Financial%20&%20 management%20accounting%20 %20chapter%2022%20(standard%20costing%20&%20variance%20analysis)[1]

Chapter 22

Standard Costing
and
Variance Analysis

Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University

Learning Objectives
1. Define standard costs and describe
how managers use standard costs in
the management cycle.
2. Explain how standard costs are
developed and compute a standard
unit cost.
3. Prepare a flexible budget and describe
how variance analysis is used to
control costs.
Copyright © Houghton Mifflin Company. All rights reserved.

22–2

Learning Objectives (cont’d)
4. Compute and analyze direct materials
variances.
5. Compute and analyze direct labor
variances.
6. Compute and analyze manufacturing
overhead variances.
7. Explain how variances are used to
evaluate managers’ performance.

22–3

Standard Costing
• Objective 1
– Define standard costs and describe how
managers use standard costs in the
management cycle


22–4

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 performance


22–5

Standard Costs
• Realistic estimates of costs
– Based on analysis of both past and
projected operating costs and conditions

• Provide a predetermined performance
level for the standard costing method
• Usually stated in terms of cost per unit


22–6

Standard Costs (cont’d)
• Based on
– Past costs
– Engineering estimates
– Forecasted demand
– Worker input
– Time and motion studies
– Type and quality of direct materials


22–7

Standard Costing
• How the standard costing method
differs from the normal and actual
costing methods
Product Cost
Elements
Direct Materials
Direct Labor
Manufacturing Overhead

Standard
Costing
Estimated costs
Estimated costs
Estimated costs


Normal
Costing
Actual costs
Actual costs
Estimated costs

Actual
Costing
Actual costs
Actual costs
Actual costs

22–8

Standard Costs and the Management Cycle

• Planning
– Managers use standard costs to
• Develop budgets
– Direct materials
– Direct labor
– Variable manufacturing overhead

• Establish goals for product costing


22–9

(cont’d)

• Executing
– Managers use standard costs to
• Apply dollar, time, and quality standards to
work
• Collect actual cost data


22–10

(cont’d)

• Reviewing
– Managers compare standard and actual
costs
• Compute variances
– Provide measures of performance that can be used
to control costs and evaluate managers
– Analyze significant variances to determine cause
» Unfavorable variances may reveal operating
problems that require correcting
» Favorable variances may indicate favorable
practices that should be implemented elsewhere

22–11

(cont’d)

• Reporting
– Managers use standard costs to report on
• Operations
• Managers’ performance


22–12

Standard
Costing,
Variance
Analysis,
and the
Management
Cycle

22–13

The Relevance of Standard Costing in
Today's Business Environment
• Manufacturing companies
– Increased automation
• Significant decrease in direct labor cost
– Corresponding decline in importance of labor-related
standard costs and variances

• Many companies now apply standard costing only to
direct materials and manufacturing overhead

• Service organizations
– Use standard costing for direct labor and service
overhead costs


22–14

Discussion
Q. What is the main difference between
the standard costing and normal
costing methods?
A. 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
overhead

22–15

Computing Standard Costs
• Objective 2
– Explain how standard costs are developed
and compute a standard unit cost


22–16

Computing Standard Costs
• Fully integrated standard costing system
– Uses standard costing for all elements of product
cost
• Direct materials
• Direct labor
• Manufacturing overhead

– Inventory accounts and Cost of Goods Sold
account
• Maintained and reported in terms of standard costs
• Standard unit costs used to compute account balances
• Actual costs recorded separately
– Actual and standard costs can then be compared

22–17

Computing Standard Costs (cont’d)
• Six elements of a standard unit cost for
a manufactured product
1. Price standard for direct materials
2. Quantity standard for direct materials
3. Standard for direct labor rate
4. Standard for direct labor time
5. Standard for variable overhead rate
6. Standard for fixed overhead rate

22–18

Standard Direct Materials Cost
… is found by multiplying the price
standard for direct materials by the
quantity standard for direct materials
Standard Direct
Materials Cost

=

Direct Materials
Price Standard


x

Direct Materials
Quantity Standard

22–19

Standard Direct Materials Cost (cont’d)
• Direct materials price standard
– Careful estimate of the cost of a specific
direct material in the next accounting
period
– Developed by purchasing agent or
purchasing department
• Takes into account
– All possible price increases
– Changes in available quantities
– New sources of supply


22–20

Standard Direct Materials Cost (cont’d)
• Direct materials quantity standard
– Estimate of the amount of direct materials that will
be used in the accounting period
• Includes scrap and waste

