chapter 12: standard costs and balance Flashcards
standards that are imposed by government agencies
regulations
standard costs
predetermined unit costs that are used as measures of performance
Advantages of standard costs
facilitate management planning
promote greater economy by making employees more cost-conscious
help set selling prices
contribute to management control by providing basis for evaluation and cost control
help highlight variances in management by exceptions
simplify costing of inventories and reduce clerical costs
when are the advantages of standard costs available?
when standard costs are carefully established and prudently used
consequences of using standards only as a way of placing blame¿
what is done to counteract this?
can have a negative effect on managers and employees
many companies offer money incentives to employees who meet their standards to minimize this effect
the difference between standards and budgets
in the way the terms are expressed
A standard is a unit amount
A budget is a total amount
true or false
A standard is concerned with each individual cost component that makes up the entire budget
true
how does the managerial accountant provide important input for management in the standard-setting process?
by accumulating historical cost data
by knowing how costs respond to changes in activity levels
what do we require from standard costs to be effective in controlling costs?
standard costs need to be up to date at all times
ideal standards
the term for optimum levels of performance under perfect operating conditions
normal standards
efficient levels of performance that are attainable under expected operating conditions
are ideal standards or normal standards used more frequently?
why?
normal standards
most managers believe that ideal standards lower the morale of the entire workforce because they are so difficult, if not impossible, to meet
what is necessary to establish the standard cost of producing a product?
we need to establish standards for each manufacturing cost element (DM, DL, MOH)
what is the standard for each manufacturing element determined by?
the standard price to be paid and the standard quantity to be used
the direct materials price standard
what is it based on?
the cost per unit of direct materials that should be incurred
should be based on the purchasing department’s best estimate of the cost of raw materials
includes related costs, such as receiving, storing, and handling the material
The direct materials quantity standard
what us included
quantity of direct materials that should be used per unit of finished goods
expressed as a physical measure, such as kilograms, barrels, or litres
management should consider both the quality and quantity of materials that are required to manufacture the product
should include allowances (extra amounts) for unavoidable waste and normal spoilage
The standard direct materials cost per unit
the standard direct materials price · the standard direct materials quantity
The direct labour price standard
what is is based on?
what does it include?
also called the direct labour rate standard
the rate per hour that should be incurred for direct labour
based on current wage rates
adjusted for expected changes, such as cost of living adjustments (COLAs)
generally includes employer payroll taxes and benefits
The direct labour quantity standard
also called the direct labour efficiency standard
the time that should be required to make one unit of the product
includes rest periods, cleanup, machine set-up, and machine downtime
The standard direct labour cost per unit
standard direct labour rate · the standard direct labour hours
standard predetermined overhead rate
determined by dividing budgeted overhead costs by an expected standard activity index
The standard manufacturing overhead rate per unit
= the predetermined overhead rate · the activity index quantity standard
Normal capacity
the average activity output that a company should experience over the long run
Total Standard Cost Per Unit
the sum of the standard costs of direct materials, direct labour, and manufacturing overhead
A standard cost card
the basis for determining variances from standards
prepared for each product after finding the total standard cost per unit
the differences between total actual costs and total standard costs
Variances
variances can also indicate differences between total budgeted costs and total actual costs (not crucial for this chapter)
unfavorable variance
what does it suggest?
When actual costs are higher than standard costs
It suggests that too much was paid for one or more of the manufacturing cost elements or that the elements were used inefficiently
favorable variance
what does it suggest?
when actual costs are less than standard costs
It suggests there is efficient management of manufacturing costs and efficient use of direct materials, direct labour, and manufacturing overhead
what is a hidden bad factor that could lead to a favorable variance?
could be obtained by using inferior materials
A variance is not favourable if quality control standards have been sacrificed
the variance is expressed in total dollars or a per-unit basis?
total dollars
two ways to calculate the Total Variance
Actual Costs - Standard Costs
Materials Variance + Labour Variance + Overhead Variance
= Total Variance
what do you need to calculate the Materials Variance and Labour Variance?
