Chapter 10 - Standard costs and variances. This chapter extends our study of management control by explaining how standard costs are used by managers to control costs. It demonstrates how to compute direct materials, direct labor, and variable overhead variances. The chapter also defines some nonfinancial performance measures that are frequently used by companies. | Standard Costs and Variances Chapter 10 Standard Costs Standards are benchmarks or “norms” for measuring performance. In managerial accounting, two types of standards are commonly used. Quantity standards specify how much of an input should be used to make a product or provide a service. Price standards specify how much should be paid for each unit of the input. Examples: Firestone, Sears, McDonald’s, hospitals, construction, and manufacturing companies. Setting Direct Materials Standards Standard Price per Unit Summarized in a Bill of Materials. Final, delivered cost of materials, net of discounts. Standard Quantity per Unit Setting Direct Labor Standards Use time and motion studies for each labor operation. Standard Hours per Unit Often a single rate is used that reflects the mix of wages earned. Standard Rate per Hour Setting Variable Manufacturing Overhead Standards The rate is the variable portion of the predetermined overhead rate. Price Standard The quantity is the . | Standard Costs and Variances Chapter 10 Standard Costs Standards are benchmarks or “norms” for measuring performance. In managerial accounting, two types of standards are commonly used. Quantity standards specify how much of an input should be used to make a product or provide a service. Price standards specify how much should be paid for each unit of the input. Examples: Firestone, Sears, McDonald’s, hospitals, construction, and manufacturing companies. Setting Direct Materials Standards Standard Price per Unit Summarized in a Bill of Materials. Final, delivered cost of materials, net of discounts. Standard Quantity per Unit Setting Direct Labor Standards Use time and motion studies for each labor operation. Standard Hours per Unit Often a single rate is used that reflects the mix of wages earned. Standard Rate per Hour Setting Variable Manufacturing Overhead Standards The rate is the variable portion of the predetermined overhead rate. Price Standard The quantity is the activity in the allocation base for predetermined overhead. Quantity Standard A General Model for Variance Analysis Variance Analysis Quantity Variance Difference between actual quantity and standard quantity Price Variance Difference between actual price and standard price Price and Quantity Standards Price and quantity standards are determined separately for two reasons: The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw material used. The buying and using activities occur at different times. Raw material purchases may be held in inventory for a period of time before being used in production. Variance Analysis Materials quantity variance Labor efficiency variance VOH efficiency variance A General Model for Variance Analysis Price Variance Quantity Variance Materials price variance Labor rate variance VOH rate variance A General Model for Variance Analysis Price Variance (2) – (1) Quantity .