– Influenced by
•
•
•
•

Product engineering specifications
Quality of direct materials
Age and productivity of machinery
Quality and experience of work force

– Established and monitored by
• Production managers
• Management accountants
• Others
– Engineers, purchasing agents, machine operators

22–21

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 labor
Standard Direct
Labor Cost

=

Direct Labor
Rate Standard


x

Direct Labor
Time Standard

22–22

Standard Direct Labor Cost (cont’d)
• Direct labor rate standard
– Hourly direct labor rate expected to prevail
during the next accounting period
• For each function or job classification

– Average standard rate is developed for
each task
• Standard rate is used even if worker is paid
more or less than the standard rate

– Easy to establish
• Rates are set by labor unions or defined by the
company

22–23

Standard Direct Labor Cost (cont’d)
• Direct labor time standard
– Expected time required for each department,
machine, or process to complete the production of
one unit or one batch of output
– Developed using
• Current time and motion studies of workers and
machines
• Records of past performance

– Should be revised when
• Machinery is replaced
• Quality of work force changes


22–24

Standard Manufacturing Overhead Cost
… is the sum of the estimates of variable
and fixed overhead costs in the next
accounting period

• Two parts
– Variable costs and fixed costs
• Compute separately because their cost
behavior differs

22–25

(cont’d)

• Standard variable overhead rate
– Computed by dividing the total budgeted
variable overhead costs by an expression
of capacity, such as number of standard
direct labor hours or standard machine
hours
Standard Variable
Overhead Rate

=

Total Budgeted Variable Overhead Costs
Expected Number of Standard Machine Hours


22–26

(cont’d)

• Standard fixed overhead rate
– Computed by dividing the total budgeted
fixed overhead costs by an expression of
capacity, usually normal capacity in terms
of standard hours or units
• Denominator expressed in same terms as the
variable overhead rate
Standard Fixed
Overhead Rate

=

Total Budgeted Fixed Overhead Costs
Normal Capacity in Terms of Standard Machine Hours

Normal capacity is the level of
operating capacity needed to
meet expected sales demand

Its use ensures that all fixed OH* costs
have been applied to units produced by
the time normal capacity is reached
*Overhead


22–27

Total Standard Unit Cost
Remember When,
Inc., recently
updated the
standards for its
line of watches

Compute the total
standard cost of
one watch

Direct materials price standards
Casing materials
Movement mechanism
Direct materials quantity standards
Casing materials
Movement mechanism
Direct labor time standards
Case Stamping Department
Watch Assembly Department
Direct labor rate standards
Case Stamping Department
Watch Assembly Department
Standard manufacturing overhead rates
Standard variable overhead rate
Standard fixed overhead rate

$9.20 per square foot
$2.17 each
.025 square foot per watch
1 per watch
.01 hour per watch
.05 hour per watch
$8.00 per hour
$10.20 per hour
$12.00 per direct labor hour
$9.00 per direct labor hour

Direct materials costs
Casing ($9.20 per sq.ft. x .025 sq.ft.)
One movement mechanism
Direct labor costs
Case Stamping Dept. ($8.00 per hour x .01 hour per watch)
Watch Assembly Dept. (10.20 per hour x .05 hour per watch)
Variable overhead ($12.00 per hour x .06 hour per watch)
Total standard variable cost of one watch
Fixed overhead ($9.00 per hour x .06 hour per watch)
Total standard cost of one watch


$ .23
2.17
.08
.51
.72
$3.71
.54
$4.25
22–28

Discussion
Q. Why are the variable and fixed
components for the standard
manufacturing overhead cost
computed separately?
A. Variable costs and fixed costs are
computed separately because their cost
behavior differs


22–29

Variance Analysis
• Objective 3
– Prepare a flexible budget and describe
how variance analysis is used to control
costs


22–30

Variance Analysis
… is the process of computing the
differences between standard costs and
actual costs and identifying the causes
of those differences
• Managers use
– Flexible budgets to improve variance analysis
– Variance analysis to control costs


22–31

The Role of Flexible Budgets in Variance
Analysis

• Accuracy of variance analysis depends
greatly on the type of budget managers
use when comparing variances
– Static budget
– Flexible budget


22–32

Analysis (cont’d)

• Static budget
– Also called fixed budget
– Forecasts revenues and expenses for just
one level of sales and just one level of
output
• Does not allow for changes in output level
– If actual output differs from budgeted output, a
variance between actual and budgeted amounts will
occur
» Cannot judge performance accurately


