9 -1

CHAPTER
Standard
Costing: A
Managerial
Control Tool
 9 -2

Objectives
1. Tell how unit standards
After arethis
studying set and why
standard costing systems are
chapter, you shouldadapted.
2. State the purposebeofable
a standard
to: cost sheet.
3. Describe the basic concepts underlying
variance analysis, and explain when
variances should be investigated.
4. Compute the material and labor variances,
and explain how they are used for control.
Continued
 9 -3

Objectives
5. Calculate the variable and fixed overhead
variances, and give their definitions.
6. Appendix: Prepare journal entries for
materials and labor variances, and show how
to account for overhead variances.
 9 -4

Cost control often means

the difference between
success and failure.
 9 -5

Why Standard Cost Systems

Are Adopted
• Standard costing systems enhance planning
and control and improve performance
measurement.
• Standard costing systems facilitate product
costing.
 9 -6

Manufacturing Costs
Direct Direct
Materials Labor Overhead
Actual costing system Actual Actual Actual
Normal costing system Actual Actual Budgeted
Standard costing system Standard Standard Standard
 9 -7

Standard Cost Sheet

for Corn Chips
Standard Standard Standard
Description Price Usage Cost Subtotal
Direct materials:
Yellow corn $0.006 18 oz. $0.108
Cooking oil 0.031 2 oz. 0.062
Salt 0.005 1 oz. 0.005
Lime 0.400 0.01 oz. 0.004
Bags 0.044 1 bag. 0.044
Total direct materials $0.223
 9 -8

Standard Cost Sheet

for Corn Chips
Standard Standard Standard
Description Price Usage Cost Subtotal
Direct materials $0.223
Direct labor:
Inspectors $7.000 0.0070 hr. $0.049
Machine operators 10.000 0.0008 hr. 0.008
Total direct labor 0.057
Overhead:
Variable overhead 3.850 0.078 hr. $0.030
Fixed overhead 32.050 0.0078 hr. 0.250
Total overhead 0.280
Total standard unit cost $0.560
 9 -9

During the first week of March, 100,000

packages of corn chips are produced.

The standard quantity of yellow corn

meal per package is 18 ounces.
 9 -10

Standard Quantity of Materials Allowed

SQ = Unit quantity standard x Actual output
= 18 x 100,000
= 1,800,000 ounces

Standard Hours Allowed

SH = Unit labor standard x Actual output
= 0.0008 x 100,000
= 80 direct labor hours
 9 -11

Total variance = Price variance + Usage variance

= (AP – SP)AQ + (AQ – SQ)SP
= [(AP x AQ) – (SP x AQ)]
+ [(SP x AQ) – (SP x SQ)]
= (AP x AQ) – (SP x AQ)]
+ (SP x AQ) – (SP x SQ)
= (AP x AQ) – (SP x SQ)
 Variance Analysis: General Description 9 -12

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

Price Variance Usage

(1-2) Variance (2-3)

Budget
Variance (1-3)
 9 -13

Unfavorable variances
occur whenever actual Favorable variances
prices or usage of inputs occur whenever the
are greater than standard opposite occurs.
prices or usage.
 9 -14

Cost

x
$110,000
x
x
x
$100,000
x
x $ 90,000

Time
 9 -15

Variance Analysis: Materials and Labor

Actual production 48,500 bags of corn chips

Actual cost of corn 780,000 ounces of $0.0069 = $5,382
Actual cost of
inspection labor 360 hours at $7.35 = $2,646

Actual Costs Budgeted Costs Total Variance

Corn $5,382.00 $5,238.00 $144.00 U
Inspection labor 2,646.00 2,376.50 269.50 U
 Variance Analysis: Columnar Approach 9 -16

AQ x AP AQ x SP SQ x SP
780,000 x 0.0069 780,000 x $.0.0060 873,000 x $0.0060
$5,382 $4,680 $5,238

$558 F
$702 U
Usage
Price Variance
Variance

$144 U
Total Variance
 9 -17

Material Price Variance

MPV = (AP – SP)AQ

The actual
The actual
The standard
quantity of
price per price
unit per unit
material used
 9 -18

Material Price Variance

MPV = (AP – SP)AQ
= ($0.0069 – $0.0060)780,000
= $0.0009 x 780,000
= $702 U

Percent of SP x SQ = $702/$4,680 = 15%

 9 -19

Direct Materials Usage Variance

MUV = (AQ – SQ)SP

The standard
The actual
The standard
quantity
quantity of of
price per unit
materials
materials used
allowed for the
actual output
 9 -20

Direct Materials Usage Variance

MUV = (AQ – SQ)SP
= (780,000 – 873,000)($0.006)
= 93,000 x $0.006
= $558 F

Percent of SQ x SP = $558/$5,238 = 10.7%

 9 -21

Labor Rate Variances

LRV = (AR – SR)AH

The actual The actual

The standard
hourly wage direct labor
hourly wage
rate rate hours used
 9 -22

Labor Rate Variances

LRV = (AR – SR)AH
= ($7.35 – $7.00)360
= $0.35 x 360
= $126 U

Percent of SR x SH = $126/$2,520 = 5%
 Labor Variances: Columnar Approach 9 -23

AH x AR AH x SR SH x SR
360 x $735 360 x $7.00 339.5 x $7.00
$2,646 $2,520 $2,376.50