Price Variance for each
–> we hold the quantity constant (at the actual quantity) but vary the price (actual versus standard)
Quantity Variance for each
–> we hold the price constant (at the standard price) but vary the quantity (actual versus standard)
total direct materials budget variance (TDMBV)
the difference between the amount paid (actual quantity times actual price) and the amount that should have been paid based on standards (standard quantity times standard price of materials)
The total materials variance could be caused by what?
differences in the price paid for the materials or by differences in the amount of materials used
formula for total materials variance
materials price variance + materials quantity variance
= total materials variance¡
materials price variance
the difference between the actual price and the standard price
Total Actual Quantities (TAQ) · Actual Price (AP) - Total Actual Quantities (TAQ) · Standard Price (SP)
= Materials Price Variance (MPV)
materials quantity variance
results from differences between the amount of material actually used and the amount that should have been used
the difference between the standard cost of the actual quantity (actual quantity · standard price) and the standard cost of the amount that should have been used (standard quantity · standard price for materials)
Total Actual Quantities (TAQ) · Standard Price (SP) - Total Standard Quantities (TSQA) · Standard Price (SP)
= Materials Price Variance (MQV)
what is the first step when using the matrix to find variances?
the formulas for each cost element are calculated
The investigation of a materials price variance usually begins where?
in the purchasing department
when is the purchasing department responsible for any materials price variances?
when the delivery method used, the availability of quantity and cash discounts, and the quality of the materials requested have been considered in setting the price standard and there is still variances
when are material price variances out of the purchasing department’s control?
when prices rise faster than expected
when there are some actions by groups that the company cannot control
sometimes, a production department may be responsible for the price variance
The starting point for determining the cause(s) of an unfavorable materials quantity variance
the production department
when is the production department responsible for any materials quantity variances?
inexperienced workers
faulty machinery
carelessness
when when is the purchasing department responsible for any materials quantity variances?
when the the materials obtained by the purchasing department were of inferior quality
Formula for total direct labour budget variance (TDLBV)
the difference between the amount actually paid for labour (actual hours · actual rate) and the amount that should have been paid (standard hours · standard rate for labour)
Total Actual Hours (TAH) · Actual Rate (AR) - Total Standard hours Allowed (TSHA) · Standard Rate (SR)
Components of total labour variance
Labour Price Variance + Labour Quantity Variance
= Total Labour Variance
Labour Price Variance (LPV)
results from the difference between the rate paid to workers and the rate that was supposed to be paid
Total Actual Hours (TAH) · Actual Rate (AR) - Total Actual Hours (TAH) · Standard Rate (SR)
= Labour Price Variance (LPV)
or
multiplying actual hours worked by the difference between the actual pay rate and the standard pay rate
TAH × (AR − SR) = LPV
The labour quantity variance
results from the difference between the actual number of labour hours and the number of hours that should have been worked for the quantity produced
Total Actual Hours (TAH) · Standard Rate (SR) - Total Standard Hours Allowed (TSHA) · Standard Rate (SR)
= Labour Quantity Variance (LQV)
or
multiply the standard rate by the difference between the total actual hours worked and total standard hours allowed
SR · (TAH - SH) = LQV
Labour price variances usually result from which two factors
(1) paying workers higher wages than expected
(2) a misallocation of workers
when is the manager responsible for labour price variances?
When workers are not unionized and there are wage increases that caused the labour price variances
when is the production department responsible for labour price variances?
abour price variances that result from misallocation of the workforce
what do labour quantity variances relate to?
the efficiency of workers
to whom can we usually relate the cause of a labour quantity variance?
the production department
when is the production department responsible for labour quantity variances?
poor worker training
worker fatigue
faulty machinery
carelessness
why is the task more challenging for finding manufacturing overhead variances?
