Standard Costing: A Managerial Control Tool Show
LEARNING OBJECTIVES After studying Chapter 9, students should be able to: 1. Explain how unit standards are set and why standard cost systems are adopted. 2. Explain the purpose of a standard cost sheet. 3. Describe the basic concepts underlying variance analysis and explain when variances should be investigated. 4. Compute the materials variances and explain how they are used for control. 5. Compute the labor variances and explain how they are used for control. 1. UNIT STANDARDS
2. STANDARD PRODUCT COSTS
3. VARIANCE ANALYSIS: GENERAL DESCRIPTIONA. Price and Efficiency VariancesThe total budget variance is the difference between actual cost of inputs and the standard (or planned) cost of inputs. There are two variances for variable production costs:
The general model for calculating variable cost variances appears below:
If the actual price or quantity is less than the standard, the variance is considered favorable. If the actual price or quantity exceeds the standard, the variance is considered unfavorable. B. The Decision to Investigate
4. VARIANCE ANALYSIS:MATERIALS A. Direct Materials VariancesDirect Materials Price VarianceThe materials price variance (MP V) for materials is calculated as follows:
The materials price variance can be computed at one of two points:
Variances should be calculated at the earliest point possible so management can take any necessary corrective action. Thus, the price variance for materials should be calculated at the time of purchase. Responsibility for the materials price variance is usually assigned to the purchasing agent. Variance analysis involves the following process:
B. Direct Materials Usage VarianceThe materials usage variance (MU V) is calculated as follows:
The production manager is usually responsible for materials usage because the production manager can minimize scrap, waste, and rework in order to meet the standard. The materials usage variance is calculated at the time materials are issued or used in the manufacturing process.
5. VARIANCE ANALYSIS: DIRECT LABOR A. Direct Labor VariancesThe labor rate variance (LR V) is calculated as follows:
When labor rate variances occur, it is usually due to: using the average wage rate as the standard rate, or using more skilled and higher paid laborers for less skilled tasks. Responsibility for the labor rate variance is often assigned to the individual, such as the production manager, who decides how labor will be used. B. Labor Efficiency VarianceThe labor efficiency variance (LE V) is calculated as follows:
Usually production managers are responsible for the direct labor efficiency variance; however, once the cause of the variance is discovered, responsibility may be assigned elsewhere. The total variance for direct labor would be the sum of the rate variance and the efficiency variance. The total variance can also be calculated as follows: Total direct labor variance =
Who is responsible for a materials price variance?Answer: The Purchasing Agent.
What is material cost variance in standard costing?Material Cost Variance (MCV)
It is the difference between the standard cost of direct materials specified for the output achieved and the actual cost of direct materials used. • This difference in material cost maybe partly due to difference in usage of raw material and partly due to difference in prices.
Who is responsible for unfavorable materials price variance?Purchasing. The purchasing department should ordinarily be held responsible for an unfavorable materials price variance because that department ordinarily has most control over the price.
Who has the main responsibility for a labor rate variance?Answer and Explanation: The human resource department is the one responsible for the labor rate variance.
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