Principles of Cost Accounting, 16th Edition, Edward J. VanDerbeck, 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or

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1 Principles of Cost Accounting, 16th Edition, Edward J. VanDerbeck, 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

2 Chapter 8 Standard Cost Accounting- Materials, Labor, and Factory Overhead

3 Learning Objectives Describe the different standards used in determining standard costs. Determine procedures for recording standard costs. Compute and analyze variances. Prepare journal entries to record variances.

4 Learning Objectives (cont.) Examine and interpret variances. Recognize the features of a standard cost system. Account for standard costs in a departmentalized factory. Distinguish between actual and applied factory overhead.

5 Learning Objectives (cont.) Compute variances using the two-variance method. Compute variances using the four-variance method. Compute variances using the three-variance method.

6 Standard Costing The purpose of standard cost accounting is to control costs and promote efficiency. It is not another accounting method for accumulating manufacturing costs, but is used in conjunction with such methods as job order, process, or backflush costing.

7 Standard Cost Accounting Standard costing is based on predetermination of what it should cost to manufacture a product, and the inventory accounts are debited for these standard costs. Types of Standards: Standard Ideal standard Attainable standard

8 Standard Cost Procedures Standard cost accounting is based on the following procedures: Standard costs are determined for the three elements of cost: direct materials, direct labor, and factory overhead. The standard costs, the actual costs, and the variances between the actual and standard costs are recorded in the appropriate accounts. Significant variance are analyzed and investigated and then appropriate action is taken.

9 Standard Procedures Materials cost standard is based on estimates of the quantity of materials required for a unit of product and the unit cost to purchase the materials used. Labor cost standard is based on estimates of the labor hours required to produce a unit of product and the cost of labor per unit.

10 Determination of Variances A variance represents the difference between the actual and the standard costs of materials, labor, and overhead. Variances measure efficiencies or inefficiencies in usage and price.

11 Determination of Variances

12 Determination of Variances A debit balance in a variance account indicates an unfavorable variance. A credit balance reflects a favorable variance, indicating that actual costs were less than the standard.

13 Determination of Variances

14 Accounting for Variances Work in Process is always debited with the standard cost ( standard quantity X standard price) Materials inventory account is credited for the actual cost of materials issued to the factory. Payroll account is credited with the actual cost of labor incurred for the period.

15 Accounting for Variances The differences between the debits (at standard costs) and the credits (at actual costs) are debited (unfavorable variances) or credited (favorable variances) to the variance accounts. The standard cost of units finished is transferred from Work in Process to Finished Goods.

16 Disposition of Variances Prorate variances to Cost of Goods Sold, Work in Process, and Finished Goods. Show an unfavorable net variance as an addition to the cost of goods sold for the period and a favorable net variance as a deduction from costs of goods sold. If crediting the entire amount of the variances to Cost of Goods Sold would materially misstate the financial

17 Disposition of Variances statements, the variances should be allocated to Work in Process, Finished Goods, and Cost of Goods Sold. If production seasonal, then the variances should be shown as deferred charges or credits on interim balance sheets. Variances due to abnormal or unusual circumstances should be charged off as extraordinary losses on the income statement.

18 Interpreting Variances Two components are investigated: Quantity Price Management should not look at each individual variance in a vacuum but rather at the relationship of that variance to other variances

19 Features of a Standard Cost System The fact that standards are based on estimates does not make them unreliable. Standards will change as conditions change. The purpose of using a standard cost system is to provide continual incentive for factory personnel to keep costs and performance in line with predetermined management objectives.

20 Features of a Standard Cost System A standard cost system helps focus management s attention on the following questions and their causes: a. Were materials purchased at prices above or below standard? b. Were materials used in quantities above or below standard? c. Is labor being paid at rates above or below standard?

21 Features of a Standard Cost System d. Is labor being used in amounts above or below standard?

22 Actual & Applied Factory Overhead Actual FOH = Applied FOH, no over or underapplied FOH exist in the FOH account and no variance Actual FOH > Applied FOH, unfavorable variance Actual FOH < Applied FOH, favorable balance

23 Two-Variance method The two-variance method of overhead analysis breaks down the total variance into a flexible-budget variance and a production-volume variance. Flexible-budget variance measures the amount by which the actual factory overhead costs differ from the flexible budget for production attained.

24 Two-Variance method The production-volume variance measures difference between the budgeted fixed overhead and the fixed overhead allocated to work in process.

25 Four Variance Method Four-variance method recognizes two variable cost variances and two fixed cost variances. It has two important aspects: 1) separate actual factory overhead accounts must be maintained for variable costs and fixed costs 2) actual direct labor hours must be known

26 Three-Variance Method Three-variance method separates actual and applied overhead into three variances: spending, efficiency, and production-volume.

27 Three-Variance Method

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