Kế toán tài chính 2 - Chapter 25: Standard costing and variance analysis

Standard Costing and Variance AnalysisMultimedia Slides by: Gail A. Mestas, MAcc, New Mexico State UniversityChapter 25Learning ObjectivesDefine standard costs and describe how managers use standard costs in the management cycle.Explain how standard costs are developed and compute a standard unit cost.Prepare a flexible budget and describe how variance analysis is used to control costs.Copyright © Houghton Mifflin Company. All rights reserved.Learning Objectives (cont’d)Compute and analyze direct materials variances.Compute and analyze direct labor variances.Compute and analyze manufacturing overhead variances.Explain how variances are used to evaluate managers’ performance.Copyright © Houghton Mifflin Company. All rights reserved.Standard CostingObjective 1Define standard costs and describe how managers use standard costs in the management cycleCopyright © Houghton Mifflin Company. All rights reserved.Standard Costing is a method of cost control that includes a measure of actual performance and a measure of the difference, or variance, between standard and actual performanceCopyright © Houghton Mifflin Company. All rights reserved.Standard CostsRealistic estimates of costsBased on analysis of both past and projected operating costs and conditionsProvide a predetermined performance level for the standard costing methodUsually stated in terms of cost per unitCopyright © Houghton Mifflin Company. All rights reserved.Standard Costs (cont’d)Based on Past costsEngineering estimatesForecasted demandWorker inputTime and motion studiesType and quality of direct materialsCopyright © Houghton Mifflin Company. All rights reserved.Standard CostingHow the standard costing method differs from the normal and actual costing methodsCopyright © Houghton Mifflin Company. All rights reserved.Standard Costs and the Management CyclePlanningManagers use standard costs toDevelop budgetsDirect materialsDirect laborVariable manufacturing overheadEstablish goals for product costingCopyright © Houghton Mifflin Company. All rights reserved.Standard Costs and the Management Cycle (cont’d)ExecutingManagers use standard costs toApply dollar, time, and quality standards to workCollect actual cost dataCopyright © Houghton Mifflin Company. All rights reserved.Standard Costs and the Management Cycle (cont’d)ReviewingManagers compare standard and actual costsCompute variancesProvide measures of performance that can be used to control costs and evaluate managersAnalyze significant variances to determine causeUnfavorable variances may reveal operating problems that require correctingFavorable variances may indicate favorable practices that should be implemented elsewhereCopyright © Houghton Mifflin Company. All rights reserved.Standard Costs and the Management Cycle (cont’d)ReportingManagers use standard costs to report onOperationsManagers’ performanceCopyright © Houghton Mifflin Company. All rights reserved.Standard Costing, Variance Analysis, and the Management CycleThe Relevance of Standard Costing in Today's Business EnvironmentManufacturing companiesIncreased automationSignificant decrease in direct labor costCorresponding decline in importance of labor-related standard costs and variancesMany companies now apply standard costing only to direct materials and manufacturing overheadService organizationsUse standard costing for direct labor and service overhead costsCopyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat is the main difference between the standard costing and normal costing methods?The standard costing method uses estimated costs for direct materials and direct labor, whereas the normal costing method uses actual costs for these items The methods are similar in that both use estimated costs for manufacturing overheadCopyright © Houghton Mifflin Company. All rights reserved.Computing Standard CostsObjective 2Explain how standard costs are developed and compute a standard unit costCopyright © Houghton Mifflin Company. All rights reserved.Computing Standard CostsFully integrated standard costing systemUses standard costing for all elements of product costDirect materialsDirect laborManufacturing overheadInventory accounts and Cost of Goods Sold accountMaintained and reported in terms of standard costsStandard unit costs used to compute account balancesActual costs recorded separatelyActual and standard costs can then be comparedCopyright © Houghton Mifflin Company. All rights reserved.Computing Standard Costs (cont’d)Six elements of a standard unit cost for a manufactured productPrice standard for direct materialsQuantity standard for direct materialsStandard for direct labor rateStandard for direct labor timeStandard for variable