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Standard Costs and Operating

Performance Measures

Chapter 11

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.

Variance Analysis Cycle

Prepare standard Prepare standard cost performance cost performance report report Analyze variances Begin Identify questions Receive explanations Take corrective actions Conduct next period’s operations

Accountants, engineers, purchasing

agents, and production managers

combine efforts to set standards that encourage

efficient future operations.

Setting Standard Costs

Learning Objective 1

Explain how direct Explain how direct materials standards materials standards and direct labor and direct labor standards are set. standards are set.

Setting Direct Material Standards

Price

Standards

Summarized in a Bill of Materials. Final, delivered cost of materials, net of discounts.

Quantity

Standards

Setting Direct Labor Standards

Rate

Standards

Often a single rate is used that reflects the mix of wages earned.

Time

Standards

Use time and motion studies for each labor operation.

Setting Variable Manufacturing Overhead

Standards

Rate

Standards

The rate is the variable portion of the predetermined overhead rate.

Quantity

Standards

The quantity is the activity in the allocation base for predetermined overhead.

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 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.  (^) 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.

A General Model for Variance Analysis

Variance Analysis

Price Variance

Difference between Difference between actual price and actual price and standard price standard price

Quantity Variance

Difference between Difference between actual quantity and actual quantity and standard quantity standard quantity

Price Variance Quantity Variance

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

A General Model for Variance Analysis

Price Variance Quantity Variance

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

A General Model for Variance Analysis

Actual quantity is the amount of direct

materials, direct labor, and variable

manufacturing overhead actually used.

Price Variance Quantity Variance

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

A General Model for Variance Analysis

Actual price is the amount actually

paid for the input used.

A General Model for Variance Analysis

Standard price is the amount that should

have been paid for the input used.

Price Variance Quantity Variance

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price