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Standard Cost Systems

Chapter 24

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All


Standard Cost Systems
Based on carefully
predetermined amounts.

Used for planning labor, material


Standard and overhead requirements.
Costs are
The expected level
of performance.

Benchmarks for
measuring performance.

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Standard Cost Systems
A standard cost variance
is the amount by which
an actual cost differs from
the standard cost.

Standard cost
Amount

Direct
Material
Direct Manufacturing
Labor Overhead

Type of Product Cost


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Standard Cost Systems
This variance is unfavorable This variance is
because the actual cost favorable because
exceeds the standard cost. the actual cost
is less than the
standard cost.
Amount

Direct
Material
Direct Manufacturing
Labor Overhead

Type of Product Cost


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Direct Materials Standards
Price Quantity
Standard Standards
s

Use competitive Use product


bids for the quality design specifications.
and quantity desired.

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Direct Labor Standards
Rate Time
Standards Standards

Use wage Use time and


surveys and motion studies for
labor contracts. each labor operation.

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Manufacturing Overhead
Standards
Rate Activity
Standards Standards

The rate is based The activity is the


on an estimate of total cost driver used to
overhead at the normal calculate the overhead
level of activity. rate.

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A General Model for
Variance Analysis
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance


Standard price is the amount that should
have been paid for the resources acquired.

Standard quantity is the quantity that should


have been used for the actual good output.

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A General Model for
Variance Analysis
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance


AQ(AP - SP) SP(AQ - SQ)
AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity

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Manufacturing Overhead
Variances
Budgeted Applied
Actual Overhead at Overhead at
Overhead Actual Activity Standard Hours

Spending Volume
Variance
Variance
Shows how economically overhead Caused by producing at
Services were purchased and how a level other than that
efficiently overhead services were used for computing the
used. Contains both fixed and standard overhead rate.
variable costs. Contains only fixed
A controllable variance. costs.
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Manufacturing Overhead Zippy

Variances Example
Budgeted Applied
Actual Overhead at Overhead at
Overhead Actual Activity Standard Hours

$15,450 $9,000 fixed 3,200 hrs.


+ ×
$6,400 variable $5.00 per hr.

$2.00 per hr. × 3,200 hrs.


Spending variance Volume variance
$50 unfavorable $600 favorable

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Disposing of Variances
Standard Cost Variances

Close to Close by
Cost of Goods Sold apportioning to:
Work in Process
Finished Goods
Cost of Goods Sold

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Summary of Variance
Computations and Manager
Responsibilities
Variance Computation Manager Responsible
Materials
Price variance AQ × (SP – AP) Purchasing agent
Quantity variance SP × (SQ – AQ) Production manager
Labor
Rate Variance AH × (SR – AR) Production manager
Efficiency variance SR × (SH – AH) Production manager
Overhead
Spending variance Budgeted OH at Actual Production Production manager for
Level – Actual OH the controllable costs.

Volume variance Actual OH at Standard Rate – None – A result of producing


Budgeted OH at Actual Production Level at a level other than normal.

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Ethics, Fraud, and
Corporate Governance
For a company using standard costing systems,
the accuracy of the inventory and cost of goods
sold figures reported in the company’s financial
statements is dependent on the reliability of the
standard cost numbers.

A company’s financial statements can be


materially misstated when standard costs are
not representative of manufacturing costs
incurred.

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End of Chapter 24

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