Chapters 9 & 10
Standard Costing, Variance Analysis and Flexible Budgets
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STANDARD – is the budgeted cost for one unit of product.
The beginning point in standard setting is a rigorous look at the past. Final responsibility for standard setting should fall on the shoulders of the person who will be working under the standard being set and his or her immediate supervisor.
Ideal Standards do not allow for imperfections or inefficiencies of any type. Therefore, ideal standards are rarely, if ever, attained.
Practical Standards allow for elements of normal inefficiency, machine breakdown time, etc., and can be attained by employees working at a reasonable, though highly efficiently, pace.
For each of the four product cost factors, (Direct Materials, Direct Labor, Variable Overhead, and Fixed Overhead) there are two standards developed. These two standards are Standard Quantity (or Usage) and Standard Price or Rate. Multiplying Standard Usage times Standard Price or Rate will give you Standard Costs.
A quantity (or usage) standard says how much of a cost element should go into the manufacture of a unit of product or into the completion of a task. The quantity might be measured either in terms of units of direct materials or hours of direct labor time.
A price standard says what the cost of this quantity (or usage) of materials or this amount of direct labor time should be.
A VARIANCE is the difference between what was planned and what was actually accomplished. You can calculate two detailed variances for each product cost as well as a total variance. To calculate the variances for each of the variable product costs you need the following four variables:
AQ = Actual quantity of a cost factor used
AP = Actual price paid per unit of a cost factor
SP = Standard price paid per unit of a cost factor (this is
found on the standard cost card) SQ = Standard quantity of a cost factor that should be used for the actual production. This is calculated as follows:
(Std usage/unit of product) x (Actual units produced)
AQ x AP = Actual Cost Incurred for Input
AQ x SP = Actual Quantity of Input at Standard Price
SQ x SP = Standard Cost Allowed for Output
For each of the Variable cost factors (Direct Materials, Direct Labor, and Variable Overhead) you will calculate two variances.
The first variance is called a Price variance for Materials and a Rate variance for Labor and a Rate or Spending variance for Variable Overhead. This formula is
Price or Rate or Spending Variance =
AQ ( AP - SP )
The second variance is called a Quantity or Usage variance for Materials and a Usage or Efficiency variance for Labor and an Efficiency variance for Variable Overhead. This formula is
Quantity or Usage or Efficiency Variance =
( AQ - SQ ) SP
Example 1 - Calculating Direct Materials and Direct Labor Variances
Company CD uses a standard cost system to value inventories. The following data has been collected on its direct costs for one month.
Std Usage x Std Price = Std Cost
10 Sq. Ft.
$ 4.00/Sq. Ft.
$40.00 Direct Labor
During the month CD purchases 1,550 square feet of materials at a cost of $6,510. All of the materials were used during the month. Direct labor costs were $4,560. The hourly rate for labor was $14.25. During the month 150 units were made.
a. Calculate the Direct Materials Price and Quantity variances.
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