$126 U $143.50 U
Rate Variance Efficiency Variance

$269.50 U
Total Variance
 9 -24

Labor Efficiency Variances

LEV = (AH – SH) SR

The actual The standard

The standard
direct labor hourly wage
direct labor
hours used hours that rate
should have
been used
 9 -25

Labor Efficiency Variances

LEV = (AH – SH)SR
= (360 – 339.5)$7
= 20.5 x $7
= $143.50 U

Percent of SH x SR = $143.50/$2,376.50 = 6%
 9 -26

Variable Overhead Variances

Variable overhead rate (standard) $3.85/DLH
Actual variable overhead costs $1,600
Actual hours worked 400
Bags of chips produced 48,500
Hours allowed for production 373.3
Applied variable overhead $1,456
Variable Overhead Variances: Columnar Approach 9 -27

Actual VO Rate x VO Rate x

VO Actual Hours Standard Hours
$1,600 $1,540 $1,456

$60 U $84 U
Spending Efficiency Variance
Variance

$144 U
Total Variance
 9 -28

Variable Overhead
Spending Variances
VOSV = (AVOR x AH) – (SVOR x AH)
= (AVOR – SVOR)AH
= ($4.00 – $3.85)400
= $60 U
 9 -29

Crunch Chips, Inc.

Flexible Budget Performance Report
For the Week Ended March 8, 2004
Cost Actual Spending
Formula Costs Budget Variance

Gas $3.00 $1,190 $1,200 $10 F

Electricity 0.78 385 312 73 U
Water 0.07 25 28 3 F
Total cost $3.85 $1,600 $1,540 $60 U
 9 -30

Crunch Chips, Inc.

Performance Report
For the Week Ended March 8, 2004
Budget
for
Cost Actual Spending Standard Efficiency
Formula Costs Budget Variance Hours Variance

Gas $3.00 $1,190 $1,200 $10 F $1,135 $65 U

Electricity 0.78 385 312 73 U 295 17 U
Water 0.07 25 28 3 F 26 2U
Total cost $3.85 $1,600 $1,540 $60 U $1,456 $84 U
 9 -31

Fixed Overhead Variances

Budgeted or Planned Items
Budgeted fixed overhead $749,970
Practical activity 23,400 direct labor hours
Standard fixed overhead rate $32.05

Hours allowed toActual

produce 3,000,000 bags of chips:
Results
0.078 x 3,000,000 = $23,400
Actual production 2,750,000 bags of chips
Actual fixed overhead cost $749,000
Standard hours allowed for actual
production 21,450
 9 -32

Total Fixed Overhead Variances

Applied fixed = Standard fixed overhead rate
overhead x Standard hours
= $32.05 x 21,450
= $687,473 (rounded)
Total fixed = $749,000 – $687,473
overhead variance
= $61,527 underapplied
Fixed Overhead Variances: Columnar Approach 9 -33

Actual FO Budgeted FO Applied FO

$749,000 $749,970 $687,473

$970 F $62,497 U
Spending Volume
Variance Variance

$61,527 U
Total Variance
 9 -34

Crunch Chips, Inc.

Performance Report
For the Year Ended 2004
Fixed Actual Budgeted
Overhead Items Costs Cost Variance
Depreciation $530,000 $530,000 $ ----
Salaries 159,370 159,970 600 F
Taxes 50,500 50,000 500 U
Insurance 9,130 10,000 870 F
Total fixed overhead $749,000 $749,970 $970 F
 9 -35

Volume Variance
Volume variance = $32.05(23,400 – 21,450)
= ($32.05 x 23,400) – ($32.05 x 21,450)
= $749,970 – $687,473
= Budgeted fixed overhead – Applied
fixed overhead
= $62,497 U
 9 -36

Appendix:
Accounting for
Variances
 9 -37

The actual price is $0.0069 per ounce of

corn and standard price is $0.0060, and
780,000 ounces of corn are purchased.

Materials Inventory 4 680 00

The receiving report and the invoice are
Materials Price Variance 702 00
used to record the receipt of the
Accounts Payable
merchandise and to control the payment. 5 382 00

Material Price Variance

 9 -38

During the period 780,000 ounces of corn

is placed into production. The
standard quantity is 873,000 ounces,
and standard price is $0.006.

Work in Process 5 238 00

The receiving report and the invoice are
Materials Usage Variance 558 00
used to record the receipt of the
Materials Inventory
merchandise and to control the payment. 4 680 00

Material Usage Variance

 9 -39
During the period the firm has 360 actual
inspection hours, while the standard hours
for the units produced is 339.5 hours. The
actual rate is $7.35 per hour while the
standard rate is $7.00 per hour.

Work in Process 2 376 00

The receiving report and the invoice are
Labor Efficiency Variance 143 50
used to record the receipt of the
Labormerchandise
Rate Variance and to control the payment.
126 00
Accrued Payroll 2 646 00

Labor Variances
 9 -40

At the end of the year, the variances for

materials and labor are usually closed to
Cost of Goods Sold.

Cost of Goods Sold 971 50

The receiving report and the invoice are
Material Price Variance 702 00
used to record the receipt of the
Labor Efficiency Variance
merchandise and to control the payment. 143 50
Labor Rate Variance 126 00

Closing Variances
 9 -41

At the end of the year, the variances for

materials and labor are usually closed to
Cost of Goods Sold.

Material Usage Variance 558 00

The receiving report and the invoice are
Cost of Goods Sold 558 00
used to record the receipt of the
merchandise and to control the payment.

Closing Variances
 9 -42

Chapter Nine

The End
9 -43