22–33

Performance Report Using Data from a Static
Budget


22–34

Analysis (cont’d)

• Flexible budget
– Also called variable budget
– Summary of expected costs for a range of
activity levels
• Provides forecasted data that can be adjusted
for changes in output level

– Used primarily as a cost control tool in
evaluating performance


22–35

Analysis (cont’d)

• Flexible budget formula
– An equation that determines the expected,
or budgeted, cost for any level of output
• Includes
– Per unit amount for variable costs
– Total amount for fixed costs
Total Budgeted Costs = (Variable Cost per Unit × No. of Units Produced) + Budgeted Fixed Costs


22–36

Flexible Budget for Evaluation of Overall
Performance


22–37

Analysis (cont’d)
• The flexible budget formula for Remember
When, Inc. is
Total Budgeted Costs = ($3.71 × No. of Units Produced) + $9,450

• The company produced 19,100 units during
20x5
Total Budgeted Costs = ($3.71 × 19,100) + $9,450
= $70,861 + $9,450
= $80,311

22–38

Performance Report Using Data from a
Flexible Budget


22–39

Using Variance Analysis to Control Costs
Step 1

Compute variance

Is the variance
significant?

No

No corrective
action needed

Yes
Step 2

Analyze variance to
determine its cause

Step 3

Select performance
measures to correct
the problem

Step 4

Take corrective action


22–40

Using Variance Analysis to Control Costs
(cont’d)

• Computing the amount of a variance is
important
– But, this does not prevent the variance
from reoccurring
– Must determine its cause
• Select performance measures that will help
track the problem
• Must then find the best solution


22–41

Discussion
Q. What is the flexible budget formula?
A. It is an equation used to determine
expected, or budgeted cost for any level
of output
Total Budgeted Costs = (Variable Cost per Unit ×
No. of Units Produced) +
Budgeted Fixed Costs


22–42

Computing and Analyzing Direct Materials
Variances

• Objective 4
– Compute and analyze direct materials
variances


22–43

Computing and Analyzing Direct Materials
Variances

• To control operations, managers
compute and analyze variances for
– Whole cost categories
• Such as total direct materials costs

– Elements of those categories
• Such as the price and quantity of each direct
material
The more detailed the analysis of a variance is, the
more effective managers will be in controlling costs


22–44

Computing Direct Materials Variances
• Total direct materials cost variance
– Difference between the standard cost and
actual cost of direct materials


22–45

Cambria 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 bags

Standard cost
Standard price × standard quantity =
$6.00 per foot × (180 bags × 4 feet per bag) =
$6.00 per foot × 720 = $4,320
Less actual cost
Actual price × actual quantity =

This is an
unfavorable
(U) situation

$5.90 per foot × 760 = 4,484
Total direct materials cost variance

$ 164 (U)
Actual cost > standard cost


22–46

(cont’d)

• Total direct materials cost variance
must be broken into two parts to find
the cause of the variance
– Direct materials price variance
– Direct materials quantity variance


22–47

(cont’d)
• Direct materials price variance
– Difference between the standard price and the
actual price per unit multiplied by the actual
quantity purchased
– Also called the direct materials spending or rate
variance
Direct Materials Price Variance = (Standard Price − Actual Price)
× Actual Quantity
= ($6.00 − $5.90) × 760 feet
= $76 (F)
Because the company paid less for direct materials
than it expected, the variance is favorable (F)

22–48

(cont’d)
• Direct materials quantity variance
– Difference between the standard quantity and the
actual quantity used multiplied by the standard
price
– Also called the direct materials efficiency or usage
variance
Direct Materials Quantity Variance = Standard Price × (Standard Quantity
Allowed − Actual Quantity)
= $6.00 per foot × (720 feet − 760 feet)
= $240 (U)
Because the company used more for direct materials
than it expected, the variance is unfavorable (U)

22–49

(cont’d)

• Test calculations of variances
– If correct, the net of the direct materials
price variance and direct materials quantity
variance will equal the total direct materials
cost variance
Direct materials price variance
Direct materials quantity variance
Total direct materials cost variance


$ 76 (F)
240 (U)
$164 (U)

