Chapter 10
Standards vs. Budgets
Are standards the
same as budgets?
A standard is the
expected cost for one
unit.
A budget is the
expected cost for all
units.
Standard Costs
Based on carefully
predetermined amounts.
Standard
Costs are
Used for planning material, labor,
and overhead requirements.
Establish the expected level
of performance.
Provide benchmarks for
measuring performance.
Standard Costs
Amount
Managers focus on quantities and costs
that exceed standards, a practice known as
management by exception.
Standard
Direct
Material
Direct
Labor
Manufacturing
Overhead
Type of Product Cost
Setting Standard Costs
Practical standards
should be set at levels
that are currently
attainable with
reasonable and
efficient effort.
Setting Standard Costs
I agree. Ideal standards,
that are based on
perfection, are
unattainable and
discourage most
employees.
Standard Cost Card –
Variable Production Cost
A standard cost card for one unit of
product might look like this:
Inputs
Direct materials
Direct labor
Variable mfg. overhead
Total standard unit cost
A
B
AxB
Standard
Quantity
or Hours
Standard
Price
or Rate
Standard
Cost
per Unit
3.0 lbs.
2.5 hours
2.5 hours
$
$ 4.00 per lb.
14.00 per hour
3.00 per hour
$
12.00
35.00
7.50
54.50
A General Model for Variance
Analysis
Variance Analysis
Price Variance
Difference between
actual price and
standard price
Quantity Variance
Difference between
actual quantity and
standard quantity
A General Model for Variance
Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Standard Quantity
×
Standard Price
Price Variance
Quantity Variance
AQ(AP - SP)
SP(AQ - SQ)
AQ = Actual Quantity
AP = Actual Price
SP = Standard Price
SQ = Standard Quantity
Standard Cost Variances
A standard cost variance is the amount by which
an actual cost differs from the standard cost.
Product Cost
Standard
This variance is unfavorable
because the actual cost
exceeds the standard cost.
Standard Cost Variances
I see that there
is an unfavorable
variance.
But why are
variances
important to me?
First, they point to causes of
problems and directions
for improvement.
Second, they trigger
investigations in departments
having responsibility
for incurring the costs.
Setting Direct Material
Standards
Price
Standards
Quantity
Standards
Final, delivered
cost of materials,
net of discounts.
Summarized in
a Bill of Materials.
Material Variances Summary
Actual Quantity
×
Actual Price
Price variance
Actual Quantity
×
Standard Price
Standard Quantity
×
Standard Price
Quantity variance
Responsibility for Material Variances
Materials Quantity Variance
Production Manager
Materials Price Variance
Purchasing Manager
The standard price is used to compute the quantity variance
so that the production manager is not held responsible for
the purchasing manager’s performance.
Setting Direct Labor
Standards
Rate
Standards
Time
Standards
Often a single
rate is used that reflects
the mix of wages earned.
Use time and
motion studies for
each labor operation.
Labor Variances Summary
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
Rate variance
Standard Hours
×
Standard Rate
Efficiency variance
Responsibility for Labor
Variances
Production managers and H. R.
managers are usually held
accountable
for labor variances
because they can
influence the:
duction Manager
Mix of skill levels
assigned to work tasks.
Level of employee
motivation.
Quality of production
supervision.
Quality of training
provided to employees.
Setting Variable
Manufacturing Overhead
Rate
Standards Quantity
Standards
Standards
The rate is the
variable portion of the
predetermined overhead
rate.
The quantity is
the activity in the allocation
base used for
predetermined overhead.
Variable Manufacturing Overhead
Variances Summary
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
Rate variance
Standard Hours
×
Standard Rate
Efficiency variance
Responsibility for Overhead
Variances
Production managers are
usually held accountable
for overhead variances
because they can
influence the:
Costs incurred on the shop
floor.
Quality of production
supervision.
Production Manager
Variable Overhead Variances – A
Closer Look
Rate Variance
Results from paying more
or less than expected for
overhead items and from
excessive usage of
overhead items.
Efficiency Variance
Controlled by
managing the
overhead cost driver.
Variance Analysis and
Management by Exception
How do I know
which variances to
investigate?
Larger variances, in
dollar amount or as a
percentage of the
standard, are
investigated first.
Advantages of Standard Costs
Possible reductions
in production costs
Management by
exception
Advantages
Improved cost control
and performance
evaluation
Better Information
for planning and
decision making
Emphasis on negative
may impact morale.
Standard cost
reports may
not be timely.
Favorable variances
may be misinterpreted.
Potential
Problems
Emphasizing standards
may exclude other
important objectives.
Continuous
improvement
may be more
important than
meeting standards.
End of Chapter 10