Chapter Nine

Standard Costing:
A Managerial
Control Tool

PPT 9 -1
 Learning Objectives

 Explain how unit standards are set and

why standard cost systems are adopted.
 Explain the purpose of a standard cost
sheet.
 Describe the basic concepts underlying
variance analysis and explain when
variances should be investigated.
PPT 9 -2
 Learning Objectives (continued)
 Compute the materials and labor variances
and explain how they are used for control.
 Compute the variable and fixed overhead
variances and explain their meanings.
 Prepare journal entries for materials and
labor variances and describe the accounting
for overhead variances. (Appendix)

PPT 9 -3
 Unit Standard Cost

To determine the unit standard cost for a

particular input, two decisions must be made:
1. How much of the input should be used per unit of
output (Quantity decision)?
2. How much should be paid for the quantity of the
input to be used (Pricing decision)?

PPT 9 -4
Types of Standards

Ideal Standards demand

maximum efficiency and can
be achieved only if everything
operates perfectly.
Currently attainable standards
can be achieved under
efficient operating conditions.

PPT 9 -5
Sources for Quantitative Standards

1. Historical experience
2. Engineering studies
3. Input from operating
personnel

PPT 9 -6
Factors for Price Standards - Materials

1. Market forces
2. Discounts
3. Freight
4. Quality

PPT 9 -7
Factors for Price Standards - Labor

1. Market forces
2. Trade unions
3. Payroll taxes
4. Qualifications

PPT 9 -8
 Purposes of Standards

To improve planning and control

To facilitate product costing

PPT 9 -9
 Cost Assignment Approaches

Manufacturing Costs

Direct Direct
Materials Labor Overhead
Actual costing system Actual Actual Actual
Normal costing system Actual Actual Budgeted
Standard costing system Standard Standard Standard

PPT 9 -10
 A Standard Cost Sheet

Standard Standard Standard

Description Price Usage Cost/Unit

Direct materials $1.50/lb. 10 lbs. $15.00

Direct labor $6.00/hr. 2 hours 12.00
Variable overhead $10.00/hr. 2 hours 20.00
Fixed Overhead1 $8.00/hr. 2 hours 16.00
$63.00
Other Operating Data for Period:
Units produced 20,000 units
210,000 pounds purchased @ $1.55 per pound; 205,000 lbs. used
Direct labor costs $39,000 hours @ $6.10 per hour
Variable overhead $410,000
1
Fixed overhead $300,000; Rate = ($310,000/38,750 hrs) PPT 9 -11
Variance Analysis: General Description

Actual Quantity of Actual Quantity of Standard Quantity of

Input at Actual Price Input at Standard Price Input at Standard Price
AQ x AP AQ x SP SQ x SP

Price Usage
Variance Variance
AQ x (AP - SP) SP x (AQ - SQ)

Budget
Variance
(AQ x AP) - (SQ x SP)

PPT 9 -12
 Variance Investigation

Variances are investigated if two conditions are

met:
1. The variance is material
2. The benefits of investigating and taking corrective
action are greater than its costs

PPT 9 -13
 Control Limits:
Standard + Allowable Deviation

Investigating occurs for values outside the

allowable range.
Example: Assume the allowable deviation may be the lesser of
$8,000 or 10% of the standard. Suppose the standard is
$50,000 and the actual deviation from standard is $6,000. Will
the variance be investigated.
Answer: Yes. Ten percent of standard is $5,000. Since $6,000 is
larger than the allowable deviation, an investigation will take
place.

