Professional Documents
Culture Documents
Chapter 11: Standard Costs and Variance Analysis Slides Prepared by: Scott Peterson Northern State University
Objectives
1. Explain how standard costs are developed. 2. Calculate and interpret variances for direct material. 3. Calculate and interpret variances for direct labor. 4. Calculate and interpret variances for manufacturing overhead. 5. Calculate the financial impact of operating at more or less than planned capacity.
Objectives
(Continued)
6. Discuss how the management by exception approach is applied to investigation of standard cost variances. 7. Explain why a favorable variance may be unfavorable, how process improvements may lead to unfavorable variances, and why evaluation in terms of variances may lead to overproduction.
Standard Costs
1. Standard cost refers to expected costs under anticipated conditions. 2. Standard cost systems allow for comparison of standard versus actual costs. 3. Differences are referred to as standard cost variances. 4. Variances should be investigated if significant.
Material Variances
1. Differences between standard and actual material costs: a. Material price variance. b. Material quantity variance.
Overhead Variances
1. Differences between overhead applied to inventory at actual overhead costs:
a. Controllable overhead variance. b. Overhead volume variance.
Calculating The Financial Impact Of Operating At More or Less Than Planned Capacity
1. Operating at less than planned capacity results in an unfavorable variance equal to the number of units (less than planned) x the marginal cost per unit. 2. Operating at more than planned capacity results in a favorable variance equal to the number of units (more than planned) x the marginal cost per unit.
Material Variances
1. Material price variance:(AP SP) x AQp : ($2.72 - $2.50) x 810,000 = $178,200 unfavorable. 2. Material quantity variance: (AQu SQ)SP: (809,000 800,000) x $2.50 = $22,500 unfavorable.
Labor Variances
1. Labor rate (price) variance: (AR SR)AH: ($12.10 - $12.00) x 130,000 = $13,000 unfavorable. 2. Labor efficiency (quantity) variance: (AH SH)SR: (130,000 125,000) x $12 = $60,000 unfavorable.
Overhead Variances
1. Controllable overhead variance: Actual overhead ($$) - flexible budget level of overhead ($$) for actual volume of production: $680,000 - $700,000 = $20,000 unfavorable. 2. Overhead volume variance: flexible budget level of overhead for actual level of production - overhead applied to production using standard overhead rate: $700,000 $750,000 = $50,000 favorable.
Management By Exception
1. Investigation of standard cost variances is a costly activity 2. Management must decide which variances to investigate. 3. Most managers practice management by exception. 4. What is exceptional? Usually an absolute dollar amount or a percentage dollar amount.
cr.
x
x
Copyright
2004 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.