Chapter 9

Standard Costing and Variances

ACCT 2200
PROFESSOR THOMAS BOURVEAU
 Performance Evaluation and Variances
Variance analysis is an important component of performance evaluation. Variances serve
several purposes. They are used:

a) As a Part of a Responsibility Accounting and Performance Evaluation System

• to communicate to managers how well they have performed relative to
expectations, and
• as input into salary and bonus decisions:
e.g., Pay = Salary + % of (Actual - Budgeted results)

b) As Feedback To Indicate Why Actual Results Differed from Expectations

• because the firm produced and/or sold more or less than budgeted, and/or
• because the selling prices and/or input costs were more or less than budgeted,
and/or
• because the quantities of inputs used were more (less) than budgeted.

c) For Process Control

• Cost (and revenue) variances may suggest the need to make improvements to the
production and/or selling and/or distribution operations

2
 Standard Cost Systems
Based on carefully
predetermined amounts.

Used for planning labor, material,

Standard and overhead requirements.
Costs are
The expected level
of performance.

Benchmarks for
measuring performance.
In a standard cost system, all manufacturing costs
are recorded at standard rather than actual amounts.
 Learning Objective 9-1

Describe the standard-setting

process and explain how standard
costs relate to budgets and variances.
 Ideal versus Attainable Standards
I recommend using
Should we use attainable standards
ideal standards that that can be
require employees to achieved with
work at 100 percent reasonable
peak efficiency? and efficient effort.
 Types of Standards
Definition Examples
Quantity The amount of input Ounces of aluminum in a can of Coca Cola
Standard that should go into a Tons of steel in a Ford F-150 truck
single unit of product Yards of denim in a pair of Levi's 550 jeans
Price The price that should Price per ounce of aluminum
Standard be paid for a specific Price per ton of steel
quantity of input Price per yard of denim
The Standard Cost Card
 Learning Objective 9-2

Prepare a flexible budget and show

how total costs change with sales
volume.
Master Budgets Versus Flexible Budgets
 Variance Analysis
These variances are favorable This variance is unfavorable
because the actual cost because the actual cost
is less than the standard cost. exceeds the standard cost.

Standard
Amount

Direct
Material
Direct Manufacturing
Labor Overhead

Type of Product Cost

 Variance Analysis
Causes of Favorable Variances Causes of Unfavorable Variances

• Paying a lower price than • Paying a higher price than

expected for direct materials. expected for direct materials.
• Using less direct materials than • Using more direct materials than
expected. expected.
• Paying a lower rate than expected • Paying a higher rate than
for direct labor. expected for direct labor.
• Producing a unit in less time than • Producing a unit in more time
expected. than expected.
• Paying less than expected for • Paying more than expected for
manufacturing overhead costs. manufacturing overhead costs.
• Using less of a variable overhead • Using more of a variable
resource than expected. overhead resource than expected.
• Producing more using a fixed • Producing less using a fixed
overhead resource than expected. overhead resource than expected.
 Comparing Actual Results to the Master Budget

Cold Stone Creamery’s master budget of $7,500 for ice cream was based on
a sales forecast of 15,000 units ($0.50 per unit × 15,000 units). During the
period, the amount spent for ice cream was $8,000, or $500 higher than the
master budget. Did Cold Stone do a good job controlling ice cream costs?
 Comparing Actual Results to the Master Budget

There are two possible reasons why spending exceeded the master budget:
1. Cold Stone may have spent more than $0.50 on ice cream for
each unit produced.
2. Cold Stone produced more than 15,000 units, requiring more ice cream
than planned.
Let’s prepare a flexible budget at 18,000 units and evaluate performance.
Volume Variance versus
Spending Variance
 Variable Cost Variances
Spending
Variance

Actual Costs Flexible Budget

Actual Quantity (AQ) Actual Quantity (AQ) Standard Quantity (SQ)
× × ×
Actual Price (AP) Standard Price (SP) Standard Price (SP)

Price Quantity
Variance Variance

Total
Spending
Variance
Learning Objective 9-3

Calculate and interpret the direct

materials price and quantity
variances.
 Direct Materials Variances
Cold Stone’s Standard Cost Information for Ice Cream
Standard Standard Standard
Quantity Price Unit Cost
Ice Cream 10 oz. $ 0.05 per oz. $ 0.50

Cold Stone’s actual results for the period were:

• 18,000 units produced and sold.
• 200,000 ounces of ice cream purchased at a total cost of $8,000.

• Actual Price (AP) = $8,000 ÷ 200,000 ounces = $0.04 per ounce

• Actual Quantity (AQ) = 200,000 ounces
• Standard Price (SP) = $0.05 per ounce
• Standard Quantity (SQ) = 10 ounces per unit × 18,000 actual units =
180,000 ounces
 Direct Materials Variances
Spending
Variance

(AQ) × (AP) (SQ) × (SP)

(AQ) × (SP)
200,000 × $0.04 180,000 × $0.05
200,000 × $0.05
$8,000 $9,000
$10,000

Price Variance Quantity Variance

$2,000F $1,000U

Spending Variance
$1,000F
 Direct Materials Variances
Materials Price Variance Materials Quantity Variance

Purchasing Manager Production 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.
Learning Objective 9-4

Calculate and interpret the direct

labor rate and efficiency variances.
 Direct Labor Variances
Spending
Variance

Actual Costs Flexible Budget

Actual Hours (AH)
Actual Hours (AH) Standard Hours(SH)
×
× ×
Standard Rate (SR)
Actual Rate (AR) Standard Rate (SR)

Rate Efficiency
Variance Variance

Total
Spending
Variance
 Direct Labor Variances
Cold Stone’s Standard Cost Information for Direct Labor
Standard Standard Standard
Hours Rate Unit Cost
Direct Labor 0.10 hrs. $10.00 per hr. $ 1.00

Cold Stone’s actual results for the period were:

• 18,000 units produced and sold.
• Direct labor costs were $20,500 for 2,000 hours worked.

• Actual Rate (AR) = $20,500 ÷ 2,000 hours = $10.25 per hour

• Actual Hours (AH) = 2,000 hours
• Standard Rate (SR) = $10.00 per hour
• Standard Hours (SH) = 0.10 hours per unit × 18,000 actual units = 1,800 hours
 Direct Labor Variances
Spending
Variance

(AH) × (AR) (SH) × (SR)

(AH) × (SR)
2,000 × $10.25 1,800 × $10.00
2,000 × $10.00
$20,500 $18,000
$20,000

Rate Variance Efficiency Variance

$500U $2,000U

Spending Variance
$2,500U
 Responsibility for Labor Variances
Production managers are Mix of skill levels
usually held accountable assigned to work tasks.
for labor variances
because they can
Level of employee
influence the:
motivation.

Quality of production
supervision.

Quality of training
Production Manager provided to employees.
 Exercise M9-7
Acoma, Inc., has determined a standard direct material cost per
unit of $8 (2 feet X $4 per foot). Last month, Acoma purchased
and used 4,200 feet of direct materials for which it paid $15,750.
The company produced and sold 2,000 units during the month.

Requirements: Calculate the direct materials price, quantity, and

spending variances.
 Exercise M9-8
Paradise Corp. has determined a standard labor cost per unit of
$12 (1 hour X $12 per hour). Last month, Paradise incurred 1,900
direct labor hours for which it paid $21,850. The company also
produced and sold 1,950 units during this month.

Requirements: Calculate the direct labor rate, efficiency, and

spending variances.