Chapter 12: Standard Costs Flashcards
what are standards
Used in business settings to establish consistent practices
quality control standards; codes of conduct and
standard costs for products or services
stadnard costs are a measure of performance@`
pros of standards costs
Facilitate management planning and control
* Promote greater economy by making employees more
“cost-conscious”
* Help set selling prices without having to wait for actual
costs
* Help highlight variances in management by exception
* Simplify inventory costing and record keeping
* Advantages realized only when standard costs are
carefully established and carefully used.
standard costs vs budgeted costs siilarities
o Pre-determined costs
o Play a role in management planning and control
how can standard costing be incoprorated into the budget coast accounting systems
the standard cost for each unit produced is
recorded as the inventoriable cost regardless of the
ACTUAL COST
STANDARD COST IS USED OVER ACTUAL COST
how are standar costs set
input from all persons who have responsibility for
costs and quantities
current and should be under
continuous review
2 levels of standard coss=ts
ideal standard: optimum level of performance under
perfect operating conditions
normal standard:RIGOROUS BUT ATTAINABLE efficient levels of performance attainable
under expected operating conditions
DM price standard
cost per unit of
direct materials that should be incurred
o When actual cost is known and is significantly and
permanently different from the best estimate the
standard should be reviewed
- Includes related costs such as receiving, storing, and
handling
DM quantity standard
amount of direct materials
that should be used per unit of finished product or
service
think KG POUNDS ETC.
Includes allowances for unavoidable waste and
normal spoilage
so standard dm cost
DM price standard x DM quantity standard
DL price standard
Rate per hour that should be incurred for direct
labour
* Based on current wage rates adjusted for anticipated
changes, such as cost of living adjustments
* Includes employer payroll taxes (income tax, CPP and
EI), and benefits such as holidays, paid vacation, and
insurance
DL quantity standard
Time that should be required to make one unit of the
product under normal operating conditions
* Standard quantity should include allowances for:
o Normal rest periods (e.g. coffee breaks)
o Cleanup and regular maintenance
o Machine setup and downtime
* Critical in labour-intensive industries
so standard dl cost per unit
Dl price stanadrd x DL quantity standard
MOH standard
The predetermined rate is derived by dividing budgeted
overhead costs by an expected standard activity index
- Activity index based on normal capacity
- The average activity output the company expects to
experience over the long-term
o Examples: Standard direct labour hours and standard
machine hours. - Activity-based costing (ABC) can be used with standard
costing
total standard cost per uni
DM + DL +MOH (both fixed and vairable)
If a standard accounting system is used, the standard
cost is what is recorded in the books as well
Unfavourable variances aoccur when:
- variances
- dm
- dl
compare to standard
Actual cost or price paid is greater than the standard
cost
More direct material units are used per unit of product
produced than the standard allowed
More direct labour hours are used per unit of product
produced than the standard allowed
favourable variances aoccur when:
- variances
- dm
- dl
compare to standard
Actual cost or price paid is less than the standard cost
o Fewer direct material units are used per unit of product
produced than the standard allowed
o Fewer direct labour hours are used per unit of product
produced than the standard allowed
total variance formula
material variance + labour variance + overhead varaiance
material variance is made up of
price variance
quantity variance
labour vairance is made up of
rate variance
quantity variance
4 things you need to know to calculate direct materials varaince
actual quantity: used
actual price: paid
——> used to calc actual dm
standard quantity: what should have been used
standard price: what should have been paid
—–> used to calc standard dm
to calculate Total Direct
Materials Budget
Variance (TDMBV)
(Actual quanity x actual price)- (Standard quantity x standard price)
NOTHING IS CONSTANT
to calculate Materials Price
Variance (MPV)
(actual quantity x actual price)- (actual quantity * standard prixe)
KEEP ACTUAL QUANTITY CONSTANT
to calculate Materials Quantity
Variance (MQV)
(actual quantity x standard price) - (standard quantity x standard price)
KEEP STANDARD PRICE CONSTANT
causes of material variance
May be caused by a variety of factors, both internal
and external factors
* Investigating materials price variances begins in the
purchasing department
* Investigating The variance may be beyond the control
of purchasing (E.g. prices rise faster than expected)
* materials quantity variance begins in the production
department
o The variance may be beyond the control of production
(E.g. faulty machinery, newer labour force unfamiliar
with process)
DM CALCULATIONS THING TO REMEMBER
ACTUAL - STANDARD
if positive then it is unfavourable
if negative then it is favourable
labour variances done the same as dm
actual - standard; positive then UF, negative than F
Acutal Rate * Actual Quantity - Stanadrd Rate * STanrd Quantity = total labour rate vairance
Actual Rate * Acutal Quantity - Stanard Rate *Actual Quantity = Rate vairance (keep the actual quantity constant)
Standard Rate * Actual Quantity - Standard Rate * Stanadrd Quantity = Quantity variance (keep the standard rate constant)
why do we have labour rate variances
Labour price variances usually result from either
o Paying workers higher wages than expected, or
o Misallocating workers (for ex., using skilled workers in
place of unskilled workers)
* Labour quantity variances relate to the efficiency of
workers and are usually related to the production
department
o Other causes include quality of the materials used;
condition of equipment used
fixed overhead. variance
between the actual fixed overhead - fixed overhead
applied using the total standard activity base allowed forthe output achieved.
can also be separated into a spending (budget) variance and a volume variance.
- There is never an FOH efficiency variance due to the
nature of fixed overhead
total overhead variance
ACTUAL OVERHEAD COSTS - (Standard base x standard cost)
how to calculate variable overhead variance
actual variable overhead - (Standard base x standard variable cost)
Separating the TVOHBV into a spending (price) variance
and an efficiency (quantity) variance will show if:
o More, or less, overhead costs were incurred than
budgeted (spending variance); PRICE
or
o More, or less, activity base was used than the standardallowed for the output achieved (efficiency variance) QUANTITY
to analyze total vmoverhead price variance
actual vmoh - (actual base * standard price)
USE ACTUAL quantity
to analyze total vmoverhead quantity variance
THIS IS CALLED EFFICIENCY VARIANCE
(actual base * standard price) - (standard base * standrd price)
STANDARD PRICE!!!
causes of moh variances
Manufacturing overhead variances may be caused by
a variety of factors
* The controllable variance relates to variable
manufacturing costs and usually is the responsibility
of the production department
o May result from either higher than expected use of
indirect materials, indirect labour or supplies, or
increases in indirect manufacturing costs such as fuel
The volume variance may be the responsibility of the
production department (inefficient use of direct
labour hours) or may come from outside the
production department (lack of sales orders)
reporting variances
All variances should be reported to appropriate levels of
management as soon as possible so that corrective action
can be taken
* The form, content, and frequency of variance reports vary
considerably among companies
* Variance reports facilitate the principle of “management
by exception”
* In using variance reports, top management normally looks
for significant variances
statement presentation of variances
In income statements prepared for management
under a standard cost accounting system, the cost of
goods sold is stated at standard cost and the
variances are disclosed separately
* Variances may also be shown in a contribution margin
income statement format.
nventories may be reported at standard costs when
there are no significant differences between standard
and actual costs.
o If there are significant differences between actual and
standard costs, inventories and the cost of goods sold
must be reported at actual costs.
balanced scroed card
do i need to study this?
standard cost accoutning system
should i study this?
