Chapter 7

Standard Costs
 Standard Costs

Predetermined.

Used for planning labor, material

Standard and overhead requirements.
Costs are
Benchmarks for
measuring performance.

Used to simplify the

accounting system.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Standard Costs
Managers focus on quantities and costs
that exceed standards, a practice known as
management by exception.

Standard
Amount

Direct
Material
Direct Manufacturing
Labor Overhead

Type of Product Cost

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 Setting Standard Costs

Accountants, engineers, personnel administrators, and

production managers combine efforts to set standards
based on experience and expectations.

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 Setting Standard Costs

Engineer&Managerial Production Manager: “Practical standards

Accountant: “Should we should be set at levels that are currently
attainable with reasonable and efficient
use practical standards effort.”
or ideal standards?”
HRD: ”I agree. Ideal
standards, based on
perfection, are unattainable
and discourage most
employees.”

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Setting Direct Material
Standards
Price Quantity
Standards Standards

Final, delivered Use product

cost of materials, design specifications.
net of discounts.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Setting Direct Labor
Standards
Rate Time
Standards Standards

Use wage Use time and

surveys and motion studies for
labor contracts. each labor operation.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Setting Variable Overhead
Standards
Rate Activity
Standards Standards

The rate is the The activity is the

variable portion of the base used to calculate
predetermined overhead the predetermined
rate. overhead.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Standard Cost Card –
Variable Production Cost
A standard cost card for one unit
of product might look like this:
A B AxB
Standard Standard Standard
Quantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. $ 4.00 per lb. $ 12.00
Direct labor 2.5 hours 14.00 per hour 35.00
Variable mfg. overhead 2.5 hours 3.00 per hour 7.50
Total standard unit cost $ 54.50

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Standards vs. Budgets

Are standards the A standard is a per

same as budgets? unit cost.
A budget is set for Standards are often
used when
total costs. preparing budgets.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Standard Cost Variances
A standard cost variance is the amount by which
an actual cost differs from the standard cost.

Standard
Cost

This variance is unfavorable

because the actual cost
exceeds the standard cost.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Standard Cost Variances
First, they point to causes of
problems and directions
I see that there for improvement.
is an unfavorable
variance. Second, they trigger
investigations in departments
But why are having responsibility
variances for incurring the costs.
important to me?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Variance Analysis Cycle
Take
Identify Receive corrective
questions explanations actions

Conduct next
Analyze period’s
variances operations

Prepare standard
Begin
cost performance
report

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Standard Cost Variances

Standard Cost Variances

Price Variance Quantity Variance

The difference between The difference between

the actual price and the the actual quantity and
standard price the standard quantity

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 A General Model for Variance
Analysis

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Standard price is the amount that should

have been paid for the resources acquired.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 A General Model for Variance
Analysis

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Standard quantity is the quantity allowed for
the actual good output.
Standard input per unit of output
times amount of good output.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 A General Model for Variance
Analysis

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

AQ(AP - SP) SP(AQ - SQ)

AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Standard Costs

Let’s use the general model

to calculate standard cost
variances for
direct material.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Material Variances
Example
Glacier Peak Outfitters has the following
direct material standard for the fiberfill in its
mountain parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.

Last month 210 kgs of fiberfill were

purchased and used to make 2,000 parkas.
The material cost a total of $1,029.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Material Variances
Summary
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
× × ×
$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favorable $50 unfavorable

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Material Variances
Summary
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
× × kgs
$1,029  210 ×
$4.90 per kg. $5.00per
= $4.90 perkg
kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favorable $50 unfavorable

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Material Variances
Summary
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
× 0.1 kg per parka× 2,000 parkas ×
$4.90 per kg. $5.00
= 200 per
kgs kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favorable $50 unfavorable

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Note: Using the formulas
Materials price variance
MPV = AQ (AP - SP)
= 210 kgs ($4.90/kg - $5.00/kg)
= 210 kgs (-$0.10/kg)
= $21 F
Materials quantity variance
MQV = SP (AQ - SQ)
= $5.00/kg (210 kgs-(0.1 kg/parka 2,000 parkas))
= $5.00/kg (210 kgs - 200 kgs)
= $5.00/kg (10 kgs)
= $50 U
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Quick Check 