PPT 9 -14
 Material Variances

Formula Approach:
MPV = (AP - SP)AQ MUV = (AQ - SQ)SP
= ($1.55-$1.50)210,000 = (205,000 - 200,000)$1.50
= $10,500 U = $7,500U

SQ = 20,000 units x 10 lbs per unit

Diagram Approach:
AQ x AP AQ x SP AQ x SP SQ x SP
210,000 x $1.55 210,000 x $1.50 205,000 x $1.50 200,000 x $1.50

MPV = $10,500U MUV = $7,500U

Responsibility: Responsibility:
Purchasing Manufacturing

Flexible Budget Variance =

$18,000U
PPT 9 -15
 Labor Variances

Formula Approach:
LRV = (AR - SR)AH LEV = (AH - SH)SR
= ($6.10 - $6.00)39,000 = (39,000 - 40,000)$6.00
= $3,900 U = $6,000 F

SQ = 20,000 units x 2 hrs. per unit

Diagram Approach:
AH x AR AH x SR SH x SR
39,000 x $6.10 39,000 x $6.00 40,000 x $6.00

LRV = $3,900 U LEV = $6,000 U

Responsibility: Responsibility:
Human Resources Manufacturing

Flexible Budget Variance = $2,100 F

PPT 9 -16
 Variable Overhead Variances

Formula Approach:
OSV = (AVOR - SVOR)AH OEV = (AH - SH)SVOR
= $410,000 - ($10 X 39,000 hrs) = (39,000 - 40,000)$10.00
= $20,000 U = $10,000 F

SQ = 20,000 units x 2 hrs. per unit

Diagram Approach:
AH x AVOR AH x SVOR SH x SVOR
$410,000 39,000 x $10.00 40,000 x $10.00

OSV = $20,000 U OEV = $10,000 F

Responsibility: Responsibility:
Manufacturing Manufacturing

Flexible Budget Variance = $10,000 U

PPT 9 -17
 Fixed Overhead Variances
Actual Overhead Budgeted Overhead Applied Overhead
$300,000 $310,000 SOR x SH($8 x40,000)

OSV = $10,000F OVV = 10,000F

Responsibility: Responsibility:
Manufacturing Difficult to Assess

Alternative Approach for Computing Overhead Volume Variance

Planned level 38,750 hrs.

Applied level (SOR) 40,000 hrs.
Over 1,250 hrs.
x $8
Overhead Volume Variance $10,000 F
PPT 9 -18
 Accounting for Variances

Journal Entry for Purchase of Direct Materials

Materials (AQ x SP) 315,000

MPV (AP - SP)AQ 10,500
Accounts Payable (AQ x AP) 325,500

Rule: Unfavorable variances are debited and favorable variances

are credited.

PPT 9 -19
Accounting for Variances (continued)

Recording the Issuance of Materials to Production

Work in Process (SQ x SP) 300,000

MUV [(AQ - SQ)SP] 7,500
Materials (AQ x SP) 307,500

AQ = Actual quantity used in production

PPT 9 -20
Accounting for Variances (continued)

Recording the Direct Labor Costs

Work in Process (SH x SR) 240,000

LEV [(AH - SH) SR] 3,900
Accrued Payroll (AH x AR) 237,900
LRV [(AR - SR) AH] 6,000

PPT 9 -21
Accounting for Variances (continued)

Recording Variable Overhead

Work in Process (SQ x SP) 400,000

Manufacturing Applied (SQ x SP) 400,000

Manufacturing Overhead (Actual Cost) 410,000

Various Accounts 410,000

PPT 9 -22
Accounting for Variances (continued)

Recording Fixed Overhead

Work in Process (SQ x SP) 320,000

Manufacturing Overhead Applied 320,000

Manufacturing Overhead (Actual Cost) 300,000

Various Accounts 300,000

PPT 9 -23
Accounting for Variances (continued)

Recording Overhead Variances and Closing the Overhead Accounts

Manufacturing Overhead Applied (Variable) 400,000

Manufacturing Overhead Applied (Fixed) 320,000
OSV (Variable) 20,000
Manufacturing Overhead (Variable) 410,000
Manufacturing Overhead (Fixed) 300,000
OEV 10,000
OSV (Fixed) 10,000
PVV 10,000

PPT 9 -24
Accounting for Variances (continued)

Disposition of Variances

OEV 20,000
OSV (Fixed) 10,000
PVV 10,000
OSV (Fixed) 10,000
Cost of Goods Sold 30,000

PPT 9 -25
End of Chapter 9

PPT 9 -26