overhead rateStandard for fixed overhead rateCopyright © Houghton Mifflin Company. All rights reserved.Standard Direct Materials Cost is found by multiplying the price standard for direct materials by the quantity standard for direct materialsCopyright © Houghton Mifflin Company. All rights reserved.Standard Direct Materials Cost (cont’d)Direct materials price standard Careful estimate of the cost of a specific direct material in the next accounting periodDeveloped by purchasing agent or purchasing departmentTakes into accountAll possible price increasesChanges in available quantitiesNew sources of supplyCopyright © Houghton Mifflin Company. All rights reserved.Standard Direct Materials Cost (cont’d)Direct materials quantity standard Estimate of the amount of direct materials that will be used in the accounting periodIncludes scrap and wasteInfluenced by Product engineering specificationsQuality of direct materialsAge and productivity of machineryQuality and experience of work forceEstablished and monitored by Production managersManagement accountantsOthersEngineers, purchasing agents, machine operatorsCopyright © Houghton Mifflin Company. All rights reserved.Standard Direct Labor Cost for a product, task, or job is calculated by multiplying the standard wage for direct labor by the standard hours of direct laborCopyright © Houghton Mifflin Company. All rights reserved.Standard Direct Labor Cost (cont’d)Direct labor rate standardHourly direct labor rate expected to prevail during the next accounting periodFor each function or job classificationAverage standard rate is developed for each taskStandard rate is used even if worker is paid more or less than the standard rateEasy to establishRates are set by labor unions or defined by the companyCopyright © Houghton Mifflin Company. All rights reserved.Standard Direct Labor Cost (cont’d)Direct labor time standardExpected time required for each department, machine, or process to complete the production of one unit or one batch of outputDeveloped usingCurrent time and motion studies of workers and machinesRecords of past performanceShould be revised whenMachinery is replacedQuality of work force changesCopyright © Houghton Mifflin Company. All rights reserved.Standard Manufacturing Overhead Cost is the sum of the estimates of variable and fixed overhead costs in the next accounting periodTwo partsVariable costs and fixed costsCompute separately because their cost behavior differsCopyright © Houghton Mifflin Company. All rights reserved.Standard Manufacturing Overhead Cost (cont’d)Standard variable overhead rateComputed by dividing the total budgeted variable overhead costs by an expression of capacity, such as number of standard direct labor hours or standard machine hoursCopyright © Houghton Mifflin Company. All rights reserved.Standard Manufacturing Overhead Cost (cont’d)Standard fixed overhead rateComputed by dividing the total budgeted fixed overhead costs by an expression of capacity, usually normal capacity in terms of standard hours or unitsDenominator expressed in same terms as the variable overhead rateNormal capacity is the level of operating capacity needed to meet expected sales demandIts use ensures that all fixed OH* costs have been applied to units produced by the time normal capacity is reached*OverheadCopyright © Houghton Mifflin Company. All rights reserved.Total Standard Unit CostRemember When, Inc., recently updated the standards for its line of watchesCompute the total standard cost of one watchCopyright © Houghton Mifflin Company. All rights reserved.DiscussionWhy are the variable and fixed components for the standard manufacturing overhead cost computed separately?Variable costs and fixed costs are computed separately because their cost behavior differsCopyright © Houghton Mifflin Company. All rights reserved.Variance AnalysisObjective 3Prepare a flexible budget and describe how variance analysis is used to control costsCopyright © Houghton Mifflin Company. All rights reserved.Variance Analysis is the process of computing the differences between standard costs and actual costs and identifying the causes of those differencesManagers use Flexible budgets to improve variance analysisVariance analysis to control costsCopyright © Houghton Mifflin Company. All rights reserved.The Role of Flexible Budgets in Variance AnalysisAccuracy of variance analysis depends greatly on the type of budget managers use when comparing variancesStatic budgetFlexible budgetCopyright © Houghton Mifflin Company. All rights reserved.The Role of Flexible Budgets in Variance Analysis (cont’d)Static budgetAlso called fixed budgetForecasts revenues and expenses for just one level of sales and just one level of outputDoes not allow for changes in output levelIf actual output differs from budgeted output, a variance between actual and budgeted amounts will occurCannot judge performance accuratelyCopyright © Houghton Mifflin Company. All rights reserved.Performance Report Using Data from a Static BudgetCopyright © Houghton Mifflin Company. All rights reserved.The Role of Flexible Budgets in Variance Analysis (cont’d)Flexible budgetAlso called variable budgetSummary of expected costs for a range of activity levelsProvides forecasted data that can be adjusted for changes in output levelUsed primarily as a cost control tool in evaluating performanceCopyright © Houghton Mifflin Company. All rights reserved.The Role of Flexible Budgets in Variance Analysis (cont’d)Flexible budget formulaAn equation that determines the expected, or budgeted, cost for any level of outputIncludesPer unit amount for variable costsTotal amount for fixed costsCopyright © Houghton Mifflin Company. All rights reserved.Flexible Budget for Evaluation of Overall PerformanceCopyright © Houghton Mifflin Company. All rights reserved.The Role of Flexible Budgets in Variance Analysis (cont’d)The flexible budget formula for Remember When, Inc. isThe company produced 19,100 units during 20x5Copyright © Houghton Mifflin Company. All rights reserved.Performance Report Using Data from a Flexible BudgetCopyright © Houghton Mifflin Company. All rights reserved.Using Variance Analysis to Control CostsCompute varianceIs the variance significant?No corrective action neededNoYesAnalyze variance todetermine its causeSelect performance measures to correct the problemTake corrective actionStep 1Step 2Step 3Step 4Copyright © Houghton Mifflin Company. All rights reserved.Using Variance Analysis to Control Costs (cont’d)Computing the amount of a variance is importantBut, this does not prevent the variance from reoccurringMust determine its causeSelect performance measures that will help track the problemMust then find the best solutionCopyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat is the flexible budget formula?It is an equation used to determine expected, or budgeted cost for any level of outputCopyright © Houghton Mifflin Company. All rights reserved.Computing and Analyzing Direct Materials VariancesObjective 4Compute and analyze direct materials variancesCopyright © Houghton Mifflin Company. All rights reserved.Computing and Analyzing Direct Materials VariancesTo control operations, managers compute and analyze variances forWhole cost categoriesSuch as total direct materials costsElements of those categoriesSuch as the price and quantity of each direct materialThe more detailed the analysis of a variance is, the more effective managers will be in controlling costs Copyright © Houghton Mifflin Company. All rights reserved.Computing Direct Materials VariancesTotal direct materials cost varianceDifference between the standard cost and actual cost of direct materialsCopyright © Houghton Mifflin Company. All rights reserved.Computing Direct Materials VariancesCambria Company makes leather bags. Each bag should use 4 feet of leather (standard quantity), and the standard price of leather is $6.00 per foot. During August, the company purchased 760 feet of leather costing $5.90 per foot and used the leather to produce 180 bagsActual cost > standard costThis is an unfavorable (U) situationCopyright © Houghton Mifflin Company. All rights reserved.Computing Direct Materials Variances (cont’d)Total direct materials cost variance must be broken into two parts to find the cause of the varianceDirect materials price varianceDirect materials quantity varianceCopyright © Houghton Mifflin Company. All rights reserved.Computing Direct Materials Variances (cont’d)Direct materials price varianceDifference between the standard price and the actual price per unit multiplied by the actual quantity purchasedAlso called the direct materials spending or rate varianceBecause the company paid less for direct materials than it expected, the variance is favorable (F)Copyright © Houghton Mifflin Company. All rights reserved.Computing Direct Materials Variances (cont’d)Direct materials quantity varianceDifference between the standard quantity and the actual quantity used multiplied by the standard priceAlso called the direct materials efficiency or usage varianceBecause the company used more for direct materials than it expected, the variance is unfavorable (U)Copyright © Houghton Mifflin Company. All rights reserved.Computing Direct Materials Variances (cont’d)Test calculations of variancesIf correct, the net of the direct materials price variance and direct materials quantity variance will equal the total direct materials cost varianceCopyright © Houghton Mifflin Company. All rights reserved.Diagram of Direct Materials Variance AnalysisCopyright © Houghton Mifflin Company. All rights reserved.Analyzing and Correcting Direct Materials VariancesCompany had been experiencing direct materials price variances and quantity variances for some timeFor three months, managers tracked Purchasing activitiesDiscovered that the purchasing agent had purchased, without authorization, a lower grade of leather at a reduced priceAfter analysis, engineers determined the lower grade of leather was not appropriateScrap and reworkDiscovered that inferior leather was causing the unfavorable quantity varianceCopyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat is the direct materials price variance?It is the difference between the standard price and the actual price per unit multiplied by the actual quantity purchased. It is also called the direct materials spending or rate varianceCopyright © Houghton Mifflin Company. All rights reserved.Computing and Analyzing Direct Labor VariancesObjective 5Compute and analyze direct labor variancesCopyright © Houghton Mifflin Company. All rights reserved.Computing Direct Labor VariancesTotal direct labor cost varianceDifference between the standard direct labor cost for good units produced and actual direct labor costsGood units are the total units produced less units that are scrapped or need to be reworkedCopyright © Houghton Mifflin Company. All rights reserved.Computing Direct Labor Variances (cont’d)At Cambria Company, each leather bag requires 2.4 standard direct labor hours, and the standard direct labor rate is $8.50 per hour. During August, 450 direct labor hours were used to make 180 bags at an average pay rate of $9.20 per hourActual cost > standard costCopyright © Houghton Mifflin Company. All rights reserved.Computing Direct Labor Variances (cont’d)Total direct labor cost variance must be broken onto two parts to find the cause of the varianceDirect labor rate varianceDirect labor efficiency varianceCopyright © Houghton Mifflin Company. All rights reserved.Computing Direct Labor Variances (cont’d)Direct labor rate varianceDifference between the standard direct labor rate and the actual direct labor rate multiplied by the actual direct labor hours workedAlso called the direct labor spending varianceBecause the company paid more per hour for direct labor than it expected, the variance is unfavorable Copyright © Houghton Mifflin Company. All rights reserved.Computing Direct Labor Variances (cont’d)Direct labor efficiency varianceDifference between the standard direct labor hours allowed for good units produced and the actual direct labor hours worked multiplied by the standard direct labor rateAlso called the direct labor quantity or usage varianceBecause the company used more direct labor hours than it expected, the variance is unfavorable (U)Copyright © Houghton Mifflin Company. All rights reserved.Computing Direct Labor Variances (cont’d)Test calculations of variancesIf correct, the net of the direct labor rate variance and direct labor efficiency variance will equal the total direct labor cost varianceCopyright © Houghton Mifflin Company. All rights reserved.Diagram of Direct Labor Variance AnalysisAnalyzing and Correcting Direct Labor VariancesManagers analyzed Employee time cardsAn assembly worker who had fallen ill was replaced with a machinery operator from another departmentAssembly worker is paid $8.50 per hour and the machine operator is paid $9.20 per hourMachine operator not as skilled as the assembly worker Temporary situation so no corrective action takenMaterials handlingParts delivered late on five occasionsWill track delivery time and number of delays for next three monthsCopyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat is the direct labor efficiency variance?The direct labor efficiency variance is the difference between the standard direct labor hours allowed for good units produced and the actual direct labor hours worked multiplied by the standard direct labor rate. It is also called the direct labor quantity or usage varianceCopyright © Houghton Mifflin Company. All rights reserved.Computing and Analyzing Manufacturing Overhead VariancesObjective 6Compute and analyze manufacturing overhead variancesCopyright © Houghton Mifflin Company. All rights reserved.Computing and Analyzing Manufacturing Overhead VariancesControlling variable and fixed overhead costs is more difficult for managers than controlling direct materials and direct labor costsResponsibility for manufacturing overhead costs is hard to assignFixed overhead costsUnavoidable past costsNot under the control of any department managerVariable overhead costsSome control possible if they can be related to departments or activitiesCopyright © Houghton Mifflin