Suppose
Suppose onlyonly 190
190 kgs
kgs ofof fiberfill
fiberfill were
were used
used to
to
make
make 2,000
2,000 parkas.
parkas. WhatWhat is is the
the materials
materials
quantity
quantity variance?
variance? Remember
Remember that that the
the
standards
standards call
call for
for 0.1
0.1 kgkg of
of fiberfill
fiberfill per
per parka
parka at
at aa
cost
cost of
of $5
$5 per
per kgkg of
of fiberfill.
fiberfill.
a.
a. $50
$50 FF
b. $50
$50= U
b.MQV U (AQ - SQ)
SP
= $5.00/kg (190 kgs-(0.1 kg/parka 2,000 parkas))
c. $100
c. $100 FF
= $5.00/kg (190 kgs - 200 kgs)
d.
d. $100 U
= $5.00/kg
$100 U (-10 kgs)
= $50 F

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Material Variances Zippy
Example

Hanson Inc. has the following direct material

standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound

Last week 1,700 pounds of material were

purchased and used to make 1,000 Zippies.
The material cost a total of $6,630.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

What
What isis the
the actual
actual price
price per
per pound
pound
paid
paid for
for the
the material?
material?
a.
a. $4.00
$4.00 per
per pound.
pound.
b.
b. $4.10
$4.10 per
per pound.
pound.
c.
c. $3.90
$3.90 per
per pound.
pound.
d.
d. $6.63
$6.63 per
per pound.
pound.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

What
What isis the
the actual
actual price
price per
per pound
pound
paid
paid for
for the
the material?
material?
a.
a. $4.00
$4.00 per
per pound.
pound.
b.
b. $4.10
$4.10 per
per pound.
pound.
AP = $6,630 ÷ 1,700 lbs.
c.
c. $3.90
$3.90 per
per pound.
pound. AP = $3.90 per lb.
d.
d. $6.63
$6.63 per
per pound.
pound.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

Hanson’s
Hanson’s material
material price
price variance
variance (MPV)
(MPV)
for
for the
the week
week was:
was:
a.
a. $170$170 unfavorable.
unfavorable.
b.
b. $170$170 favorable.
favorable.
c.
c. $800$800 unfavorable.
unfavorable.
d.
d. $800$800 favorable.
favorable.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

Hanson’s
Hanson’s material
material price
price variance
variance (MPV)
(MPV)
for
for the
the week
week was:
was:
a.
a. $170$170 unfavorable.
unfavorable.
b.
b. $170$170 favorable.
favorable.
c.
c. $800$800 unfavorable.
unfavorable.
MPV = AQ(AP - SP)
d. MPV = 1,700 lbs. × ($3.90 - 4.00)
d. $800$800 favorable.
favorable.
MPV = $170 Favorable

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

The
The standard
standard quantity
quantity of
of material
material that
that
should
should have
have been
been used
used toto produce
produce
1,000
1,000 Zippies
Zippies is:
is:
a.
a. 1,700
1,700 pounds.
pounds.
b.
b. 1,500
1,500 pounds.
pounds.
c.
c. 2,550
2,550 pounds.
pounds.
d.
d. 2,000
2,000 pounds.
pounds.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

The
The standard
standard quantity
quantity of
of material
material that
that
should
should have
have been
been used
used toto produce
produce
1,000
1,000 Zippies
Zippies is:
is:
a.
a. 1,700
1,700 pounds.
pounds.
b.
b. 1,500
1,500 pounds.
pounds.
c.
c. 2,550
2,550 pounds.
pounds.
d. 2,000 SQ = 1,000 units × 1.5 lbs per unit
pounds.
d. 2,000 pounds.
SQ = 1,500 lbs

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

Hanson’s
Hanson’s material
material quantity
quantity variance
variance (MQV)
(MQV)
for
for the
the week
week was:
was:
a.
a. $170$170 unfavorable.
unfavorable.
b.
b. $170$170 favorable.
favorable.
c.
c. $800$800 unfavorable.
unfavorable.
d.
d. $800$800 favorable.
favorable.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Material Variances Zippy
Summary
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
1,700 lbs. 1,700 lbs. 1,500 lbs.
× × ×
$3.90 per lb. $4.00 per lb. $4.00 per lb.
= $6,630 = $ 6,800 = $6,000

Price variance Quantity variance

$170 favorable $800 unfavorable
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Material Variances Zippy
Continued

