COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan
Chapter 9
Standard Costing: A
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Study Objectives
1. Describe how unit input standards are developed, and explain why standard costing systems are adopted.
2. Explain the purpose of a standard cost sheet.
3. Compute and journalize the direct materials and direct labor variances, and explain how they are used for
control.
4. Compute overhead variances three different ways, and explain overhead accounting.
Developing Unit Input Standards
• Unit standard cost is the product of standard price and standard quantity
• Quantity standards specify how much of the input should be used per unit of output
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Developing Unit Input Standards
• Ideal standards demand maximum efficiency and can be achieved only if everything operates perfectly.
• Currently attainable standards can be achieved under efficient operating
conditions.
• Kaizen standards reflect a planned
Developing Unit Input Standards
• Usage of standard costing systems
– Cost management – Planning and control
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Total budget variance = (AP AQ) – (SP SQ)
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Accounting for the Direct Materials Price and Usage Variances
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Variance Analysis and Accounting: Direct Materials and Direct Labor
• Direct materials price variances can be computed at the point
– when the direct materials are issued into production OR
– when the materials are purchased
• This method would require AQ to be defined as the actual quantity purchased, rather than actual
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Direct materials usage variances should be computed as direct materials are issued into production.
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Accounting for the Direct Labor Rate and Efficiency Variances
Variance Analysis and Accounting: Direct Materials and Direct Labor • Investigating direct materials and labor
variances
– Because random variations around the standard are expected, management should establish an
acceptable range of performance.
– The acceptable range is the standard, plus or minus an allowable deviation.
• The upper control limit is the standard plus the allowable deviation
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Disposition of Direct Materials and Direct Labor Variances Immaterial
Disposition of Direct Materials and Direct Labor Variances Material
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Accounting for Overhead Variances
Accounting for Overhead Variances (continued)
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Standard Mix Information: Direct Materials
Yield: 120 lbs.
Yield ratio: 0.75 (120 / 160)
Standard cost of yield (SPy): $0.80 per pound ($96 / 120 pounds of yield)
Malcom Nut Company produces a batch of 1,600 pounds and produces the following actual results:
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Mix Variance = Σ(AQi – SMi)SPi
Yield variance = (Standard yield – Actual yield) Spy
Standard yield = Yield ratio × Total actual inputs
Yield variance = (1,200 – 1,300)$0.80
= $80 F
Direct Materials Yield Variance
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Mix and Yield Variances: Materials and Labor
Standard Mix Information: Direct Labor
Yield: 120 lbs.
Yield ratio: 24 or 2400% (120 / 5)
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Mix and Yield Variances: Materials and Labor
Yield variance = (Standard yield – Actual yield)Spy
= [(24 × 50) – 1,300]$0.45
= (1,200 – 1,300)$0.45
= $45 F
COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan
