Chapter_10_Presentation_Study_Aid_Slides

Basic Definitions and Concepts

• Standards: Benchmarks or norms for measuring performance in managerial accounting.

  • Types of Standards:

    • Quantity Standards: Specify input amounts needed for production/service delivery.

    • Price Standards: Define the cost per unit for inputs.

  • Examples of organizations utilizing these standards: Firestone, Sears, McDonald’s, hospitals, construction, and manufacturing companies.

Setting Direct Materials Standards

• Standard Price per Unit: Summarized in a Bill of Materials.

  • Final delivered cost of materials, net of discounts.

• Standard Quantity per Unit: Specifies the amount of material needed for a unit of product/service.

Setting Direct Labor Standards

• Use time and motion studies for determining labor operation requirements.

  • Standard Hours per Unit: Reflects the hours estimated for production per unit.

  • Standard Rate per Hour: Often a single rate that encompasses the wage mix.

Setting Variable Manufacturing Overhead Standards

• Rate: Reflects the variable portion of the predetermined overhead rate.

• Price Standard: The unit cost of the overhead allocation.

• Quantity Standard: Activity level measured in the allocation base.

The Standard Cost Card

• A standard cost card represents cost information for one unit of product, laying out variable expenses clearly.

Using Standards in Flexible Budgets

• Standard costs for direct materials, labor, and variable manufacturing overhead are essential for calculating activity/spending variances.

  • Spending variances can be divided into price and quantity variances for detailed analysis.

General Model for Variance Analysis

• Variance Analysis:

  • Quantity Variance: Difference between actual quantity used vs. standard quantity.

  • Price Variance: Difference between actual price paid and standard price.

Price and Quantity Standards

• Established separately for:

  • Purchasing manager's control over material prices.

  • Production manager's responsibility for material quantity.

• Raw material purchases may remain in inventory before use.

Variance Analysis Overview

• Key variances tracked include:

  • Materials Quantity Variance

  • Labor Efficiency Variance

  • Variable Overhead Efficiency Variance

  • Price Variance: Measures efficiency against standard prices.

  • Quantity Variance: Compares actual against standard quantities.

Models of Variance Analysis

• Use actual quantities to construct:

  • Price Variance: Computation involving actual vs. standard prices (AQ,xAP - AQ, xSP).

  • Spending Variance: Compare total spent against standard cost for total input used.

Responsibility for Materials Variance

• Materials Price Variance: Typically assigns accountability to the purchasing manager.

• Materials Quantity Variance: Accountability generally uses standard price, isolating purchasing decisions from production manager accountability.

Controllability of Variances

• Variances can stem from multiple sources, making control subjective:

  • Example: Poor quality materials affecting production costs.

Direct Labor Standards: Example

• Glacier Peak Outfitters sets:

  • Standard: 1.2 hours at $10.00/hour per parka.

  • Actuals: 2,500 hours worked, costing $26,250 for 2,000 parkas.

Labor Variances Summary

• Summarization includes:

  • Rate Variance: Unfavorable by $1,250.

  • Efficiency Variance: Unfavorable by $1,000.

Labor Variances using Factored Equations

• Rate Variance calculation breakdown:

  • LRV = (AH × AR) – (AH × SR)

• Efficiency Variance:

  • LEV shows the relationship between actual hours and standard hours tied to rate.

Responsibility for Labor Variances

• Factors influencing labor variances include:

  • Skill level of workers.

  • Employee motivation levels.

  • Quality of training and supervision.

Variable Manufacturing Overhead Variances Example

• Managed via direct labor hours:

  • Standard: 1.2 hours at $4.00/hour.

  • Actuals: 2,500 hours, costing $10,500 total.

Variable Manufacturing Overhead Variances Summary

• Rate and Efficiency Variances summarized.

  • Rate Variance: $500 unfavorable.

  • Efficiency Variance: $400 unfavorable.

Materials Variances Important Subtlety

• Calculation differences:

  • Quantity Variance only applies to used quantity; price variance looks at all purchased.

Advantages of Standard Costs

• Key elements:

  • Benchmarks promote economy.

  • Simplify record-keeping.

  • Support responsibility accounting systems.

Potential Problems with Standard Costs

• Risks when misusing variance reports:

  • Employee morale may suffer if variances are punitive.

  • Monthly preparation of reports might present outdated information.

Additional Issues with Standard Costs

• Labor assumptions that may fail in automated environments.

• Encouragement for meeting standards may overshadow other operational priorities like quality and customer satisfaction.