22–50

Diagram of Direct Materials Variance Analysis


22–51

Analyzing and Correcting Direct Materials
Variances
• Company had been experiencing direct
materials price variances and quantity
variances for some time
• For three months, managers tracked
– Purchasing activities
• Discovered that the purchasing agent had purchased,
without authorization, a lower grade of leather at a
reduced price
– After analysis, engineers determined the lower grade of
leather was not appropriate

– Scrap and rework
• Discovered that inferior leather was causing the
unfavorable quantity variance

22–52

Discussion
Q. What is the direct materials price
variance?
A. 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 variance
Direct Materials Price Variance = (Standard Price − Actual Price)
× Actual Quantity

22–53

Computing and Analyzing Direct Labor
Variances

• Objective 5
– Compute and analyze direct labor
variances


22–54

Computing Direct Labor Variances
• Total direct labor cost variance
– Difference between the standard direct
labor cost for good units produced and
actual direct labor costs
• Good units are the total units produced less
units that are scrapped or need to be reworked


22–55

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 hour

Standard cost
Standard rate × standard hours allowed =
$8.50 per foot × (180 bags × 2.4 hours per bag) =
$8.50 per hour × 432 hours = $3,672
Less actual cost

Actual rate × actual hours =
$9.20 per hour × 450 hours = 4,140

Total direct labor cost variance

$ 468 (U)


22–56


• Total direct labor cost variance must be
broken onto two parts to find the cause
of the variance
– Direct labor rate variance
– Direct labor efficiency variance


22–57

• Direct labor rate variance
– Difference between the standard direct labor rate
and the actual direct labor rate multiplied by the
actual direct labor hours worked
– Also called the direct labor spending variance
Direct Labor Rate Variance = (Standard Rate − Actual Rate)
× Actual Hours
= ($8.50 − $9.20) × 450 hours
= $315 (U)
Because the company paid more per hour for direct
labor than it expected, the variance is unfavorable

22–58

• Direct labor efficiency variance
– 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
– Also called the direct labor quantity or usage
variance
Direct Labor Efficiency Variance = Standard Rate × (Standard Hours Allowed

− Actual Hours)
= $8.50 per hour × (432 hours − 450 hours)
= $153 (U)
Because the company used more direct labor hours
than it expected, the variance is unfavorable (U)

22–59


– If correct, the net of the direct labor rate
variance and direct labor efficiency
variance will equal the total direct labor
cost variance
Direct labor rate variance
Direct labor efficiency variance
Total direct labor cost variance


$ 315 (U)
153 (U)
$468 (U)

22–60

Diagram of
Direct Labor
Variance
Analysis

22–61

Analyzing and Correcting Direct Labor
Variances
• Managers analyzed
– Employee time cards
• An assembly worker who had fallen ill was replaced with
a machinery operator from another department
– Assembly worker is paid $8.50 per hour and the machine
operator is paid $9.20 per hour
– Machine operator not as skilled as the assembly worker
» Temporary situation so no corrective action taken

– Materials handling
• Parts delivered late on five occasions
– Will track delivery time and number of delays for next three
months

22–62

Discussion
Q. What is the direct labor efficiency
variance?
A. 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 variance
Direct Labor Efficiency Variance = Standard Rate × (Standard Hours

Allowed − Actual Hours)

22–63

Computing and Analyzing Manufacturing
Overhead Variances

• Objective 6
– Compute and analyze manufacturing
overhead variances


22–64

Computing and Analyzing Manufacturing
Overhead Variances
• Controlling variable and fixed overhead costs
is more difficult for managers than controlling
direct materials and direct labor costs
– Responsibility for manufacturing overhead costs is
hard to assign
• Fixed overhead costs
– Unavoidable past costs
– Not under the control of any department manager

• Variable overhead costs
– Some control possible if they can be related to
departments or activities


22–65

Using a Flexible Budget to Analyze
Manufacturing Overhead Variances

• Cambria Company’s managers use a
flexible budget to evaluate performance
– For manufacturing overhead costs only
– Evaluate activity level using direct labor
hours
• Variable costs vary with the number of direct
labor hours worked
• Total fixed overhead costs remain constant


22–66

Flexible
Budget for
Evaluation of
Manufacturing
Overhead
Costs

22–67

Using a Flexible Budget to Analyze
Manufacturing Overhead Variances
• Flexible budget formula
Total Budgeted OH Costs = (Variable Costs per Direct Labor Hour ×
Number of Direct Labor Hours) +
Budgeted Fixed OH Costs

• Flexible budget formula when applied to
Cambria’s data
Total Budgeted OH Costs = ($5.75 × No. of Direct Labor Hours)
+ $1,300
To find the total monthly budgeted overhead costs,
insert direct labor hours into the flexible budget

22–68

Computing Manufacturing Overhead
Variances

• Total manufacturing overhead variance
– Difference between actual overhead costs
and standard overhead costs
• Standard overhead costs are applied to
production using a standard overhead rate
– Standard overhead rate has two parts
» Variable
» Fixed


22–69

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.

