Unit 11 - Standard Costing and Variance Analysis
1 Actual, Normal and Standard Costing
Product costs can be recorded:
(1) When actually incurred,
(2) At a predetermined rate, or
(3) At a combination of (1) & (2) .
Actual Cost System
Product costs incurred when actually incurred. It is usually acceptable for DM & DL. It is difficult to do with factory overhead because these costs are indirect costs.
Normal Costing
DM & DL are recorded when actually incurred. Fty OH is applied to production based on actual input multiplied by a predetermined fty OAR.
Standard Costing (SC)
All costs attached to products are based on standard or predetermined amounts.
SC is planned, generally established well before production begins, and provides mgt with goals to attain (planning) & a basis for comparison with actual results (control). SC is costs per unit while a budget is total costs. SC is also known as planned costs, predicted costs and scheduled costs.
2 Uses of Standard Costs
Cost information may be used for different purposes.
Cost Control
It aids management in:
-production of a unit of usable product at the lowest possible cost at predetermined quality standards;
-making periodic comparisons of actual costs with standard costs to measure performance & correct inefficiencies.
Inventory Costing
Inventories costed at standard must be adjusted if necessary to approximate actual cost on external financial statements.
Budgetary Planning
SC are useful in developing a budget,
Budget = standard costs multiplied by vol or activity levels.
Product Pricing
Selling price of a unit & the cost per unit are closely related and may effect each other.
-when selling price increases, if sales decrease, then unit cost increases .
-when selling price decreases, if sales increase, then unit cost decreases .
Mgt attempts to achieve the best combination of price & volume to maximize profits.
Records-Keeping
May decrease when recording standard costs
3 Types of Standards
Ideal Standard
Usually this standard cannot be attained and leads to unfavorable variances as it assumes:
-min prices for all costs (DM, DL & fty OH)
-optimal usage of DM, DL & fty OH
-100% manufacturing capacity
Attainable Standard
Can be met because it recognizes:
-good overall price but not necessarily the lowest price for all costs
-DL is not 100% efficient
-normal spoilage will occur
-manufacturers do not operate at 100% capacity
Most co presently use attainable standards but a new manufacturing environment is developing that emphasizes ideal standards.
4 Establishment of Standards
Direct materials standards
Direct materials price (rate) standard The unit price of DM should be purchased
-contingent upon sales forecast
-suppliers need to know an estimate of total quantity to determine amount of discount
-also need quality and delivery standards before a standard price per unit can be set Price changes must be considered in determining the standards
-can use weighted average of prices, or
-preferred alternative is to change the standard when prices change
A separate standard must be established for each material. It is determined by the cost accounting and/or the purchasing departments.
A separate dept is established as establishing standards is a time consuming process
Direct materials efficiency (usage) standard
Predetermined specification of the quantity of direct materials that should go into the production of one finished product .
Individual standards must be established for each direct material.
Direct Labor Standards
-classified as:
Direct labor price (rate) standards
Predetermined rates of pay for a period
-usually established by union contract or by mgt and/or personnel if non union -influenced by type of job and experience
Any pay rate increases during the year must be considered in determining the standards. It can use weighted average of pay rates, or preferred alternative is to change the standard when pay rates increase
Direct labour efficiency standards
Predetermined performance standards for the amt of DL hrs that should go into the production of one finished unit .
Should consider the learning curve effects when setting this std.
Learning process most noticeable in processes that are complex and require dexterity; not needed in processes that are fully automated .
standard direct labour = total annual DL cost
price/direct labour hour total annual DL hours
Factory Overhead Standards
Fty OH cost pool includes IDM, IDL, fty rent, fty depn, fty equip depn, etc.
To prepare the std usually involves input from many dept & mgrs
Standard costing establishes a single std cost/unit which is applied despite fluctuations in activity.
Budgets are commonly used in controlling factory overhead costs.
Fixed budgets show anticipated costs at one level of activity. FB show anticipated costs at different levels of activities.
5 Establishing Standards for a Process Cost and
Job Order Cost System
In a process cost sys separate stds are established for DM, DL & fty OH for each product.
If there is more than one department, indi stds are set for each department; the mgr for that department is held accountable for the standard.
In a job order cost system, stds are set for DM, DL, and fty OH for each job.
6 Variance Analysis
Variances - the differences that arise % actual & standard results. Variance analysis is to measure performance, correct inefficiencies, deal with the accountability function Variances can be favorable or adverse (unfavorable).
Favorable variance - the actual amount < the standard amount . Favorable variances are credits; they reduce production costs.
Adverse variance - the actual amount > the standard . Adverse/Unfavorable variances are debits; they increase production costs.
A favorable variance does not necessarily mean good,nor does an unfavorable variance mean bad.
Mgt should analyze all variances to determine the cause
-determine if standard is correct
-consider costs vs. benefit in reviewing standards
7 Different Types of Variances
Variances - initially classified into 1-way and 2-way variances regarding various cost elements.
Price variance
Efficiency variance
Volume/Capacity variance
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