Determining the standard costs of direct materials and direct labor is less complicated than determining the standard costs of manufacturing overhead. The standard direct material cost per unit of a product consists of the standard amount of material required to produce the unit multiplied by the standard price of the material. Standard Manufacturing Overhead Costs To find the standard manufacturing overhead costs for a unit, use the following steps.
Standard overhead costrateper unit=Total budgeted overhead at the standard level of output Standard level of output. Third, a single materials variance—the difference between the standard cost and the actual cost of the materials used—is unlikely to be of any real value to management for effective cost control. The materials usage variance occurs when more or less than the standard amount of materials are used to produce a product or complete a process.
The variance is unfavorable because more materials were used than the standard quantity allowed to complete the job. If the standard quantity allowed exceeded the actual quantity used, the materials usage variance would be favorable. The variance is positive and unfavorable because the rate actually paid exceeded the standard rate allowed.
According to the flexible manufacturing overhead budget, the expected manufacturing overhead cost at standard volume (20,000 machine hours) is $100,000, so the standard overhead rate is $5 per machine hour ($machine hours).
Goods completed and sold
For a summary of the six variances from the standard discussed in this chapter, see Figure 52 below. Labor rate variance = (Actual rate – standard rate) x Actual hours worked Labor efficiency. Actual working hours – standard hours allowed) x Standard rate. Although standard cost often seems more difficult than actual cost to students, determining standard cost is generally easier in the real world.
Once a firm sets standards for a product, it is relatively simple to update these standards for changes in labor rates, product prices, and efficiency improvements. Beta debits work-in-process inventory at the standard cost of materials, labor, and manufacturing overhead for the units placed into production. Therefore, the entry recording the transfer of the standard cost of units completed, 11,000 x $60 = $660,000, reduces Work in Process Inventory to a zero balance.
It is fairly common practice to base selling prices at least in part on standard costs. Note that Beta debits finished goods inventory with the standard cost of finished goods and credits it with the standard cost of goods sold. Thus, the ending inventory of finished goods consists of the units actually on hand (1,000) at their standard cost of USD 60 each, or USD 60,000.
Investigating variances from standard
Disposing of variances from standard
Theoretically, the alternative chosen should depend on whether the standards set were reasonably achievable and whether the deviations were manageable for the company's employees. For example, a company may consider an unfavorable variance in material use or labor efficiency, caused by carelessness or inefficiency, as a loss and include it in the Income Statement because the standard was achievable and the variance was manageable. The company may consider an unfavorable material price variance caused by an unexpected price change as an additional cost and allocate it to inventory accounts and cost of goods sold because the standard was unattainable and the variance was uncontrollable.
In practice, companies usually close small variances to the cost of goods sold account instead of allocating them to inventory accounts and cost of goods sold. Companies do not report variances separately in the financial statements that are released to the public, but simply include them in the reported cost of goods sold amount. Reports prepared for internal use may separately indicate variances after cost of goods sold is shown at standard cost.
Many of the methods used successfully in the Japanese quality movement originated in the United States. The use of statistical controls in process evaluation originated in the United States, but Japanese managers used the concept and had much greater employee involvement in quality improvement than American companies. Although lagging behind in the implementation of quality management programs, many American companies have embarked on quality management.
The award is given to businesses that excel in major aspects of quality, such as quality planning, human resource development and customer focus. Companies that have won this award include well-known manufacturing companies such as Motorola, Westinghouse (Commercial Nuclear Fuel Division), IBM, Texas Instruments (Defence Systems and Electronics Group), and General Motors (Cadillac Division). The award was also given to large service organizations—Ritz-Carlton Hotels, Federal Express and AT&T (Network Systems Group)—and to small businesses such as Granite Rock Co.
The Baldrige Award promotes the sharing of information about effective quality management programs and identifies companies with role model quality management systems.
Nonfinancial performance measures
Three possible selection guidelines are (1) amount of deviation, (2) size of the deviation relative to costs incurred, and (3) controllability of the costs associated with the deviation. Which of the following explains why accountants separate material variances into a purchase price variance and a usage variance. Now turn to "Answers for self-test" at the end of the chapter to check your answers.
Of the two variants, it is more likely to be under management control. Identify the type of variance indicated by each of the following situations and indicate whether it is favorable or unfavorable:. How the use of standard costs enables the application of the principle of management by exception.
Exercise E The following data are related to the production activities of the Strauss company for the first quarter of the current year: Prepare a journal entry to record the closing of the cost of goods sold variance accounts. Flexible monthly budget for production overheads. allows $180,000 for fixed overhead and $4.80 per unit of output for variable overhead.
Problem F Based on a standard production volume of 96,000 units per month, the standard cost of the product manufactured by Tahoe Company consists of: Alternative Problem C Some of the records of Gonzaga Company's repair and maintenance department were accidentally fragmented. Montel agrees that under the circumstances it should be held responsible for most material price variations.
If the group is doing this, decide who should set the individual standards on your list. The title of the memorandum must contain the date, to whom it is written, from whom and the subject. You are encouraged (but not required) to find an article that answers some of the following questions: When is it appropriate to use standard costing?
Use any online search engine to select one of the new terms at the end of the chapter and perform a keyword search. Select an article that directly addresses the newly used term and print a copy of the article.
