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Learning Objectives
How are material, labor, and overhead standards set? How are material, labor, and overhead variances calculated and recorded? Why are standard cost systems used? How have the setting and use of standards changed over time? How does the use of a single conversion element rather than the traditional labor and overhead elements! affect standard costing? (Appendix) How are variances affected by multi"le material and labor categories?
%anufacturing #ervice &ot'for'(rofit Record standard and actual costs in the accounting records
#tandards
%anufacture a single unit of "roduct or (erform a single service %aterial and labor ty"es, *uantities, and "rices Overhead ty"es and behavior
%anufacturing Objective
%inimi+e unit cost while achieving certain *uality s"ecifications,
-n"ut Resources
Out"ut .uality
%aterial #tandards
%aterials used
/rom
Labor #tandards
Labor used
/rom
)y"es
.uantity $ost
-ndustrial engineering studies including methods'time measurement %)%!, time and motion studies, historical data O"erations flow document
Overhead #tandards
3ariable and fi2ed manufacturing overhead 4stimated level of activity 4stimated costs (redetermined factory overhead a""lication rates
3ariance
3ariance is the difference between an actual cost and a standard cost,
)otal 3ariance
)otal actual cost incurred minus total standard cost a""lied to out"ut "roduced
)otal 3ariance*
*
/avorable or unfavorable
)otal 3ariance
AP
-n"uts
A! )otal 3ariance
SP
S!
Out"uts
AP = actual cost7"rice "er unit of materials or hours of labor A! = actual *uantity of materials or hours of labor SP = standard cost7"rice "er unit of materials or hours of labor S! = standard *uantity of materials or hours of labor
(rice 3ariance
AP A! SP A! SP S!
(rice7Rate
"AP # SP$
A!*
/avorable or unfavorable
9sage 3ariance
AP A! SP A! SP 9sage 3ariance S!
/avorable or unfavorable
"AP # SP$
A!*
/avorable or unfavorable
%(3 $alculations
%.3
What was used
8
/avorable or unfavorable
"AP # SP$
A!*
/avorable or unfavorable
SP
S!
/avorable or unfavorable
Overhead 3ariances
3ariable Overhead 6ctual variable overhead is total of various ledger accounts #( : (redetermined variable overhead rate /i2ed Overhead 6ctual fi2ed overhead is total of various ledger accounts #( : (redetermined fi2ed overhead rate
%anagers have little control over "rices %anagers should be held accountable
$onstant 6mount
$alculate variance for each com"onent $aused by "rice differences %ay reflect mismanagement of resources
%easures ca"acity utili+ation $aused by "roducing at a level that differs from the ca"acity level used to com"ute the "redetermined overhead rate 6lso called the noncontrollable variance
)otal OH 3ariance
6""lied Overhead
)otal OH 3ariance
#tandard OH #( 2 #.
OH #"ending 3ariance
OH 4fficiency 3ariance
3olume 3ariance
6""lied Overhead
)otal OH 3ariance
$redits Re"resent savings in "roduction costs 5ebits Re"resent e2cess "roduction costs
9nfavorable variances
%aterials #( 2 6. "urchased
%ebit&Un'a(orable Credit&)a(orable
9se of %aterials
6t #tandard $ost
W-( #( 2 #. allowed
%aterials #( 2 6. used
%ebit&Un'a(orable Credit&)a(orable
Record Labor
6t #tandard $ost
LR3 9 /
L43
W-( #( 2 #. allowed
Wages (ay 6( 2 6.
%ebit&Un'a(orable Credit&)a(orable
6""ly Overhead
W-( #( 2 #. 6llowed
3OH #( 2 #. 6llowed
/OH #( 2 #. 6llowed
%ebit&Un'a(orable Credit&)a(orable
%ebit&Un'a(orable Credit&)a(orable
#etting #tandards
6""ro"riateness 6ttainability
)rends in #tandards -deal #tandards and )heoretical $a"acity 6djusting standards (rice variance on "urchase versus usage 5ecline in direct labor content
$onversion $osts
#"ending variance for overhead 4fficiency variances for machinery and "roduction costs 3olume variances for "roduction
Material Mi Variance
Labor Mi Variance
.uestions
How are standards set for material, labor, and overhead? How is variance analysis used for control and "erformance evaluation? Why are labor and overhead elements sometimes combined into a single conversion element?
#etting high standards to create favorable variances -gnoring effects of one "roduction area on another #etting overhead rates too low based on high "roduction levels to distort inventory cost and o"erating income (roducing inventory only to create a favorable volume variance &ot u"dating standards so that favorable variances are created 9sing low *uality materials or labor to create favorable variances and low *uality "roducts