ACCT 4B Ch. 11

What is a standard cost?

budget for a single unit of product

What are the types of standards?

Ideal, perfection, and practical (attainable)

What are ideal standards?

Based on perfect or ideal conditions

What are perfection standards?

Do not allow for any poor-quality raw materials, waste, machine breakdown, or other inefficiencies (lean production systems)

What are practical (attainable) standards?

Based on currently attainable conditions. Allow for normal waste and inefficiency

Information Used to Develop and Update Standards

-Past materials and labor usage
-Current cost of inputs
-Estimated future changes
-Time and quantity that should be needed to produce each unit

Computing Standard Costs

Compute for:
- Direct Materials (DM)
- Direct Labor (DL)
- Manufacturing Overhead (MOH) (variable and fixed)

How to calculate standard cost of DM

Standard quantity of DM X Standard price of DM

How to calculate standard cost of DL

Standard quantity of DL X Standard price of DL

How to calculate variable MOH rate

Total estimated variable MOH / Total estimated amount of the allocation base

How to calculate standard variable MOH per unit

Standard quantity of allocation base X Variable MOH rate

How to calculate fixed MOH rate

Total estimated fixed MOH / Total estimated amount of the allocation base

How to calculate standard fixed MOH per unit

Standard quantity of allocation base X fixed MOH rate

What variances can the flexible budget variance for DM split into?

DM price variance and DM quantity variance

How to calculate actual cost if DM purchased = DM used

AQ X AP
(actual quantity X actual price)

How to calculate standard cost allowed if DM purchased = DM used

SQA X SP
(standard quantity allowed X standard price)

What is DM price variance if DM purchased = DM used?

(AQ x AP) - (AQ X SP) or AQ (AP-SP)

What is DM quantity variance if DM purchased = DM used?

(AQ x SP) - (SQA x SP) or SP (AQ -SQA)

What is DM price variance?

How much of the variance is due to paying a higher or lower price than expected for DM purchased

What is DM quantity variance?

How much of the total variance is due to using a larger or smaller quantity of DM than expected

How to compute DM price variance when quantity purchased differs from the quantity used

Based on quantity of DM purchased (AQP).
AQP X (AP - SP)

How to compute DM quantity variance when quantity purchased differs from the quantity used

Based on quantity of DM used (AQU).
SP X (AQU - SQA)

What is DL rate variance?

How much of the total labor variance is due to paying a higher or lower hourly wage rate than anticipated

How do you calculate DL rate variance?

Actual hours X (Actual rate - Standard rate)

What is DL efficiency variance?

How much of the total labor variance is due to using a greater or lesser amount of time than anticipated

How is DL efficiency variance calculated?

Standard rate X (Actual hours - Standard hours allowed)

Who should you inquire with for DM price variance?

Purchasing supervisor

Who should you inquire with for DM quantity variance?

Production supervisor

Who should you inquire with for DL rate variance?

HR and production supervisors

Who should you inquire with for DL efficiency variance?

Production supervisor

Advantages of using standard costs and variances

1. Cost benchmarks
2. Usefulness in budgeting
3. Motivation
4. Simplify bookkeeping

Disadvantages of using standard costs and variances

1. Outdated or inaccurate standards
2. Lack of timeliness
3. Focus on operational performance measures and visual management
4. Lean thinking
5. Increase in automation and decrease in DL
6. Unintended behavioral consequences

What is a variable overhead rate variance?

Difference between actual variable MOH costs incurred and the amount of variable MOH expected. Aka variable overhead spending variance.
Actual hours X (Actual rate - standard rate)

What is a variable overhead efficiency variance?

Difference between actual amount of allocation base used and the standard allocation base allowed for the actual production volume
Standard rate X (Actual hours - standard hours allowed)

What is a fixed overhead budget variance?

Difference between actual fixed overhead costs incurred and the budgeted fixed overhead costs.
Actual fixed MOH - Budgeted fixed MOH

What is a fixed overhead volume variance?

Difference between the budgeted fixed overhead and the standard fixed overhead cost allocated to production.
Budged fixed MOH - Standard fixed MOH
Budged fixed MOH - (SHA X SR)

When is the fixed overhead volume variance favorable?

If production volume is greater than anticipated,
then fixed overhead has been overallocated,
and the fixed overhead volume variance is favorable

When is the fixed overhead volume variance unfavorable?

If production volume is less than anticipated,
then fixed overhead has been underallocated,
and the fixed overhead volume variance is unfavorable

What is standard costing?

Integrating standards directly into the general ledger accounting by recording inventory-related costs at standard cost rather than actual cost.
It saves bookkeeping costs and isolates price and efficiency variances as possible.