Chapter 9 Standard Costing and Variance Analysis

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Chapter 9 Standard Costing and Variance Analysis

• Fall 2007
• Crosson

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Learning Objectives

• Responsibility Accounting Cost Centers
• Cost Performance Evaluation using Master and
  Flexible Budgets
• Standard Costing Basics for Cost Centers
• Performance Evaluation using Standard Costing
  Spending and Efficiency Variances
• Compute and Analyze DM,DL,VOH, and FOH variances

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Responsibility AccountingCost Center

• An information system that classifies data
  according to a managers responsibilities for
  organizational resources
• Manager accountable for costs that have
  well-defined relationships between the centers
  resources and products or services.

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Cost Performance Evaluation using Flexible and
Master Budgets
ACTUAL PRODUCTION FLEXIBLE BUDGET MASTER BUDGET
Actual Output x Actual Quantity x Actual Cost Actual Output x Standard Quantity x Standard Cost Estimated Output x Standard Quantity x Standard Cost
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What Do You Know?Flexible Budget Preparation

• Look and listen to SE5.
• P2 parts 3 4

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P2 Cost Performance Evaluation
ACTUALPRODUCTION (46,560) APRIL FLEXIBLE BUDGET (46,560) MASTER BUDGET (50,000)
DM 4,975 DL 5,850 IDL 1,290 Supplies 960 VHP 1,325 VO 2,340 FHP 3,500 Depreciation 4,200 IT 1,200 FO 1,600 Total 27,240 DM .10 x 46,560 4,656.00 DL .12 x 46,560 5587.20 IDL .03 x 46,560 1396.80 Sup. .02 x 46,560 931.20 VHP .03 x 46,560 1,396.80 VO .05 x 46,560 2,328.00 FHP 3,500 Dep. 4,200 IT 1,200 FO 1,600 Total 26,796 DM 5,000 DL 6,000 IDL 1,500 Sup. 1.000 VHP 1,500 VO 2,500 FHP 3,500 Dep. 4,200 IT 1,200 FO 1,600 Total 28,000
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Performance Evaluation using Flexible and Master
Budgets
ACTUAL PRODUCTION FLEXIBLE BUDGET MASTER BUDGET
Actual Output x Actual Quantity x Actual Cost Actual Output x Standard Quantity x Standard Cost Estimated Output x Standard Quantity x Standard Cost
Standard Costing
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Standard Costing Basics

• Master Budget Prepared for year
• As part of the Master Budget, Standard
  Quantities and Rates set for Materials, Labor,
  Variable Overhead and Fixed Overhead (i.e.,
  predetermined ratesremember applied OH?
• During year Journal Entries use these Standards
• Managers monitor Cost Centers by computing and
  analyzing Price and Quantity Variances for
  Materials, Labor and Variable Overhead and Budget
  and Volume Variances for Fixed Overhead

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Material, Labor, and Variable Overhead Variances
ACTUAL PRODUCTION FLEXIBLE BUDGET
Actual Output x Actual Quantity x Actual Cost Actual Quantity x Standard Cost Actual Output x Standard Quantity x Standard Cost
Spending or Price or Rate Variance
Efficiency or Quantity Variance
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Use the following information to answer
questions The California Steel Works uses a
standard costing system.

• BUDGET The variable standard cost of producing
  one case of steel brackets is
• Direct material (5 pounds _at_ 1 per pound) 5.00
• Direct labor (2 hours _at_ 2 per hour) 4.00
• Variable overhead (2 hours _at_ 3 per hour) 6.00
• Thus, total variable cost per case 15.00.
• The predetermined overhead rate is 7 per direct
  labor hour (3 VOH and 2 FOH).
• Based on a master budget of 20,000 cases.

• ACTUAL During the past accounting period the
  company produced 25,000 cases and the actual cost
  per case were
• Direct material (5 pounds _at_ .90 per pound 4.50
• Direct labor ( 2 1/4 hours _at_ 1.80 per hour)
  4.05
• Variable overhead (148,750/25,000 cases)
  5.95
• The actual fixed overhead was 105,250.

