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Accounting 210 Chapter 11 Notes

by: Kristin Koelewyn

Accounting 210 Chapter 11 Notes ACCT210

Marketplace > University of Arizona > Accounting > ACCT210 > Accounting 210 Chapter 11 Notes
Kristin Koelewyn
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Chapter 11 Notes
Managerial Accounting
Heather Altman
Class Notes
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This 10 page Class Notes was uploaded by Kristin Koelewyn on Tuesday April 19, 2016. The Class Notes belongs to ACCT210 at University of Arizona taught by Heather Altman in Spring 2016. Since its upload, it has received 9 views. For similar materials see Managerial Accounting in Accounting at University of Arizona.


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Date Created: 04/19/16
Accounting 210: Chapter 11 Notes Standard Costs and Balanced Scorecard - Describe Standard Costs: o Distinguishing Between Standards and Budgets o Both standards and budgets are predetermined costs, and both contribute to management planning and control. o There is a difference: ▯ A standard is a unit amount. ▯ A budget is a total amount o Advantages: - Setting Standard Costs: o Setting standard costs requires input from all persons who have responsibility for costs and quantities. o Standards should change whenever managers determine that the existing standard is not a good measure of performance. o IDEAL VERSUS NORMAL STANDARDS: ▯ Companies set standards at one of two levels: ▯ Ideal standards represent optimum levels of performance under perfect operating conditions. ▯ Normal standards represent efficient levels of performance that are attainable under expected operating conditions. ▯ Properly set, normal standards should be rigorous but attainable. o Case Study: To establish the standard cost of producing a product, it is necessary to establish standards for each manufacturing cost element— ▯ direct materials, ▯ direct labor, and ▯ manufacturing overhead. • The standard for each element is derived from the standard price to be paid and the standard quantity to be used. o Direct Materials: ▯ The direct materials price standard is the cost per unit of direct materials that should be incurred. ▯ The direct materials quantity standard is the quantity of direct materials that should be used per unit of finished goods. o Question: The direct materials price standard should include an amount for all of the following except: ▯ a.receiving costs. ▯ b.storing costs. ▯ c.handling costs. ▯ d.normal spoilage costs. - Setting Standard Costs and Spoilage: o When spoilage or waste is part of the process, you must account for this in determining the standard cost. o This can be presented in 2 ways: o 1. Sometimes they look at it from a planning perspective Pounds of material needed3.5 Allowance for Waste .4 Allowance for spoilage .1▯ Total pounds 4.0 for standard o 2. Sometimes they look at it with a percentage of waste that is planned into the system. You need 3.5 lbs. as your final product and you have 12.5% waste. So standard pounds * (1-.125) = 3.5 lbs needed ▯ This would lead to the standard of 4.0 lbs - Setting Standard Costs: o Direct Labor: ▯ The direct labor price standard is the rate per hour that should be incurred for direct labor. ▯ The direct labor quantity standard is the time that should be required to make one unit of the product. o Manufacturing Overhead: ▯ For manufacturing overhead, companies use a standard predetermined overhead rate in setting the standard. ▯ This overhead rate is determined by dividing budgeted overhead costs by an expected standard activity index, such as standard direct labor hours or standard machine hours. ▯ The company expects to produce 13,200 gallons during the year at normal capacity. It takes 2 direct labor hours for each gallon. o Total Standard Cost Per Unit: ▯ The total standard cost per unit is the sum of the standard costs of direct materials, direct labor, and manufacturing overhead. o DO IT! Ridette Inc. accumulated the following standard cost data concerning product Cty31. Materials per unit: 1.5 pounds at $4 per pound. Labor per unit: 0.25 hours at $13 per hour. Manufacturing overhead: Predetermined rate is 120% of direct labor cost. Compute the standard cost of one unit of product Cty31. - Determine Direct Materials Variances: - Analyzing and Reporting Variances: o Variances are the differences between total actual costs and total standard costs. ▯ Actual costs < Standard costs = _______________ variance. ▯ Actual costs > Standard costs = _______________ variance. o Variance must be analyzed to determine the underlying factors. o Analyzing variances begins by determining the cost elements that comprise the variance. o Direct Materials Variances: ▯ In completing the order for 1,000 gallons of Xonic Tonic, Xonic used 4,200 pounds of direct materials. These were purchased at a cost of $3.10 per unit. Standard price is $3. • (Actual Quantity x Actual Price) – (Standard Quantity x Standard Price) = Total Materials Variance • (4,200 x $3.10 = $13,020) – (4,000 x $3.00 = $12,000)= $1,020 U ▯ Next, the company analyzes the total variance to determine the amount attributable to price (costs) and to quantity (use). The materials price variance is computed from the following formula: • (Actual Quantity x Actual Price) – (Actual Quantity x Standard Price) = Materials Price Variance • (4,200 x $3.10 = $13,020) – (4,200 x $3.00= $12,600) = $420 U ▯ The materials quantity variance is determined from the following formula. • (Actual Quantity x Standard Price) – (Standard