Chapter 5 - Cost Accounting and Performance Measurement WILL FINISH LATER

Question 1

What are Standard Costs in general?

Answer 1

Predetermined target costs which should be attainable under certain conditions. Used to:

• aid in budget process
• identify troubled areas
• evaluate performance

Question 2

Rememer how we touched on companies setting “Internal Standards” in Auditing?

Answer 2

That’s exactly what’s happening here - we’re setting inter goals, or standards, to ensure efficient production of inventory.

Thus, we also establish standards for the individual components that determine direct materials, labor, and overhead

Then, at the end of the period, we compare these standards to the actual results to determine VARIANCES

Question 3

Examples of Standards - Read these carefully because they are easy to confuse with eachother. Rest of the chapter is based off of these

Answer 3

• Standard Cost - unit purchase price of Direct Materials. Standard Costs and actual costs are compared to produced DIRECT MATERIALS PRICE VARIANCES
• Standard Quantity - # of units of direct materials used to produce the inventory. Standard vs actual quantity are the DIRECT MATERIALS USAGE VARIANCES
• Standard Rate - Hourly rate of pay for direct labor. Standard vs Actual rate of pay is the DIRECT LABOR RATE VARIANCES
• Standard Hours - Number of hours of direct labor to produce each unit of inventory. Standard vs actual hours to produced are called DIRECT LABOR EFFICIENCY VARIANCES
• Predetermined Ovhd Rate - Amount of overhead to apply. Based on what the company wants, many questions base it off direct labor hours. Differences between actual and standard are simply called OVERHEAD VARIANCES. Sometimes called Standard Fixed Application Rate (SFR)

Question 4

How to find the Variances (just the first step!)

Say our estimated costs for one day growing one marijuana plant:

• Direct Materials - $100
• Direct Labor - $50
• Overhead - $95
• Total = $245

Answer 4

One day, we actually make two plants and incur the following:

• Direct Materials - $144
• Direct Labor - $132
• Overhead - $255
• Total = $531

BUT that’s based on TWO plants. Thus, our standard can’t compare. So, we multiply our estimated costs by TWO, and then compare.

Estimated x 2

• Direct Materials - $200
• Direct Labor - $100
• Overhead - $190
• Total = $490

What we just calculate is called STANDARD FOR ACTUAL. We compare this to the actual and calculate the following variances:

• Direct Materials - 144 Actual vs 200 Est = 56 F
• Direct Labor - 132 Actual vs 100 Est = 32 U
• Overhead - 255 Actual vs 190 Est = 65 U

F means “favorable”, or that actual performance was less than budgeted. U is “unfavorable”, meaning we exceeded budget. We don’t know who did it or why it happened yet - that’s for variance analysis (step 2 :D)

Question 5

What can go wrong with Direct Materials? (Type of direct material variances)?

Answer 5

• DM Price Variances - If actual costs are different from standard costs. Responsible by the PURCHASING DEPT. If they purchased something for 30 cents, but the standard costs are 25 cents, they fucked up
• DM Usage Variance - the Quantity that we wanted to use was different from standard. Responsibility by Manufacturing dept. Say we wanted them to use 10 widgets, but they used 15… they wasted 5 more widgets and they fucked up.

Total DM Variance is equal to the sum of these two numbers

Question 6

How to calculate the two direct material variances - DM is 56 favorable

Answer 6

1. Draw a little chart and put the Actual to one side and the Standard we set on the far right.
2. Multiply them out to find their totals.
3. Then, in the middle, draw a line to see the Actual Quantity by the standard’s set price. That will tell you the PRICE variance - difference with the pricing - placed to the left.
4. The rest HAS to come from the usage variance.

Question 7

Direct LAbor Variances Calculations - DL Variance is 58 Unfavorable.

Answer 7

1. Draw a little chart and put the Actual to one side and the Standard we set on the far right.
2. Multiply them out to find their totals.
3. Then, in the middle, draw a line to see the Actual Hours multiplied by the Standard Rate. It’s always going to be actual times standard (what we can control comes first
4. What’s to the left is Rate Variance***, the rest (to the right) is efficiency variance.

***Rates used for HR Dept

Question 8

What can go wrong with Direct labor? (2 direct labor variances)

Answer 8

1. Direct Labor RATE Variance - The price component. The responsibility here lies with PERSONNELL
2. Direct Labor EFFICIENCY Variance - Were we using hours efficiently? Controlled by PRODUCTION

Question 9

With the line charts for variances, how should the flow of the numbers go?

Answer 9

The numbers should be going from LARGE to SMALL from the right to the left. If not, then it’s an unfavorable variance.