Standard Costs and Variances Standard Costs I a Standard Benchmark norm for measuring performance i Used in managerial accounting where they relate to the quantity and cost acquisition price of inputs used in manufacturing goods and providing services ii Quantity and price standards are set for each major input ex raw b Quantity Standards specify how much of an input should be used to make a materials and labor time product or provide a service c Price Standards specify how much should be paid for each unit of the input i Actual quantities and actual costs of inputs are compared to these standards ii Management by Exception If either quantity or cost of inputs departs significantly from the standards managers investigate the discrepancy to find the cause of the problem and eliminate it d Variance Analysis Cycle basic approach to identifying and solving problems i Highlight the Variances the differences between actual results and what should have occurred according to the standards ii Manufacturing Service Food and Not For Profit Organizations all make use of standards to some extent e Setting Standard Costs i Standards should be designed to encourage efficient future operations and repeat efficient past operations 1 Ideal Standards can be attained only under the best circumstances Allow for no machine breakdowns or other work interruptions and they call for a level of effort that can be attained only by the most skilled and efficient employees working a peak effort 100 of the time a Large variances from the ideal are normal and it is therefore difficult to manage by exception b Cannot be used to forecast cash flows and plan inventory because they do not allow for normal inefficiencies and result in unrealistic forecasts 2 Practical Standards standards that are tight but attainable Allow for normal machine downtime and employee rest periods and can be attained through reasonable though highly efficient efforts by the average worker a Variances from practical standards typically signal a need for management attention because they represent deviations that fall outside of normal operating conditions b Can be used in forecasting cash flows and in planning inventory f Setting Direct Material Standards i Standard Price Per Unit for Direct Materials should reflect the final delivered cost of the materials ii Standard Quantity Per Unit for Direct Materials should reflect the amount of materials required for each unit of finished product as well as an allowance for unavoidable waste g Setting Direct Labor Standards 1 Expressed in terms of a labor rate and labor hours ii Standard Rate Per Hour for Direct Labor should include hourly wages employment taxes and fringe benefits 1 Many companies prepare a single standard rate per hour for all employees in a department which reflects the expected mix of workers even though the actual wage rates may vary somewhat from individual to individual iii Standard Hours Per Unit the standard direct labor time required to complete a unit of product 1 Most difficult standard to determine 2 Break down each task into elemental body movements reaching pushing turning over Published tables of standard times for such movements can be used to estimate the total time required to complete the task Industrial engineer to do a time and motion study actually clocking the time required for each task 3 a Standard time should include allowances for breaks personal needs cleanup and machine downtime h Setting Variable Manufacturing Overhead Standards 1 With Direct Labor the price and quantity standards for variable manufacturing overhead are usually expressed in terms of rate and hours 2 The Variable Portion of the Predetermined Overhead Rate ii Standard Cost Per Unit Standard Quantity allowed per unit of the Output x Standard Price 1 Same way to find for direct materials or for direct labor i Using Standards in Flexible Budgets i Standard costs for materials per unit of direct labor and per unit for variable manufacturing overhead can be used to compute activity and spending variances General Model for Standard Cost Variance Analysis II i Used to decompose spending variances from the flexible budget into 1 One due to amount of input that is used 2 One due to the price paid for the input b Quantity Variance difference between how much of an input was actually used and how much should have been used Stated in dollar terms using the standard price of the input c Price Variance difference between the actual price of an input and its standard price multiplied by the actual amount of the input purchased i REMEMBER standards are separated into quantity and price 1 Quantity variance and a price variance can be computed for each of the three variable cost elements DM DL and variable manufacturing overhead 2 The quantity variance regardless of what it is called is computed in exactly the same way regardless of whether one is dealing with direct materials direct labor or variable manufacturing overhead 3 The input is the actual quantity of direct materials or direct labor purchased the output is the good production of the period expressed in terms of the standard quantity allowed for the actual output a Standard Quantity Allowed Standard Hours Allowed the amount of an input that should have been used to produce the actual output of the period III Using Standard Costs Direct Materials Variances a Variances are computed by comparing standard costs to actual costs Pound Unit Pound Unit i ii Manufacturing Department or Purchasing Department are at fault b The Materials Quantity Variance of materials used in production and the quantity that should have been used according to the standard Measures the difference between the quantity i MQV Actual Quantity Standard Quantity X Standard Price 1 Standard Price is used to hold only the production manager accountable ii Must Label as Favorable or Unfavorable 1 Favorable Standard Quantity Actual Quantity 2 Unfavorable Standard Quantity Actual Quantity iii Excessive materials usage can result from many factors including faulty machines inferior materials quality untrained workers and poor supervision 1 Responsibility of production department to ensure material usage 2 Sometimes purchasing department is responsible for unfavorable is kept in line with standards materials quantity variance c The Materials Price Variance quantity of materials and what should have been paid according to the standard i MPV Actual Price Standard Price x Actual
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