cost of Goods Sold

The receiving report and the invoice are Direct Materials Price Variance used to record the receipt of the Direct Materials Usage Variance merchandise and to control the payment.

4 765 00

3 900 00 600 00 65 00 200 00

Direct Labor Rate Variance Direct Labor Efficiency Variance

If immaterial in amount
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Disposition of Direct Materials and Direct Labor Variances

Work in Process Finished Goods Prime Costs $ 0 3,480 Percentage of Total 0% 20

Cost of Goods Sold

Total

13,920
$17,400

80
100 %

If material in amount
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Disposition of Direct Materials and Direct Labor Variances

The receiving report and the invoice are Cost of Goods Sold 3 812 00 used to record the receipt of the Direct Materials Price Variance merchandise and to control the payment.
Direct Materials Usage Variance Direct Labor Rate Variance Direct Labor Efficiency Variance Finished Goods 953 00

3 900 00 600 00 65 00 200 00

If material in amount
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Variable Overhead Variances

Variable overhead rate (standard) Actual variable overhead costs Actual hours worked Quarts of deluxe frozen strawberry yogurt produced Hours allowed for production Applied variable overhead $6.00/DLH $7,540 1,300 120,000 1,200 $7,200

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Variable Overhead Variances

Actual Variable Overhead (1)
Variable Overhead Rate x Actual Hours (2) Variable Overhead Rate x Standard Hours (3)

Spending Variance (1) (2)

Efficiency Variance (2) (3)

Total Variance (1) (3)

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Variable Overhead Spending Variances

VOSV = (AVOR x AH) (SVOR x AH)
= (AVOR SVOR)AH = ($5.80 $6.00)1,300 = $260 F

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Variable Overhead Efficiency Variances

VOSV = (AH SH)SVOR
= (1,300 1,200)$6.00 = $600 U

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Helado Company, Inc. Flexible Budget Performance Report For the Month Ended May 31, 2004

Cost Formula
Natural gas $3.80

Actual Costs
$4,400

Budget $4,940

Spending Variance
$540 F

Electricity
Water Total cost

2.00
0.20 $6.00

2,840
300 $7,540

2,600
260 $7,800

240 U
40 U $240 F

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Helado Company, Inc. Performance Report For the Month Ended May 31, 2004 Budget for Budget Actual for Actual Spending Standard Efficiency Cost Formula Costs Hours Variance Hours Variance Natural gas $3.80 $4,400 $4,940 $540 F $4,560 $380 U

Electricity
Water Total

2.00
0.20 $6.00

2,840
300 $7,540

2,600
260

240 U
40 U

2,400
240 $7,200

200 U
20 U $600 U

$7,800 $260 F

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Fixed Overhead Variances

Budgeted or Planned Items (May) Budgeted fixed overhead $20,000 Expected activity 1,000 direct labor hours Standard fixed overhead rate $20 Hours allowed toActual produce 100,000 quarts of frozen Results yogurt (0.01 x 100,000) Actual production 120,000 quarts Actual fixed overhead cost $20,500 Standard hours allowed for actual production (0.01 x 120,000) 1,200
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Total Fixed Overhead Variances

Applied fixed = Standard fixed overhead rate overhead x Standard hours = $20 x 1,200 = $24,000 Total fixed = $20,500 $24,000 overhead variance = $3,500 Overapplied

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Fixed Overhead Variances

Actual Fixed Overhead (1) Budgeted Fixed Overhead (2) Fixed Overhead Rate x Standard Hours (3)

Spending Variance (1) (2) Total Variance (1) (3)

Volume Variance (2) (3)

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Fixed Overhead Spending Variance

FOSV = AFOH BFOH
= $20,500 $20,000 = $500 U

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Helado Company, Inc. Performance Report For the Month Ended May 31, 2004 Fixed Overhead Items Actual Cost Budgeted Cost Variance

Depreciation Salaries Taxes Insurance Total

$ 5,000 13,400 1,100 1,000 $20,500

$ 5,000 $---13,000 400 U 1,050 50 U 950 50 U $20,000 $500 U

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Fixed Overhead Volume Variance

FOVV = Budgeted fixed overhead Applied fixed overhead = [Standard fixed overhead rate x SH(D)] (Standard fixed overhead x SH) = $20(1,000 1,200) = $4,000 F
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To assign overhead to production, the following entry is made:

Work in Process

The receiving report and the invoice are Variable Overhead Control used to record the receipt of the Fixed Overhead Control merchandise and to control the payment.

31 200 00

7 200 00
24 000 00

To recognize the incurrence of actual overhead, the following entry is needed:

Variance Overhead Control

The receiving report and the invoice are Fixed Overhead Control 20 500 00 used to record the receipt of the Miscellaneous Accounts merchandise and to control the payment. 28

7 540 00

040 00
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MIX AND YIELD VARIANCES: MATERIAL AND LABOR

Standard Mix Information: Direct Materials
Direct Material Peanuts Almonds Mix Mix Proportion 128 lbs. 32 lbs. 0.80 0.20 SP $0.50 1.00 Standard Cost $64 32

Total

160 lbs.

$96

Yield 120 lbs. Yield ratio: 0.75 (1.20/160) Standard cost of yield (SP): $0.80 per pound ($96/120 pounds of yield)
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Malcom Nut Company produces a batch of 1,600 pounds and produces the following actual results:
Direct Material

Actual Mix

Percentages

Peanuts Almonds Total Yield

1,120 lbs. 480 1,600 lbs. 1,300 lbs.

70 % 30 100 % 81.3 %

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Standard Mix
SM = Standard mix proportion x Total actual input quantity SM(peanuts) = 0.80 x 1,600 pounds = 1,280 pounds SM(almonds) = 0.20 x 1,600 pounds = 320 pounds

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Standard Mix
Mix Variance = 3(AQ SM)SP
Direct Material AQ SM AQ SM SP (AQ SM)SP

Peanuts 1,120 1,280 Almonds 480 320 Mix variance

-160 160

$0.50 1.00

$-80 60 $-80 U

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Direct Materials Yield Variance

Standard yield = Yield ratio x Total actual inputs Yield variance = (Standard yield Actual yield)SPy

Yield variance = (1,200 1,300)$0.80

= $80 F

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Standard Mix Information

Labor Type Shelling Mixing Total Yield Mix Mix Proportion 3 hrs. 2 hrs. 5 hrs. 120 lbs. 0.60 0.40 SP $ 8.00 15.00 Standard Cost $24 30 $54

Yield ratio: 24 = (120/5), or 2,400% Standard cost of yield (SPy): $0.45 per pound ($54/120 pounds of yield)

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Standard Mix Information

Malcom processes 1,600 pounds of nuts and produces the following actual results: Labor Type
Shelling Mixing Total Yield

Actual Mix
20 hrs. 30 hrs. 50 hrs. 1,300 lbs.

Mix Percentages*
40% 60% 100% 2,600%

*Uses 50 hours as the base.

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Direct Labor Mix Variance

Labor Type AH Shelling Mixing 20 30 SM 30 20 AH SM -10 10 SP $ 8.00 15.00 (AH SM)/SP $-80 150 $-70 U

Direct Labor mix variance

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Direct Labor Yield Variance

Using the standard mix information and the actual results, the yield variance is computed as follows: Yield variance = (Standard yield Actual yield)SPy = [(24 x 50) 1,300]$0.45 = (1,200 1,300)$0.45 = $45 F The yield variance is favorable because the actual yield is greater than the standard yield.

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Chapter
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End of

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