Company. All rights reserved.Using a Flexible Budget to Analyze Manufacturing Overhead VariancesCambria Company’s managers use a flexible budget to evaluate performanceFor manufacturing overhead costs onlyEvaluate activity level using direct labor hoursVariable costs vary with the number of direct labor hours workedTotal fixed overhead costs remain constant Copyright © Houghton Mifflin Company. All rights reserved.Flexible Budget for Evaluation of Manufacturing Overhead CostsUsing a Flexible Budget to Analyze Manufacturing Overhead VariancesFlexible budget formulaFlexible budget formula when applied to Cambria’s dataTo find the total monthly budgeted overhead costs, insert direct labor hours into the flexible budgetCopyright © Houghton Mifflin Company. All rights reserved.Computing Manufacturing Overhead VariancesTotal manufacturing overhead varianceDifference between actual overhead costs and standard overhead costsStandard overhead costs are applied to production using a standard overhead rateStandard overhead rate has two partsVariableFixedCopyright © Houghton Mifflin Company. All rights reserved.Computing Manufacturing Overhead Variances (cont’d)For Cambria Company, the standard variable overhead rate is $5.75 per direct labor hour (from the flexible budget). Total budgeted overhead is $1,300 by normal capacity, which is 400 direct labor hours.Copyright © Houghton Mifflin Company. All rights reserved.Computing Manufacturing Overhead Variances (cont’d)For Cambria Company, the standard variable overhead rate is $5.75 per direct labor hour (from the flexible budget). Total budgeted overhead is $1,300 by normal capacity, which is 400 direct labor hours.This amount can be divided into variable overhead variances and fixed overhead variancesActual cost > standard costCopyright © Houghton Mifflin Company. All rights reserved.Variable Overhead VarianceTotal variable overhead varianceDifference between actual variable overhead costs and the standard variable overhead costs that are applied to good units produced using the standard variable rateCopyright © Houghton Mifflin Company. All rights reserved.Variable Overhead Variances (cont’d)At Cambria Company, each leather bag requires 2.4 standard labor hours and the variable overhead rate is $5.75 per direct labor hour. During August, the company incurred $2,500 of variable overhead costsActual cost > standard costCopyright © Houghton Mifflin Company. All rights reserved.Diagram of Variable Overhead Variance AnalysisVariable Overhead Variances (cont’d)Total variable overhead cost variance must be broken into two parts to find the cause of the varianceVariable overhead spending varianceVariable overhead efficiency varianceCopyright © Houghton Mifflin Company. All rights reserved.Variable Overhead Variances (cont’d)Variable overhead spending varianceDifference between the budgeted variable overhead costs at actual hours and actual variable overheadCopyright © Houghton Mifflin Company. All rights reserved.Variable Overhead Variances (cont’d)Variable overhead efficiency varianceDifference between the standard direct labor hours allowed for good units produced and the actual hours worked multiplied by the standard variable overhead rateCopyright © Houghton Mifflin Company. All rights reserved.Compute standard hours allowedCompute variable overhead efficiency varianceVariable Overhead Variances (cont’d)Copyright © Houghton Mifflin Company. All rights reserved.Variable Overhead Variances (cont’d)Test calculations of variancesIf correct, the net of the variable overhead spending variance and variable overhead efficiency variance will equal the total variable overhead cost varianceCopyright © Houghton Mifflin Company. All rights reserved.Fixed Overhead VariancesTotal fixed overhead varianceDifference between actual fixed overhead costs and the standard fixed overhead costs that are applied to good units produced using the standard fixed overhead rateCopyright © Houghton Mifflin Company. All rights reserved.Diagram of Fixed Overhead Variance AnalysisFixed Overhead Variances (cont’d)At Cambria Company, each leather bag requires 2.4 standard direct labor hours and the standard fixed overhead rate is $3.25 per direct labor hour. During August, the company incurred $1,600 of actual fixed overhead costsCopyright © Houghton Mifflin Company. All rights reserved.Fixed Overhead Variances (cont’d)Total fixed overhead cost variance must be broken into two parts to find the cause of the varianceFixed overhead budget varianceFixed overhead volume varianceCopyright © Houghton Mifflin Company. All rights reserved.Fixed Overhead Variances (cont’d)Fixed overhead budget varianceDifference between the budgeted and actual fixed overhead costsAlso called budgeted fixed overhead