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Standard Costs And Variances
I. Overview
To know when actual costs differ significantly from target or standard costs.
Budgeted unit costs.
The static budget variance.
Flexible budget variances.
Sale-volume variances.
Price variance AQx(AP-SP) and quantity variance (AQ-SQ)xSP.
The mix variance and yield variance.
Sale price variance.
Variance analysis.
Variable and fixed components.
Spending variances and efficiency variances.
Spending variances and production-volume variances.
II. Standard Cost Concepts
Flexible budgeting and standard costing.
Standard costs represent what cost should be, and budgeted costs are expected actual costs.
Note: In the long run, these costs should be the same.
The actual equivalent units are multiplied by the standard cost per unit.
The difference between the actual costs incurred and the costs that should have been incurred given the actual output achieved.
Engineering standards based on attainable performance.
Ideal standard.
Practical capacity.
Note: Practical standards may be defined as the reasonably expected performance with an allowance for normal spoilage, waste, and downtime.
Because changes in the relationship between production and sales do not cause changes in the amount of fixed manufacturing costs, that is, expenses, and profits more directly follow the trends in sales.
It allows management to measure performance and correct inefficiencies, thereby helping to control costs.
Because variances exist between actual and budgeted costs.
- The magnitude of the variance and the cost of the investigation.
- The trend of the variances over time.
- The likelihood that the investigation will eliminate future occurrences of the variance.
Note: Whether the variance is favorable or unfavorable is not a factor in deciding to investigate a variance because all variances should be investigated.
Cost of goods sold and inventories.
III. Direct Materials
The time of materials is purchased.
Production and industrial engineering.
- Performance of the workers using the material.
- The action of the purchasing department.
- Design of the product.
- Waste.
- Shrinkage.
- Theft.
- Nonskilled workers.
Purchase of lower-than-standard-quality materials.
- Machine efficiency (e.g. cutting back preventive maintenance.).
- A change in product mix (e.g. processing a large number of rush orders.).
- Labor efficiency (e.g. inadequately training and supervising the labor force.).
Yield variance and mix variance.
(Budgeted weighted-average materials until cost for planned mixed – budgeted weighted – average materials until cost for actual mix) x input used.
(Inputs allowed – input used) x budgeted weighted-average materials unit price for the planned mix.
Determining price and usage variances allows management to evaluate the efficiency of the purchasing and production functions.
Purchasing department and production department.
Information for use in controlling the cost of production.
Because a standard cost system differentiates the predetermined cost from the actual cost, therefore, deviations are identified.
IV. Direct Labor
It indicates that actual hours exceed standard hours and unfavorable direct labor efficiency variance.
- Employees take longer work breaks than anticipated when standards were established.
- Poor quality material or material shortages result in unfavorable materials usage variance.
Direct labor efficiency variance.
Because the budget cycle may already be incorporated into the standard since the union contract was approved prior to the budget cycle.
- Labor rate predictions.
- The assignment of different skill levels of workers than planned.
- The payment of hourly rates instead of prescribed piecework rates.
Direct labor rate variance.
The mix of workers assigned to the particular job was heavily weighted toward the use of new, relatively low-paid unskilled workers.
(inputs allowed-input used)xbudgeted weighted-average labor rate for the planned mix.
(Budgeted weighted-average labor rate for planned mix-budgeted weighted-average labor rate for actual mix)xinputs used.
V. Manufacturing Overhead
- Fluctuating production levels.
- Fixed overhead is a significant cost.
- Several products are produced simultaneously (A change in the product mix).
Production volume variance.
Fixed overhead budget variance.
It is the difference between the budgeted fixed overhead and the amount applied based on a predetermined rate and the standard input allowed for the actual output.
Unfavorable.
Because the production volume variance measures the effect of not operating at the budgeted activity level, the events can be least controllable by a production supervisor.
Examples of events: Insufficient sales, economic downturn, bad weather, change in planned outputs, and labor strikes.
When overhead is applied on the basis of units of output.
Controllable (budget) variance.
Net manufacturing overhead variance.
Spending variance.
Efficiency variance.
Volume variance or idle capacity variance.
Unchanged.
- The budget variance is not based on any allocation of overhead.
- The spending variance is based on the assumption that unit variable overhead is constant within the relevant range.
- Thus, a change in the denominator activity does not affect the variable overhead application rate and therefore the amount applied based on actual input. (Because actual variable overhead is likewise affected, the spending variance is unchanged.)
The unfavorable variance will increase.
VI. Sales
(Actual units – master budget unit)x budgeted weighted-average UCM for the planned mix.
The difference between flexible budget and master budget sales volume, times master budget unit contribution margin.
Actual unit x (budgeted weighted-average UCM for planned mix – budgeted weighted-average UCM for actual mix).
Budgeted market sharer percentage x (actual market size in unit – budgeted market size in units) x budgeted weighted-average UCM.
(Actual market share percentage – budgeted market share percentage) x actual market size in units x budgeted weighted-average UCM.
Sale quantity variance and sale mix variance.
Master budget increment.
Sale volume variance.
VII. Variances In The Ledger Accounts
Inventory (debited )$3,500
DM price variance (debited) $500
Account Payable (credited) $4,000
Cost of goods sold (debited) $500
Material price variance (credited) $500
Work-in-process (debited) $3,600.
DM quantity variance (debited) $400.
Inventory (credited) $4,000
Variable overhead control (debited) $4,800.
Payroll payable (credited) $4,800.
Work-in-process (debited) $4,200.
Overhead applied (Credited)$4,200.
Overhead applied (debited) $4,200.
Overhead spending variance (debited) $600
Overhead Control (Credited) $4,800.
Finished goods (debited).
Fixed overhead (credited).
VOH efficiency variance (debited) $700.
VOH spending variance (credited) $500.
Income summary (credited) $200.
Work-in-process (debited) $5,000.
Fixed overhead applied (credited) $5,000.
Fixed overhead applied (debited) $5,000.
Fixed volume variance (debited) $1,000.
Fixed overhead control (credited) $6,000.
Allocated among work-in-process inventory, finished good inventory, and cost of goods sold.
The immaterial variance is close to the COGS in the period they arose.
- Apportion the total only between that part of the current period’s production remaining in inventories at the end of the period and that part sold during the period.
- Carry forward the variance as a deferred charge or credit.
- Charge or credit the total to the cost of goods sold during the period.