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October 11th-13th Notes

by: Callisa Ruschmeyer

October 11th-13th Notes ACCT 2210

Marketplace > Auburn University > Accounting > ACCT 2210 > October 11th 13th Notes
Callisa Ruschmeyer
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Chapter 10- Standard Costs and Variances -all chapter 10 notes
Principles of Managerial Accounting
Talitha S. Smith
Class Notes
Chapter10, Managerial Accounting Notes, fetsch, standard, costs, variances
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This 3 page Class Notes was uploaded by Callisa Ruschmeyer on Thursday October 13, 2016. The Class Notes belongs to ACCT 2210 at Auburn University taught by Talitha S. Smith in Spring 2016. Since its upload, it has received 7 views. For similar materials see Principles of Managerial Accounting in Accounting at Auburn University.


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Date Created: 10/13/16
October 11 -13 Notes Chapter 10 Standard Costs  Standards are benchmarks or "norms" for measuring performance  In managerial accounting, two types of standards are commonly used 1. Price standards- specify how much should be paid for each unit of the input 2. Quantity standards- specify how much of an input should be used to make a product or provide a service Setting Direct Materials Standards  Standard price per unit o Final, delivered cost of materials, net of discounts  Standard quantity per unit o Summarized in a Bill of Materials Setting Direct Labor Standards  Standard rate per hour o Often a single rate is used that reflects the mix of wages earned  Standard hours per unit o Use time and motion studies for each labor operation Setting Variable Manufacturing Overhead Standards  Price standard- the rate is the variable portion of the predetermined overhead rate  Quantity standard- the quantity is the activity in the allocation based for predetermined overhead Using Standards in Flexible Budgets  Standard costs per unit for direct materials, direct labor, and variable manufacturing overhead can be used to compute activity and spending variances o Spending variances become more useful by breaking them down into price and quantity variances Price and Quantity Standards  Price and quantity standards are determined separately for two reasons 1. The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw material used 2. The buying and using activities occur at different times i. Raw material purchases may be held in inventory for a period of time before being used in production General Model for Variance Analysis  Price variance- difference between actual price and standard price o Materials price variance; labor rate variance; VOH rate variance  Quantity variance- difference between actual quantity and standard quantity o Materials quantity variance; labor efficiency variance; VOH efficiency variance October 11 -13 Notes Chapter 10  Actual quantity- the amount of direct materials, direct labor, and variable manufacturing overhead actually used  Standard quantity- the quantity allowed for the actual output of the period  Actual price- the amount actually paid for the input used  Standard price- the amount that should have been paid for the input used Materials Variances  Using Factored Equations o Materials Price Variance (MPV) = (AQ X AP) - (SQ X SP)  AQ(AP-SP) o Materials Quantity Variance (MQV) = (AQ X SP) - (SQ X SP)  SP(AQ - SQ)  Responsibility for Materials Variances o Materials price variance- purchasing manager o Materials quantity variance- production manager o 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  An Important Subtlety o The quantity variance is computed only on the quantity used o The price variance is computed on the entire quantity purchased Labor Variances  Using the Factored Equations o Labor Rate Variance (LRV) = (AH X AR) - (AH X SR)  AH(AR-SR) o Labor Efficiency Variance (LEV) = (AH X SR) - (SH X SR)  SR(AH-SH)  Responsibility for Labor Variances o Production managers are usually held accountable for labor variances because they can influence the:  Mix of skill levels assigned to work tasks  Level of employee motivation  Quality of production supervision  Quality of training provided to employees October 11 -13 Notes Chapter 10 Variable Manufacturing Overhead Variances  Using Factored Equations o Variable manufacturing overhead rate variance (VMRV) = (AH X AR) - (AH - SR)  AH(AR-SR) o Variable manufacturing overhead efficiency variance (VMEV) = (AH X SR) - (SH - SR)  SR(AH-SH) Advantages of Standard Costs  Standard costs are a key element of the management by exception approach  Standards can provide benchmarks that promote economy and efficiency  Standards can greatly simplify bookkeeping  Standards can support responsibility accounting systems Potential Problems with Standard Costs  Standard cost variance reports are usually prepared on a monthly basis and may contain information that is outdated  If variances are misused as a club to negatively reinforce employees, morale may suffer and employees may make dysfunctional decisions  Labor variances assume that the production process is labor-paced and that labor is a variable cost o These assumptions are often invalid in todays automated manufacturing environment where employees are essentially a fixed cost  Just meeting standards may not be sufficient o Continuous improvement may be necessary to survive in a competitive environment o In some cases, a "favorable" variance can be as bad or worse than an unfavorable variance o Excessive emphasis on meeting the standards any overshadow other important objectives such as maintaining and improving quality, on-time delivery, and customer satisfaction


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