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Material, Labor, and Variable Overhead Variances
ACTUAL PRODUCTION 25,000 cases (AAA) ACTUAL Quantity AT STANDARD Cost (AAS) FLEXIBLE BUDGET 25,000 cases (ASS)
DM 25,000 x (5 pounds _at_ .90 per pound) 112,500 DM 25,000 x 5 x1 125,000 DM 25,000 x (5 pounds _at_ 1 per pound) 125,000
DL 25,000 x( 2 1/4 hours _at_ 1.80 per hour) 101,250 DL 25,000 x 2 1/4 x2 112,500 DL 25,000 x (2 hours _at_ 2 per hour) 100,000
VOH 148,750 VOH 25,000 x 2 ¼ x3 168,750 VOH 25,000 x (2 hours _at_ 3 per hour) 150,000
Spending or Price or Rate Variance
Efficiency or Quantity Variance
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Material, Labor, and Variable Overhead Variances
ACTUAL PRODUCTION FLEXIBLE BUDGET
Actual Output x Actual Quantity x Actual Cost Actual Quantity x Standard Cost Actual Output x Standard Quantity x Standard Cost
Favorable or Unfavorable Spending or Price or
Rate Variance
Favorable or Unfavorable Efficiency or Quantity
Variance
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Crosswalk to Variable Overhead Account
Actual VOH Actual Output x Actual Quantity x Actual Cost Applied VOH Actual Output x Standard Quantity x Standard Cost (SAME AS FLEXIBLE BUDGET!!!)
Underapplied aka Net Spending Efficiency Variances Overapplied aka Net Spending Efficiency Variances

• Variable Overhead

Dr. OH xx Cr. COGS xx
Dr. COGS xx Cr. OH xx
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Fixed Overhead Variances
ACTUAL PRODUCTION MASTER or FLEXIBLE BUDGET APPLIED OVERHEAD
Actual Fixed Overhead Budgeted Fixed Overhead Actual Output x Fixed Overhead Rate (Standard Quantity x Standard Cost)
Budget or Spending or Controllable Variance
Volume or Uncontrollable Variance
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Crosswalk to Fixed Overhead Account
Actual FOH Actual Fixed Overhead Applied FOH Actual Output x Fixed Overhead Rate (Standard Quantity x Standard Cost)
Underapplied aka Net Budget and Volume Variances Overapplied aka Net Budget and Volume Variances

• Fixed Overhead

Dr. COGS xx Cr. OH xx
Dr. OH xx Cr. COGS xx
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Use the following information to answer
questions The California Steel Works uses a
standard costing system.

• BUDGET The variable standard cost of producing
  one case of steel brackets is
• Direct material (5 pounds _at_ 1 per pound) 5.00
• Direct labor (2 hours _at_ 2 per hour) 4.00
• Variable overhead (2 hours _at_ 3 per hour) 6.00
• Thus, total variable cost per case 15.00
• The predetermined overhead rate is 7 per direct
  labor hour (3 VOH and 2 FOH).
• Based on a master budget of 20,000 cases.

• ACTUAL During the past accounting period the
  company produced 25,000 cases and the actual cost
  per case were
• Direct material (5 pounds _at_ .90 per pound 4.50
• Direct labor ( 2 1/4 hours _at_ 1.80 per hour)
  4.05
• Variable overhead (148,750/25,000 cases)
• 5.95
• The actual fixed overhead was 105,250.

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Fixed Overhead Variances
ACTUAL PRODUCTION BUDGET (MASTER or FLEXIBLE) APPLIED OVERHEAD
105,250 80,000 (20,000 cases x 2/DLH x 2DLH) 100,000 25,000 cases x 4/case or 25,000 cases x 2/DLH x 2DLH
Favorable or Unfavorable Volume or Uncontrollable
Variance
Favorable or Unfavorable Budget or Spending or
Controllable Variance
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What Do You Know?Compute and Analyze DM,DL,VOH,
and FOH variances
P4 Look and listen SE6 , SE7, SE8.
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What Do You Know?Variance Analysis

• P3
• P7

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Homework

• P4