Hanson Inc. has the following material

standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound

Last week 2,800 pounds of material were

purchased at a total cost of $10,920, and
1,700 pounds were used to make 1,000
Zippies.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Material Variances Zippy
Continued
Actual Quantity Actual Quantity
Purchased Purchased
× ×
Actual
2,800Price
lbs. Standard Price
2,800 lbs.
× ×
$3.90 per lb. $4.00 per lb.
= $10,920 = $11,200

Price variance increases

Price variance because quantity
$280 favorable purchased increases.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Material Variances Zippy
Continued
Actual Quantity
Used Standard
Quantity
× ×
Standard Price Standard Price
1,700 lbs. 1,500 lbs.
× ×
$4.00 per lb. $4.00 per lb.
= $6,800 = $6,000
Quantity variance is
unchanged because
actual and standard Quantity variance
quantities are unchanged. $800 unfavorable
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Note
Materials variances:
 Material price variance
 MPV = AQ (AP - SP)
Actual hours
 Material quantity variance
 MQV = SP (AQ - SQ)
Actual rate
Labor variances:
 Labor rate variance Standard rate
 LRV = AH (AR - SR)

 Labor efficiency variance Standard hours allowed

 LEV = SR (AH - SH) for the actual good output

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Labor Variances Example Zippy

Hanson Inc. has the following direct labor

standard to manufacture one Zippy:
1.5 standard hours per Zippy at $12.00 per
direct labor hour

Last week 1,550 direct labor hours were

worked at a total labor cost of $18,910
to make 1,000 Zippies.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

What
What was was Hanson’s
Hanson’s actual
actual rate
rate (AR)
(AR)
for
for labor
labor for
for the
the week?
week?
a.
a. $12.20
$12.20 perper hour.
hour.
b.
b. $12.00
$12.00 perper hour.
hour.
c.
c. $11.80
$11.80 perper hour.
hour.
d.
d. $11.60
$11.60 perper hour.
hour.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

What
What was was Hanson’s
Hanson’s actual
actual rate
rate (AR)
(AR)
for
for labor
labor for
for the
the week?
week?
AR = $18,910 ÷ 1,550 hours
a. $12.20 per
a. $12.20 per hour.hour.
AR = $12.20 per hour
b.
b. $12.00
$12.00 perper hour.
hour.
c.
c. $11.80
$11.80 perper hour.
hour.
d.
d. $11.60
$11.60 perper hour.
hour.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

Hanson’s
Hanson’s labor
labor rate
rate variance
variance (LRV)
(LRV) for
for
the
the week
week was:
was:
a.
a. $310
$310 unfavorable.
unfavorable.
b.
b. $310
$310 favorable.
favorable.
c.
c. $300
$300 unfavorable.
unfavorable.
d.
d. $300
$300 favorable.
favorable.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

Hanson’s
Hanson’s labor
labor rate
rate variance
variance (LRV)
(LRV) for
for
the
the week
week was:
was:
a.
a. $310
$310 unfavorable.
unfavorable.
b.
b. $310
$310 favorable.
favorable.
c. LRV = AH(AR - SR)
c. $300
$300 unfavorable.
unfavorable.
LRV = 1,550 hrs($12.20 - $12.00)
d.
d. $300
$300 favorable.
favorable.LRV = $310 unfavorable

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

The
The standard
standard hours
hours (SH)
(SH) of
of labor
labor that
that
should
should have
have been
been worked
worked to
to produce
produce
1,000
1,000 Zippies
Zippies is:
is:
a.
a. 1,550
1,550 hours.
hours.
b.
b. 1,500
1,500 hours.
hours.
c.
c. 1,700
1,700 hours.
hours.
d.
d. 1,800
1,800 hours.
hours.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

The
The standard
standard hours
hours (SH)
(SH) of
of labor
labor that
that
should
should have
have been
been worked
worked toto produce
produce
1,000
1,000 Zippies
Zippies is:
is:
a.
a. 1,550
1,550 hours.
hours.
b.
b. 1,500
1,500 hours.
hours.
c.
c. 1,700
1,700 hours.
hours.
SH = 1,000 units × 1.5 hours per unit
d.
d. 1,800
1,800 hours.
hours.
SH = 1,500 hours