Fixed overhead rate
Budgeted fixed overhead ÷ normal capacity =
$1,300 ÷ 400 direct labor hours = $3.25
Total standard overhead rate
Standard variable overhead rate + standard fixed overhead rate =
$5.75 + $3.25 = $9.00


22–70

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.

Standard OH costs applied to good units produced
Total standard OH rate × ( No. good units produced
× standard hours allowed) =
$9.00 per direct labor hour × (180 bags × 2.4 hours per bag) = $3,888
4,100
Less actual overhead costs
Total manufacturing overhead variance

$ 212 (U)

This amount can be divided into variable overhead
variances and fixed overhead variances

22–71

Variable Overhead Variance
• Total variable overhead variance
– Difference between actual variable
overhead costs and the standard variable
overhead costs that are applied to good
units produced using the standard variable
rate


22–72

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
costs

Overhead applied to good units produced
Standard variable rate × standard direct labor hours allowed =
$5.75 per hour × (180 bags × 2.4 hours per bag) =
Less actual cost

$5.75 per hour × 432 hours = $2,484
2,500

Total variable overhead cost variance

$ 16 (U)


22–73

Diagram of
Variable
Overhead
Variance
Analysis

22–74

• Total variable overhead cost variance
must be broken into two parts to find
the cause of the variance
– Variable overhead spending variance
– Variable overhead efficiency variance


22–75

• Variable overhead spending variance
– Difference between the budgeted variable
overhead costs at actual hours and actual
variable overhead
Variable OH Spending Variance = Budgeted Variable Costs at Actual Hours −
Actual Variable Overhead
= (Standard Variable Rate × Actual
Hours Worked) − Actual Variable OH
= ($5.75 × 450 hours) − $2,500
= $87.50 (F)

22–76

• Variable overhead efficiency variance
– Difference between the standard direct
labor hours allowed for good units
produced and the actual hours worked
multiplied by the standard variable
overhead rate
Variable OH Efficiency Variance = Standard Variable Rate × (Standard
Hours Allowed − Actual Hours)


22–77

• Compute standard hours allowed
Standard Hours Allowed = Good Units Produced × Standard Hours per Bag
= 180 bags × 2.4 hours per bag
= 432 hours

• Compute variable overhead efficiency variance
Variable OH Efficiency Variance = Standard Variable Rate × (Standard
Hours Allowed − Actual Hours)

= $5.75 × (432 hours − 450 hours)
= $103.50 (U)

22–78

– If correct, the net of the variable overhead
spending variance and variable overhead
efficiency variance will equal the total
variable overhead cost variance
Variable overhead spending variance
Variable overhead efficiency variance


$ 87.50
103.50
$ 16.00

(F)
(U)
(U)

22–79

Fixed Overhead Variances
• Total fixed overhead variance
– Difference between actual fixed overhead
costs and the standard fixed overhead
costs that are applied to good units
produced using the standard fixed
overhead rate


22–80

Diagram of
Fixed
Overhead
Variance
Analysis

22–81

Fixed 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 costs

Overhead applied to good units produced
Standard fixed rate × standard direct labor hours allowed =
$3.25 per hour × (180 bags × 2.4 hours per bag) =
$3.25 per hour × 432 hours = $1,404
Less actual cost
1,600

Total fixed overhead cost variance


$ 196 (U)

22–82

• Total fixed overhead cost variance must
be broken into two parts to find the
cause of the variance
– Fixed overhead budget variance
– Fixed overhead volume variance


22–83

• Fixed overhead budget variance
– Difference between the budgeted and
actual fixed overhead costs
– Also called budgeted fixed overhead
variance
Fixed OH Budget Variance = Budgeted Fixed Overhead −
Actual Fixed Overhead

= $1,300 − $1,600
= $300 (U)


22–84

• Fixed overhead volume variance
– Difference between budgeted fixed
overhead costs and manufacturing
overhead costs applied to production using
the standard fixed overhead rate
Standard fixed OH applied for 432 direct labor hours
$3.25 per direct labor hour × (180 bags × 2.4 hours per bag)
Less total budgeted fixed overhead

