Chapter 10 - Standard Costing

St andar dCos t i ng:A Manage r i alCont r olTool Pamela Gonzalez Liriano Source: Conerstones of Managerial Accounting, Accountin g, 5th edition

Budg e t ss e ts t andar dst hatar eu s e dt oc o nt r oland eval uat ema manager i alpe r f orma manc e

Quant i t ySt andar ds

Pr i c eSt a nda r ds

T ode t e r mi net heuni ts t a nda r dc os tf orapa r t i c ul a r i nput ,t wodec i s i onsmus tbema made: Thequa Thea mo mounto fi nputt ha t nt i t yde c i s i on: s houl dbeus e dpe runi tofout put Thepr Theamo mountt hats houl dbe i c i ngde c i s i on: pa i df ort hequa nt i t yoft hei nputt obeus e d

St a nda r dc o s tpe runi t=Qua nt i t y s t a nda r dxPr i c es t a nda r d

Sour c e sf orQua nt i t yS t a nda r ds , 1 . Hi .H s t o r i c a l Ex pe r i e nc e 2 .Eng .E i ne e r i ngS t ud i e s 3 .I .I np utf r o mOp e r a t i ngPe r s o n ne l

WHYSTANDARD COSTSYSTEMSAREADOPTED

Toi mpr ovepl anni ngandc ont r ol Compa r i nga c t ua lc o s t swi t hbudg e t e dc o s t si de nt i fie s v a r i a n c e s . Ov e r a l lv ar i a nc e sc a nbef ur t he rbr oke ndo wni nt oapr i c e va r i a nc eoraus a g eo re ffic i e nc yv a r i a nc ei funi tpr i c eor v ebe e nde v e l o pe d. qua nt i t ys t a nda r dsha Tof a c i l i t a t epr oduc tc os t i ng Cos t sa r ea s s i gne dt opr oduc t sus i ngqua nt i t ya ndpr i c e s t a nda r dsf oral lt hr e ema nuf ac t ur i ngc os t s : di r e c t ma t e r i a l s , di r e c tl a bor ,a ndove r he ad. S t a nda r dc os t i nga ndva r i a nc ea na l ys i sf orc ont r ol l i ngc os ta nde va l ua t i ng pe r f or ma nc ec a nha ves t r onge t hi c a li mpl i c a t i ons .

 Advant ag e sofSt andar dpr oduc tc os t i ng

Gr e a t e r Ca pa c i t y Cont r ol

Nonee dt o di s t i ngui s h– Fi FO & Wei ght ed Aver age

Re a di l y a va i l a bl euni t c o s t i nf o r ma t i o n

Nouni tc o s t c a l c ul a t i ons f ore a c h e qui v al e nt unit

St andar dCos tShe e t Thes o vi de st hepr oduc t i on t a nda r dc o s ts he e tpr da t ane e de dt oc a l c ul a t et hes t a nda r duni tc os t .I t a l s os ho wst hequa nt i t yofe a c hi nputt ha ts houl dbe us e dt opr oduc eo neuni tofo ut put .

Var i anc eanal ys i s Ac t ua lc os t=APxAQ Pl annedc os t=SPxSQ Thet st hedi ffe r e nc e ot a lbudge tva r i a nc ei  be t we e nt hea c t ua lc os toft hei nputandi t s pl annedc os t Be c a us er e s pons i bi l i t yf orde vi a t i onsf r om pl a nne dpr i c e st e ndst obel oc a t e di nt he pur c has i ngorper s onneldepar t mentand r e s pons i bi l i t yf orde vi a t i onsf r om pl a nne d us a geofi nput st e ndst obel oc a t e di nt he pr oduc t i onde pa r t me nt ,i ti si mpor t a ntt o s e pa r a t et het ot a lva r i a nc ei nt opr i c eand us a ge( qua nt i t y)va r i a nc e s .

Pr i c ev a r i a nc e=( AP-SP)xAQ

Us agevar i anc e=( AQ -SQ)xSP

c urwhe ne v e ra c t ua lpr i c e sora c t ua l Unf a v or a bl e( U)v a r i a nc e soc us a g eofi nput sa r egr e a t e rt ha ns t a nda r dpr i c e sors t a nda r dus a ge . Whe nt heo ppo s i t eo c c ur s ,f r eobt a i ne d. a vor a bl e( F)va r i a nc e sa c ont r oll i mi t s

Thema sc omput ed t e r i a l spr i c eva r i a nc ei  byus i ngt heac t ua lquant i t yofma t e r i al s t e r i a l sus a g e pur c ha s e d,a ndt hema sc o mput e db yus i ngt hea c t ua l va r i a nc ei qua nt i t yofma t e r i a l sus e d

Mea s ur eswhats houl d havebeenpai df orr aw mat er i al sandwhatwas ac t ua l l ypai d

Me a s ur e st hedi r e c t ma t e r i a l sa c t ua l l yus e d a ndt hedi r e c tma t e r i a l s t hats houl dhavebeen used

Us i ngt heva r i a nc ei nf or ma t i ont oe x e r c i s e c ont r oli sf unda me nt a lt oas t a nda r dc o s t s ys t e m. Ther e s pons i bi l i t yf orc ont r ol l i ngt he ma t e r i a l spr i c eva r i a nc eus ua l l ybe l ongst o t hepur c ha s i nga ge nt . Pr e s s ur et opr o d uc ef a v o r a b l ev a r i a nc e sma yr e s ul ti nt hep ur c h a s eo fma t e r i a l so fl o we rq ua l i t y t ha nde s i r e do re x c e s s i v ei nv e nt o r ypur c h as e si no r d e rt oge tq ua nt i t ydi s c o unt s .