Quantity x Standard Price) = Materials Quantity Varaince • (4,200 x $3.00= $12,600) – (4,000 x $3.00= $12,00) = $600 U o Causes of Materials Variances: ▯ Materials price variance – factors that affect the price paid for raw materials include the • availability of quantity and cash discounts • quality of the materials requested • delivery method used. ▯ To the extent that these factors are considered in setting the price standard, the purchasing department is responsible. ▯ Materials quantity variance – if the variance is due to inexperienced workers, faulty machinery, or carelessness, the production department is responsible. o DO IT! The standard cost of Wonder Walkers includes two units of direct materials at $8.00 per unit. During July, the company buys 22,000 units of direct materials at $7.50 and uses those materials to produce 10,000 units. Compute the total, price, and quantity variances for materials. - Determine Direct Labor and Manufacturing Overhead Variances: - Direct Labor Variances: o In completing the Xonic Tonic order, Xonic incurred 2,100 direct labor hours at an average hourly rate of $14.80. The standard hours allowed for the units produced were 2,000 hours (1,000 gallons x 2 hours). The standard labor rate was $15 per hour. The total labor variance is computed as follows. o Next, the company analyzes the total variance to determine the amount attributable to price (costs) and to quantity (use). The labor price variance is computed from the following formula. o The labor quantity variance is determined from the following formula. o Causes of Labor Variances: ▯ Labor price variance – usually results from two factors: • 1. paying workers different wages than expected, and • 2. misallocation of workers. ▯ When workers are not unionized, the manager who authorized the wage increase is responsible for the higher wages. ▯ Production department generally is responsible for labor price variances resulting from misallocation of the workforce. ▯ Labor quantity variances • Relates to the efficiency of workers. • The cause of a quantity variance generally can be traced to the production department. o Manufacturing Overhead Variances: ▯ Total overhead variance is the difference between actual overhead costs and overhead costs applied to work done. The computation of the actual overhead is comprised of a variable and a fixed component. ▯ The formula for the total overhead variance and the calculation for Xonic, Inc. for the month of June. ▯ Standard hours allowed are the hours that should have been worked for the units produced. o The overhead variance is generally analyzed through a price variance and a quantity variance. o ____________________________(price variance) shows whether overhead costs are effectively controlled. o ____________________________(quantity variance) relates to whether fixed costs were under- or over-applied during the year. o Causes of Manufacturing Overhead Variances: ▯ Over- or underspending on overhead items such as indirect labor, electricity, etc. ▯ Poor maintenance on machines. ▯ Flow of materials through the production process is impeded because of a lack of skilled labor to perform the necessary production tasks, due to a lack of planning. ▯ Lack of sales orders o DO IT! The standard cost of Product YY includes 3 hours of direct labor at $12.00 per hour. The predetermined overhead rate is $20.00 per direct labor hour. During July, the company incurred 3,500 hours of direct labor at an average rate of $12.40 per hour and $71,300 of manufacturing overhead costs. It produced 1,200 units. (a) Compute the total, price, and quantity variances for labor. (b) Compute the total overhead variance. - Prepare Variance Reports and Balanced Scorecards: - Reporting Variances o All variances should be reported to appropriate levels of management as soon as possible. o The form, content, and frequency of variance reports vary considerably among companies. o Facilitate the principle of “management by exception.” o Top management normally looks for _________________. o Materials price variance report for Xonic, Inc., with the materials for the Xonic Tonic order listed first. - Statement Presentation of Variances: o In income statements prepared for management under a standard cost accounting system, cost of goods sold is stated at standard cost and the variances are disclosed separately. - Balanced Scorecard: o The balanced scorecard incorporates financial and nonfinancial measures in an integrated system that links performance measurement and a company’s strategic goals. o The balanced scorecard evaluates company performance from a series of “perspectives.” The four most commonly employed perspectives are as follows. o Question: Which of the following would not be an objective used in the customer perspective of the balanced scorecard approach? ▯ a. Percentage of customers who would recommend product to a friend. ▯ b. Customer retention. ▯ c. Brand recognition. ▯ d. Earning per share. o In summary, the balanced scorecard does the following: 1.Employs both __________ and _________________ measures. 2.Creates linkages so that high-level corporate goals can be communicated all the way down to the shop floor. 3.Provides _________________ ____________for such nonfinancial measures such as product quality, rather than vague statements such as “We would like to improve quality.” 4.Integrates all of the company’s goals into a single performance measurement system, so that an inappropriate amount of weight will not be placed on any single goal.  


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