$1,404
1,300
$ 104 (F)
22–85

• A volume variance will occur if more or less
than normal capacity is used
– Fixed overhead volume variance measures the
use of existing facilities and capacity
– Favorable overhead volume variance
• Capacity exceeds the expected amount

– Unfavorable overhead volume variance
• Company operates at a level below normal capacity
– May be in best interest of company during periods of slow
sales
– Means company is not building up excess inventory

22–86

Summary of Manufacturing Overhead
Variances

Variable overhead spending variance
Fixed overhead budget variance
Fixed overhead volume variance
Total manufacturing overhead variance


$ 87.50
103.50
300.00
104.00
$212.00

(F)
(U)
(U)
(F)
(U)

22–87

Analyzing and Correcting Manufacturing
Overhead Variances

Variance
Variable overhead
spending variance
Variable overhead
efficiency variance
Fixed overhead
budget variance
Fixed overhead
volume variance

Amount

Cause

Corrective Action

$87.50 (F) Savings on purchases

No action

Inefficiency of machine
103.50 (U) operator who substituted for ill
assembly worker
Higher than expected factory
insurance premiums due to
300.00 (U)
increased claims filed by
employees

Consider feasibility of
implementing a program for
cross-training employees

Overutilization of capacity
104.00 (F)
traced to high seasonal demand


Study insurance claims filed
over a three-month period
No action necessary because
variance fell within anticipated
range

22–88

Discussion
Q. What four variances are used to
analyze the total manufacturing
overhead variance?
A. Variable overhead spending variance
Fixed overhead budget variance
Fixed overhead volume variance


22–89

Using Cost Variances to Evaluate Managers’
Performance

• Objective 7
– Explain how variances are used to
evaluate managers’ performance


22–90

Performance

• The effectiveness and fairness of a
manager's performance evaluation
depends on
– Human factors
– Company policies
• Should be based on input from managers and
employees
• Should specify procedures that managers are
to use

22–91

Performance (cont’d)
• Procedures that should be specified for
managers
– Preparing operational plans
– Assigning responsibility for carrying out the
operational plans
– Communicating operational plans to key personnel
– Evaluating performance in each area of
responsibility
– Identifying causes of significant variances from the
operational plan
– Taking corrective action to eliminate problems


22–92


• Variance analysis
– Provides detailed data about differences
between standard and actual costs
• Effective at pinpointing efficient and inefficient
operating areas
– Basic comparison of budgeted and actual data not
as effective


22–93

• Effective managerial performance reports
based on standard costs and related
variances should
– Identify
• Causes of the differences
• Personnel involved
• Corrective actions taken

– Be tailored to the manager’s specific areas of
responsibility
• Explain clearly and accurately in what way the manager’s
department did or did not meet operating expectations
Managers should only be held accountable for cost areas under their control

22–94


• Managerial performance reports should
– Summarize all cost data
– Include variances for direct materials,
direct labor, and manufacturing overhead
– Identify
• Causes of variances
• Corrective actions taken


22–95


• The occurrence of a variance does not
indicate poor performance
• If 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 manager


22–96

Discussion
Q. What items should be included in an
effective managerial performance
report?
A. 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 taken

22–97

Time for Review
1. Define standard costs and describe
how managers use standard costs in
the management cycle
2. Explain how standard costs are
developed and compute a standard
unit cost
3. Prepare a flexible budget and describe
how variance analysis is used to
control costs

22–98

And Finally…
4. Compute and analyze direct materials
variances
5. Compute and analyze direct labor
variances
6. Compute and analyze manufacturing
overhead variances
7. Explain how variances are used to
evaluate managers’ performance

22–99

Financial%20&%20 management%20accounting%20 %20chapter%2022%20(standard%20costing%20&%20variance%20analysis)[1]

Recommandé

Recommandé

Contenu connexe

Tendances

Tendances (20)

En vedette

En vedette (6)

Similaire à Financial%20&%20 management%20accounting%20 %20chapter%2022%20(standard%20costing%20&%20variance%20analysis)[1]

Similaire à Financial%20&%20 management%20accounting%20 %20chapter%2022%20(standard%20costing%20&%20variance%20analysis)[1] (20)

Dernier

Dernier (20)

Financial%20&%20 management%20accounting%20 %20chapter%2022%20(standard%20costing%20&%20variance%20analysis)[1]