Chapter 11: Standard Costs

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Describe Standard Costs

Distinguishing Between Standards and Budgets

Both Standards and budgets are predetermined costs and both contribute to management planning and control.

A standard is a unit amount.

A budget is a total amount.

Setting Standard Costs DM

Direct Materials

The direct materials price standard is the cost per unit of direct materials that should be incurred.

Items for DM price standard:

Purchase price, net of discounts

Freight

Receiving and handling

= Standard direct materials price per pound

The direct materials quantity standard is the quantity of direct materials that should be used per unit of finished goods.

Items for DM quantity standard:

Required materials

Allowance for waste

Allowance for spoilage

= Standard direct materials quantity per unit

Setting Standard Costs DL

Direct Labor

The direct labor price standard is the rate per hour that should be incurred for direct labor.

Items for DL price standard:

Hourly wage rate

COLA

Payroll taxes

Fringe benefits

= Standard direct labor rate per hour

The direct labor quantity standard is the time that should be required to make one unit of the product.

Items for DL quantity standard:

Actual production time

Rest periods and cleanup

Setup and downtime

= Standard direct labor hours per unit

Setting Standard Costs MOH

For manufacturing overhead, companies use a standard predetermined overhead rate in setting the standard.

This overhead rate is determined by dividing budgeted overhead costs by an expected standard activity index, such as standard direct labor hours or standard machine hours.

Items for MOH:

Budgeted Overhead Costs (FC+VC)

/ Standard Direct Labor Hours

= Overhead Rate per Direct Labor Hour

Analyzing and Reporting Variances

Variances are the differences between total actual costs and total standard costs.

Actual costs < standard costs = Favorable variance

Actual costs > standard costs = Unfavorable variance

Direct Materials Variances

(Actual Quantity(AQ) x Actual Price(AP)) - (Standard Quantity(SQ) x Standard Price(SP)) = Total Materials Variance (TMV)

(AQ x AP) - (AQ x SP) or AQ(AP-SP) = Materials Price Variance (MPV)

(AQ x SP) - (SQ x SP) or SP(AQ -SQ) = Materials Quantity Variance (MQV)

Cause of Materials Variances

Materials price variance -factors that affect the price paid for raw materials include the:

Availability of quantity and cash discounts

Quality of the materials requested

To the extent that these factors are considered in setting the price standard, the purchasing department is responsible.

Materials quantity variance - if the variance is due to inexperienced workers, faulty machinery, or carelessness, the production department is responsible.

Direct Labor Variances

(Actual Hours(AH) x Actual Rate(AR)) - (Standard Hours(SH) x Standard Rate(SR)) = Total Labor Variance (TLV)

(AH x AR) - (AH x SR) or AH(AR-SR) = Labor Price Variance (LPV)

(AH x SR) - (SH x SR) or SR(AH-SH) = Labor Quantity Variance (LQV)

Causes of Labor Variances

Labor price variance - usually results from two factors:

Paying workers different wages than expected

Responsible party: manager authorizing the wage increase

Misallocation of workers

Responsible party: production department

Labor quantity variances

Relates to the efficiency of workers

The cause of a quantity variance generally can be traced to the production department

Manufacturing Overhead Variances

Total overheard variance is the difference between actual overhead costs applied to work done.

Actual Overhead - Overhead Applied = Total Overhead Variance

Standard hours allowed are the hours that should have been worked for the unit produced.