Chapter 16: Standard Cost and Variance Analysis for Decision MakingMore about Standard Costs- Standard costs are the costs that a company should incur in performing an activity or producing a product under a given set of planned operating conditionso aid in the development of budgetso most valuable use: controlling the company’s operationso flexible budgeting for manufacturing costs shows the standard costs for direct materials, direct labor, and factory overhead at various levels of productiono managers use this flexible budget as a benchmark against which to measure the actual costs of productiono if an actual production cost is different from the standard cost budgeted for the actual level of production (variance), one or more of the planned conditions must not have existed.o When the actual cost is greater than the standard cost, the variance is favorableo When the actual cost is less than the standard cost, the variance is unfavorableo By analyzing favorable and unfavorable variances, managers can determine which of the plannedconditions did not exist and decide what changes, if any, to make in the company’s operations- Recording Standard Costs in the Accountso Standard cost system normally assigns standard costs rather than actual costs to each of its inventory accounts (Raw Materials Inventory, Goods in Process Inventory, and Finished Goods Inventory). Simplifies costs by eliminating the following tasks:- Keeping detailed records of actual costs to support the raw materials inventory; the supporting raw materials inventory records can be kept in physical quantities only- Recording actual costs on job order cost sheets in job order costing- Calculating actual costs per unit in process costing Managers avoid assigning different costs to identical units in inventory just because problems (such as inefficient production by a new employee, a machine breakdown, or the use of faulty materials) result in production costs that are higher for some units than for others. Thus, a company that uses a standard cost system does not record in inventory the costs that result from inefficiency in manufacturing operations. Rather, it measures these costs as variances and treats them separately from the cost of inventories.- Manufacturing Cost Standardso The actual cost of a product=cost of its inputs (direct materials, direct labor, and factory overhead)o Find the standard cost of a unit of product output by determining two standards for each input to the manufacturing process. Quantity standard and price standardo Price standard: the cost that a company should incur to acquire one unit of input for a manufacturing process Ex: cost per pound for direct materials, cost per hour for direct laboro Quantity standard: the number of units of an input that a company should use to produce one unit of product output ex: 4 lbs of sugar and .5 hours of direct labor for each case of candy bars it produceso A company determines the standard cost of an input for one unit of product output by multiplying the quantity standard of the input by its price standardo A company spends a lot of time and effort in order to have efficient production. Tries determine the least costly way of manufacturing each product, while maintaining high product quality, by considering:- 1. The price of various types, sizes, and qualities of direct materials.- 2. The expected direct labor and factory overhead costs that would result from using different combinations of direct labor and machine operations this planning process results in a set of specific conditions for the production of the company’s product the company determines standards from these conditionsStandard Costs and Variances for Direct Materials- Direct Materials Price and Quantity Standardso Direct Materials Price Standard Direct materials price standard show the cost that a company should incur to acquire one unit of a direct material for production.  the cost includes:- 1. The invoice price (less any expected discounts) to be paid to normal suppliers when the company purchases materials in expected quantities- 2. Any transportation costs the company expects to pay- Direct Materials Quantity Standardo Direct materials quantity standard shows the amount of a direct material that a company should use to produce one unit of product.o The amount includes: The amount of materials that should end up in each “good” unit of product An allowance for materials normally lost through various manufacturing operations (“waste”) An allowance for normal amounts of spoiled production (“spoilage”-products that are not“up to snuff” and therefore, unacceptable for sale). o In this way the direct materials quantity standard shows the average (normal) amount of a material that the company should use per unit of product when it performs manufacturing operations under planned conditions- Setting Standards for Direct Materialso Conditions are important in setting the price standard Type, size, quality of required direct materials Planned purchase quantities Suppliers’ terms (n/30) Shipping by normal freight carriers and unloading and inspecting in the usual manner determine the transportation cost per pound of materialo All together, these conditions determine the standard price per unit to make the required available for productiono Conditions that influence the determination of the direct materials quantity standard Ex: size of a 50 pound bag of sugar (in relation to desired product) affects the pouring, mixing, refining, and molding operations and determines the resulting sugar content of the product and the allowances for waste Quality of direct material Proper adjustment of equipment Skill level of laborers Condition of storage areas for direct materials- Direct Materials Price and Quantity Varianceso Direct Materials Price Variance Direct materials price variance is the difference between the standard cost that a company should have incurred to acquire the direct materials and the actual cost it did incur to acquire the direct materials Company computes this variance by multiplying the actual number of direct material units purchased by the difference between the standard price and the actual price per unit of direct material.- PV=AQp(SP-AP)o Companies usually compute this at the time they purchase materialso The standard purchase cost (what the