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

Hanson’s
Hanson’s labor
labor efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was:
was:
a.
a. $590
$590 unfavorable.
unfavorable.
b.
b. $590
$590 favorable.
favorable.
c.
c. $600
$600 unfavorable.
unfavorable.
d.
d. $600
$600 favorable.
favorable.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

Hanson’s
Hanson’s labor
labor efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was:
was:
a.
a. $590
$590 unfavorable.
unfavorable.
b.
b. $590
$590 favorable.
favorable.
c.
c. $600
$600 unfavorable.
unfavorable.
d.
d. $600
$600 favorable.
favorable.
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Labor Variances Zippy
Summary

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
1,550 hours 1,550 hours 1,500 hours
× × ×
$12.20 per hour $12.00 per hour $12.00 per hour
= $18,910 = $18,600 = $18,000

Rate variance Efficiency variance

$310 unfavorable $600 unfavorable
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Labor Efficiency Variance –
A Closer Look
Insufficient
Poorly Poor
demand
trained quality
workers materials

Unfavorable
Efficiency
Variance
Poor Poorly
supervision maintained
of workers equipment
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Note
Actual hours of
Labor variances: the allocation
 Labor rate variance base
 LRV = AH (AR - SR)
Actual variable
 Labor efficiency variance overhead rate
 LEV = SR (AH - SH)
Standard
Variable overhead variances: variable
 Variable overhead spending variance overhead rate
 VOSV = AH (AR - SR)

 Variable overhead efficiency variance

 VOEV = SR (AH Quick Check 
Standard hours allowed
for the actual good output
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Quick Check  Zippy

Hanson’s
Hanson’s spending
spending variance
variance (VOSV)
(VOSV) for
for
variable
variable manufacturing
manufacturing overhead
overhead for
for
the
the week
week was:
was:
a.
a. $465
$465 unfavorable.
unfavorable.
b.
b. $400
$400 favorable.
favorable.
c.
c. $335
$335 unfavorable.
unfavorable.
d.
d. $300
$300 favorable.
favorable.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

Hanson’s
Hanson’s spending
spending variance
variance (VOSV)
(VOSV) forfor
variable
variable manufacturing
manufacturing overhead
overhead for
for
the
the week
week was:
was:
a.
a. $465
$465 unfavorable.
unfavorable.
b.
b. $400
$400 favorable.
favorable.
SV = AH(AR - SR)
c.
c. $335
$335 unfavorable.
unfavorable.
SV = 1,550 hrs($3.30 - $3.00)
d. SV = $465 unfavorable
d. $300
$300 favorable.
favorable.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

Hanson’s
Hanson’s efficiency
efficiency variance
variance (VOEV)
(VOEV) forfor
variable
variable manufacturing
manufacturing overhead
overhead for
for the
the
week
week was:
was:
a.
a. $435
$435 unfavorable.
unfavorable.
b.
b. $435
$435 favorable.
favorable.
c.
c. $150
$150 unfavorable.
unfavorable.
d.
d. $150
$150 favorable.
favorable.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check  Zippy

Hanson’s
Hanson’s efficiency
efficiency variance
variance (VOEV)
(VOEV) for for
variable
variable manufacturing
manufacturing overhead
overhead forfor the
the
week
week was:
was:
a.
a. $435
$435 unfavorable.
unfavorable.
b.
b. $435
$435 favorable.
favorable.1,000 units × 1.5 hrs per unit
c.
c. $150
$150 unfavorable.
unfavorable.
d.
d. $150
$150 favorable.
favorable.
EV = SR(AH - SH)
EV = $3.00(1,550 hrs - 1,500 hrs)
EV = $150 unfavorable
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Variable Manufacturing Zippy
Overhead Variances

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
1,550 hours 1,550 hours 1,500 hours
× × ×
$3.30 per hour $3.00 per hour $3.00 per hour
= $5,115 = $4,650 = $4,500

Spending variance Efficiency variance

$465 unfavorable $150 unfavorable
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Advantages of Standard Costs

Possible reductions Management by

in production costs exception

Advantages

Improved cost control Better Information

and performance for planning and
evaluation decision making

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Disadvantages of
Standard Costs
Emphasis on Favorable variances
negative may Potential may be
impact morale. Problems misinterpreted.

Continuous
improvement
Standard cost may be more
reports may important than
not be timely. meeting standards.

Emphasizing standards
Incentives to build may exclude other
inventories. important objectives.
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 Akhir Pertemuan 7:
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