Ana l ys i sofMa t e r i a l sPr i c eVa r i a nc e

Thefir s ts t e pi nva r i a nc eana l ys i si st o de c i dewhe t he rt hev ar i a nc ei ss i gni fic a nt . wha ti si t sc a us e ? Onc et her e a s o ni sk no wn,c o r r e c t i vea c t i on c a nbet a ke ni fne c e s s a r y —a ndi fpos s i bl e .

Ther e s pons i bi l i t yf orc ont r ol l i ngt he ma t e r i a l sus a geus ua l l ybe l ongst ot he pr oduc t i onmanager . Pr e s s ur et opr oduc ef a v or a bl eva r i a nc e sma ya l l o w de f e c t i veuni t st obet r a ns f e r r e dt ofini s he dgoods a ndul t i ma t e l yc a us ec us t ome rr e l a t i onspr obl e ms . I fva r i a nc ei ss i gni fic a nt ,i nve s t i ga t i oni sne ede dt o findoutt hec a us e sf ort hede vi a t i on. Thei mpor t a nc eofe v al ua t i ngc ur r e ntbus i ne s sc o ndi t i onsa nd upda t i ngs t a nda r dst or e fle c ta nyc ha nge si nt he s ec o ndi t i ons c a nnotbeo ve r l ooke d. T ypi c a l l y , ma t e r i a l sva r i a nc e sa r ea dde dt o c os tofgoodss o l di funf a vor a bl ea nda r e s ubt r a c t e df r om c os tofgoodss ol di f f a v o r a b l e .

Thet ot a ll a borva r i a nc eme a s ur e st he di ffe r e nc ebe t we e nt hea c t ua lc os t so fl a bor a ndt he i rbudge t e dc o s t sf ort heac t ua l l e ve lofa c t i vi t y .

Thel a bo rr a t ea ndl a bore ffic i e nc y v ar i a nc e sa l wa y swi l la ddupt ot he t ot all aborv ar i anc e . Tot a ll a borva r i a nc e=La borr a t eva r i a nc e +Laboreffic i enc yvar i anc e a borr a t eva r i a nc e( LRV)c Thel omput est he di ffe r e nc ebe t we e nwha twa spa i dt odi r e c tl a bor e r s andwhats houl dha vebe enpai d, LRV =( AR-SR)xAH

Thel a s ur e st hedi ffe r e nc e a bo re ffic i e nc yv a r i a nc e( LEV)me  be t we e nt hel aborhour st ha twe r eac t ual l yus e dandt hel abor hour st ha ts houl dha v eb e e nus e d LEV =( AH -SH)xSR

Ca l c ul at i ngl a borvar i a nc e si ni t i a t e st he f e e dba c kpr oc e s s . Re s pons i bi l i t ymus tbea s s i gne d,va r i a nc es i gni fic a nc emus tbe a s s e s s e d, a ndt heva r i a nc e smus tbea c c ount e df ora nddi s pos e dofa t t hee ndoft hey e ar .

I na ddi t i ont os t a nda r dc o s t i ng,s omec ompa ni e sc hoos et oe mpl o yo t he r t a r ge tc os t i ng. c o s tma na ge me ntpr a c t i c e s ,s uc ha ska i z e nc o s t i nga nd  Ka i z e nc o s t i ngf oc us e so nt hec o nt i nuousr e duc t i onoft he ma nuf a c t ur i ngc o s t so fe x i s t i ngpr oduc t sa ndpr oc e s s e s . Ta r ge tc os t i ngf oc us e sont he r e duc t i onoft hede s i gnc os t so f e x i s t i nga ndf ut ur epr oduc t sa nd pr oc e s s e s .

Ta r ge tc os tpe runi t=Ex pe c t e ds a l e s pr i c epe runi t-De s i r e dpr ofitpe runi t

Ac c ount i ngf orVa r i a nc e s Thea c c ount sc ont a i ni ngt heva r i a nc e sbe t we e na ppl i e ds t a nda r dc o s t sa nd a c t ua lc os t sa r ec l os e d,whi c ha l l o wst heamountofa c t ua lc os t st oul t i ma t e l y i mpa c tt hefina lc o s tofgoodss ol dnumbe rt ha ta ppe a r si nt hefina nc i a l s t a t e me nt s . I nr e c or di ngva r i a nc e s , unf a vor a bl eva r i a nc e sa l wa ysa r ede bi t s , a ndf a vor a bl e va r i a nc e sa l wa ysa r ec r e di t s .

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