varianceCopyright © Houghton Mifflin Company. All rights reserved.Fixed Overhead Variances (cont’d)Fixed overhead volume varianceDifference between budgeted fixed overhead costs and manufacturing overhead costs applied to production using the standard fixed overhead rateCopyright © Houghton Mifflin Company. All rights reserved.Fixed Overhead Variances (cont’d)A volume variance will occur if more or less than normal capacity is usedFixed overhead volume variance measures the use of existing facilities and capacityFavorable overhead volume varianceCapacity exceeds the expected amountUnfavorable overhead volume varianceCompany operates at a level below normal capacityMay be in best interest of company during periods of slow salesMeans company is not building up excess inventoryCopyright © Houghton Mifflin Company. All rights reserved.Summary of Manufacturing Overhead VariancesCopyright © Houghton Mifflin Company. All rights reserved.Analyzing and Correcting Manufacturing Overhead VariancesCopyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat four variances are used to analyze the total manufacturing overhead variance?Variable overhead spending variance Variable overhead efficiency variance Fixed overhead budget variance Fixed overhead volume varianceCopyright © Houghton Mifflin Company. All rights reserved.Using Cost Variances to Evaluate Managers’ PerformanceObjective 7Explain how variances are used to evaluate managers’ performanceCopyright © Houghton Mifflin Company. All rights reserved.Using Cost Variances to Evaluate Managers’ PerformanceThe effectiveness and fairness of a manager's performance evaluation depends on Human factorsCompany policiesShould be based on input from managers and employeesShould specify procedures that managers are to useCopyright © Houghton Mifflin Company. All rights reserved.Using Cost Variances to Evaluate Managers’ Performance (cont’d)Procedures that should be specified for managers Preparing operational plansAssigning responsibility for carrying out the operational plansCommunicating operational plans to key personnelEvaluating performance in each area of responsibilityIdentifying causes of significant variances from the operational planTaking corrective action to eliminate problemsCopyright © Houghton Mifflin Company. All rights reserved.Using Cost Variances to Evaluate Managers’ Performance (cont’d)Variance analysisProvides detailed data about differences between standard and actual costsEffective at pinpointing efficient and inefficient operating areasBasic comparison of budgeted and actual data not as effectiveCopyright © Houghton Mifflin Company. All rights reserved.Using Cost Variances to Evaluate Managers’ Performance (cont’d)Effective managerial performance reports based on standard costs and related variances should Identify Causes of the differencesPersonnel involvedCorrective actions takenBe tailored to the manager’s specific areas of responsibilityExplain clearly and accurately in what way the manager’s department did or did not meet operating expectationsManagers should only be held accountable for cost areas under their controlCopyright © Houghton Mifflin Company. All rights reserved.Using Cost Variances to Evaluate Managers’ Performance (cont’d)Managerial performance reports shouldSummarize all cost dataInclude variances for direct materials, direct labor, and manufacturing overheadIdentifyCauses of variancesCorrective actions takenCopyright © Houghton Mifflin Company. All rights reserved.Using Cost Variances to Evaluate Managers’ Performance (cont’d)The occurrence of a variance does not indicate poor performanceIf a variance consistently occurs, its cause is not identified, and no corrective action is taken, it may indicate poor performance on the part of the managerCopyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat items should be included in an effective managerial performance report?Summarization of all cost data Variances for direct materials, direct labor, and manufacturing overhead Identification of the causes of the variances, personnel involved, and any corrective actions takenCopyright © Houghton Mifflin Company. All rights reserved.Time for ReviewDefine standard costs and describe how managers use standard costs in the management cycleExplain how standard costs are developed and compute a standard unit costPrepare a flexible budget and describe how variance analysis is used to control costsCopyright © Houghton Mifflin Company. All rights reserved.And FinallyCompute and analyze direct materials variancesCompute and analyze direct labor variancesCompute and analyze manufacturing overhead variancesExplain how variances are used to evaluate managers’ performanceCopyright © Houghton Mifflin Company. All rights reserved.