NOVA ACC 212 - Performance Evaluation Through Standard Cost

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Performance Evaluation Through Standard Costs Adapted for Accounting 212Slide 2The Need for StandardsStandards and Budgets STUDY OBJECTIVE 1Why Standard Costs? STUDY OBJECTIVE 2Setting Standard Costs STUDY OBJECTIVE 3A Case StudyDirect Materials StandardSetting Direct Materials Price StandardSlide 10Setting Direct Materials Quantity StandardTotal Direct Materials Cost/UnitDirect Labor Price StandardSetting Direct Labor Price StandardDirect Labor Quantity StandardSetting Direct Labor Quantity StandardDirect LaborManufacturing Overhead StandardComputing Predetermined Overhead RatesStandard Cost Per Gallon of Weed-OVariances from StandardsActual Production Costs and Computation of Total VarianceAnalyzing variancesRelationships of VariancesFormula for Total Materials Variance STUDY OBJECTIVE 4Formula for Materials Price VarianceFormula for Materials Quantity VarianceSummary of Materials VarianceMatrix for Direct Materials VarianceCauses of Materials VariancesFormula for Total Labor VarianceFormula for Labor Price VarianceFormula for Labor Quantity VarianceSummary of Labor VariancesMatrix for Direct Labor VariancesActual Overhead Costs STUDY OBJECTIVE 5Formula for Total Overhead VarianceFormula for Overhead Controllable VarianceFormula for Overhead Volume VarianceSlide 40Detailed Analysis of Overhead Volume VarianceAlternative Formula for Overhead Volume VarianceSummary of Overhead VarianceMatrix for Manufacturing Overhead VarianceReporting Variances STUDY OBJECTIVE 6Standard Cost Accounting System STUDY OBJECTIVE 7Standard Cost System Journal Entry #1Standard Cost System Journal Entry #2Standard Cost System Journal Entry #3Standard Cost System Journal Entry #4Standard Cost System Journal Entry #5Standard Cost System Journal Entry #6Standard Cost System Journal Entry #7Standard Cost System Journal Entry #8Standard Cost System Journal Entry #9Statement Presentation of VariancesVariances in Income Statement for ManagementPerformance Evaluation Through Performance Evaluation Through Standard CostsStandard CostsAdapted forAdapted forAccounting 212Accounting 212Chapter 26Chapter 26CHAPTER 26Performance Evaluation Through Standard CostsAfter studying this chapter, you should be able to:1 Distinguish between a standard and a budget.2 Identify the advantages of standard costs.3 Describe how standards are set.4 State the formulas for determining direct materials and direct labor variances.5 State the formulas for determining manufacturing overhead variances.6 Discuss the reporting of variances.7 Enumerate the features of a standard cost accounting system.The Need for Standards•Standards –common in business–those imposed by government agencies are often called regulations (such as Fair Labor Standards Act)•Standard costs–predetermined unit costs used as measures of performanceStandards and Budgets STUDY OBJECTIVE 1•Both are pre-determined costs and both contribute to management planning and control.•Standard–unit amount•Budget–total amount•Standard costs may be incorporated into a cost accounting system.Why Standard Costs?STUDY OBJECTIVE 2Setting Standard CostsSTUDY OBJECTIVE 3•Input from all persons who have responsibility for costs and quantities. •Two levels –Ideal standards •optimum levels of performance under perfect operating conditions –Normal standards•efficient levels of performance attainable under expected operating conditionsA Case Study•To establish the standard cost of producing a product, it is necessary to establish standards for each manufacturing cost element - direct materials, direct labor, and manufacturing overhead. •The standard for each element is derived from the standard price to be paid and the standard quantity to be used.•To illustrate, assume that Xonic, Inc., wishes to use standard costs to measure performance in filling an order for 1,000 gallons of Weed-O, a liquid weed killer.WEED-ODirect Materials Standard•Cost per unit which should be incurred–purchasing department’s best estimate of the cost of raw materials–include amount for related costs•receiving, storing, and handlingSetting Direct Materials Price StandardStandard direct materials price per pound $3.00The materials price standard per pound of material for Xonic’s weed killer is:WEED-ODirect Materials Standard•Quantity of direct materials used per unit of finished goods•Physical measure–pounds, barrels, or board feet, etc.–includes allowances of unavoidable waste and normal storage.Setting Direct Materials Quantity StandardStandard direct materials quantity per unit 4.0The standard quantity per unit for Xonic’s Weed-O is as follows:WEED-OTotal Direct Materials Cost/UnitSTANDARD DIRECTMATERIALSPRICEx=STANDARDDIRECT MATERIALSQUANTITYSTANDARDDIRECT MATERIALS COSTPER UNIT•The standard direct materials cost per unit is calculated as follows for a gallon of Weed-O:$3.00 x 4.0 pounds = $12.00Direct Labor Price Standard•Rate per hour incurred for direct labor.–based on current wage rates adjusted for anticipated changes, such as cost of living adjustments–includes employer payroll taxes and fringe benefitsSetting Direct Labor Price StandardStandard direct labor rate per hour $10.00For Xonic, Inc., the direct labor price standard is as follows:WEED-ODirect Labor Quantity Standard•Time required to make one unit of the product•Critical in labor-intensive companies.–allowances should be made for rest periods, cleanup, machine setup and machine downtimeSetting Direct Labor Quantity StandardStandard direct labor hours per unit 2.0For Xonic, Inc., the direct labor quantity standard is as follows:WEED-ODirect LaborSTANDARD DIRECTLABOR RATESTANDARD DIRECTLABOR HOURSSTANDARD DIRECTLABOR COSTPER UNIT•The standard direct labor cost per unit is calculated as follows for a gallon of Xonic’s Weed-O: $10.00 x 2.0 hours = $20.00Manufacturing Overhead Standard•Based on a standard predetermined overhead rate.•Divide budgeted overhead costs by an expected standard activity index.•The standard manufacturing overhead rate per unit is the predetermined overhead rate times the direct labor quantity standard.Computing PredeterminedOverhead Rates$3.00 2.00$5.00Xonic, Inc., uses standard direct labor hours as the activity index. The company expects to produce 13,200 gallons of Weed-O


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