both variable and fixed overhead costs must be considered
the difference between the actual overhead costs and overhead costs applied based on standard hours allowed for the amount of goods produced
the total overhead variance
Total standard hours allowed
The hours that should have been worked for the units produced
Formula for total overhead budget variance
Actual Overhead - Overhead Applied = Total Overhead Variance
Overhead Applied: Total Standard Hours Allowed (TSHA) · Standard Rate (SR)
total variable overhead budget variance (TVOHBV)
shows whether variable overhead costs were effectively controlled
the actual variable overhead costs incurred are compared with budgeted costs for the total standard hours allowed
Formula for the total variable overhead budget variance
Actual Variable Overhead - Variable Overhead Applied = Total Variable Overhead Budget Variance (TVOHBV)
Variable Overhead Applied: Total Standard Hours Allowed (TSHA) · Standard Rate (SR)
Formula for variable overhead spending (price) variance
Actual Variable Overhead - Total Actual Hours (TAH) · Standard Rate (SR) = Variable Overhead Spending (Price) Variance (VOHSPV)
Formula for variable overhead efficiency (quantity) variance
Total Actual Hours (TAH) · Standard Rate (SR) - Total Standard Hours Allowed (TSHA) · Standard Rate (SR)
= Variable Overhead Efficiency Variance (VOHEV)
total fixed overhead variance
the difference between the actual fixed overhead and the total standard hours allowed · by the fixed overhead rate
Formula for the total fixed overhead variance
Actual Fixed Overhead - Fixed Overhead Applied
= Total Fixed Overhead Variance
Fixed Overhead Applied:
Total Standard Hours Allowed (TSHA) · Standard Rate (SR)
fixed overhead spending (budget) variance
shows whether spending on fixed costs was under or over the budgeted fixed costs for the year
Formula for fixed overhead spending (budget) variance
Actual Fixed Overhead Costs - Fixed Overhead master Budget (Static Budget)
= Fixed Overhead Spending (Budget) Variance (FOHSV)
Fixed Overhead master Budget (Static Budget):
Normal Capacity Hours (NCH) · Standard Fixed Rate (SR)
The fixed overhead volume variance
answers the question of whether we effectively used our fixed capacity
If we produces less than normal capacity would allow, an unfavourable or favorable variance results?
unfavourable variance
If we produces more than normal capacity would allow, an unfavourable or favorable variance results?
favorable variance
Formula for fixed overhead volume variance
Fixed Overhead master Budget (Static Budget) - TSHA · SR
= Fixed Overhead Volume Variance
Fixed Overhead master Budget (Static Budget):
Normal Capacity Hours (NCH) · Standard Fixed Rate (SR)
or
Fixed Overhead rate · (NCH - TSHA)
what is important to remember when calculating the overhead variances?
- The standard hours allowed are used in each of the variances.
- The total budget overhead variance generally relates to total variable overhead budget variance and the fixed overhead spending (budget) variance only
- The volume variance relates only to fixed overhead costs
- Over-applied or under-applied overhead is the difference between the total actual overhead costs (variable + fixed) and the budget overhead at the standard base (based on direct labour hours) allowed
how is the overhead volume variance also called?
the production volume variance
causes of an unfavorable overhead spedningvariance
(1) a higher-than-expected use of indirect materials, indirect labour, and factory supplies
(2) increases in indirect manufacturing costs
on whom does the responsibility of overhead spending variance rest on?
the production department
on whom does the responsibility of overhead volume variance rest on?
when are they to blame?
the production
department
inefficient use of direct labour or machine breakdowns
when the cause of a overhead volume variance is a lack of sales orders, on whom does the responsibility rest?
not the production
department
would be the sales department
Variance reports make it easier or harder to use the “management by exception” approach?
easier
income statements prepared for management
cost of goods sold is stated at standard cost and the variances are disclosed separately
what types of variances increase or decrease COGS?
Unfavorable variances increase cost of goods sold
favorable variances decrease cost of goods sold
can income statements for shareholders be reported at standard costs instead of actual costs?
yes if the variances are not that big
The balanced scorecard
uses financial and non-financial measures in an integrated system
integrated system links performance measurement and a company’s strategic goals
The four most commonly used balanced scorecard perspectives
The financial perspective
The customer perspective
The internal process perspective
The learning and growth perspective
The balanced scorecard financial perspective
the most traditional view of the company
uses the financial measures of performance that most firms use
The balanced scorecard customer perspective
evaluates how well the company is performing from the viewpoint of those people who buy and use its products or services
measures how well the company compares with competitors in terms of price, quality, product innovation, customer service, and other dimensions
The balanced scorecard internal process perspective
evaluates the internal operating processes that are critical to success
All critical aspects of the value chain are evaluated to ensure that the company is operating effectively and efficiently
The balanced scorecard learning and growth perspective
evaluates how well the company develops and retains its employees
includes an evaluation of such things as employee skills, employee satisfaction, training programs, and the communication of information
In summary, the balanced scorecard does what
- Employs both financial and non-financial measures
- Creates links so that high-level corporate goals can be communicated all the way down to the shop floor
- Provides measurable objectives for such non-financial measures as product quality, rather than vague statements such as “We would like to improve quality.”
- Integrates all of the company’s goals into a single performance measurement system, so that too much weight will not be placed on any single goal
