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STANDARD COST
ACTUAL COST
a budget for the
used in the
production of one
production of the
unit of product or
product or service
service

COST VARIANCE
the difference
between the
actual cost and
the standard cost
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Mhat is significant?

Depends on
Depends on
the
the Size of the
Production
Organization
Depends on Process
the Type of
the
Organization
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Analysis of Mhat DID


Used in a mature
Historical the product
production Process
Data cost?

Mhat
Analyze the process
Task SHOULD the
of manufacturing
Analysis product
the product
cost?

A Analyze the process for the step that


Combined has changed, but use historical data
Approach for the steps that have not changed
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PRACTICAL OR
PERFECTION
ATTAINABLE
STANDARDS
STANDARDS
Can only be attained Tight as practical,
under near perfect but still are expected
conditions to be attained

›Peak efficiency
›Occasional machine
›Lowest possible
breakdowns
input prices
›Normal amounts
›best-quality material
of raw material
›no disruption in
waste
production
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Standards can be used by service firms, nonprofit


organizations, and governmental units

COST
BENEFITS

Implementing and maintaining cost standards can


be time-consuming, labor-intensive, and expensive.
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DIRECT LABOR STANDARDS

S an ar
oala Camp an y:
ear Company D re la o r
re re per en  
Standard rate:
rly wage rate 
Fringe benefits
(20% of wages)
Total standard
rate per hour 

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h
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,000
   
 
  
hyh  
    
  f,000
,000 0,000
„  
 k,000

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Actual Actual Actual Standard Standard Standard
x x x
quantity price quantity price quantity price
m0,000 sq. m0,000 sq. ,000
$8.15 per $8.00 per $8.00 per
meters x meters x sq. meters x
sq. meter sq. meter sq. meter
purchased purchased allowed

$ ,000 $ 0,000 $288,000

$,000U
Direct-material price variance
,m00 sq. $8.00
meters per sq.
used meter Direct-
material
quantity
$21,200 $,200U variance
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Mhat caused oala to spend more than the


anticipated amount on direct material?

First, the company purchased fabric at a higher price ($8.15 per


square meter) than the standard price ($8.00 per square meter).
Direct-material price variance = (PQ X AP) - (PQ X SP) = PQ(AP - SP)
where PQ = Quantity purchased
AP = Actual price
SP = Standard price

oalas direct- material price variance for June is computed as follows


Direct-material price variance = PQ(AP - SP)
= m0,000 ($8.15 - $8.00) = $,000 unfavorable
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Mhat caused oala to spend more than the


anticipated amount on direct material?

Second, the company used more fabric than the standard price.
(,m00 sq. meters actually used, instead of the standard amount of
,000 sq. meters)
Direct-material quantity variance = (AQ X SP) - (SQ X SP) =
SQ(AQ - SQ) where
AQ = Actual quantity used
SQ = Standard quantity allowed
oalas direct- material quantity variance for June
is computed as follows
Direct-material quantity variance = SP(AQ - SQ)
= $8.00(,m00 - ,000)
=$,200 unfavorable
 
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Actual Labor Cost Standard Labor Cost


Actual Actual Actual Standard Standard Standard
X X X
hours rate hours price rate rate
5,00 $1 5,00 $18 ,000 $18
hours X per hours X per hours X per
used hour used hour allowed hour

$112,100 $10,200 $108,000

$5,00 Unfavorable $1,800 Favorable


Direct-labor Direct-labor
rate variance efficiency variance

$m,100 Unfavorable
Direct-labor variance
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$  

Mhat caused oala to spend more than the
anticipated amount on direct labor?

First, the company incurred a cost of $1 per hour for direct
labor instead of the standard amount of $18 per hour
Direct-labor rate variance = (AH X AR) - (AH X SR) =
AH(AR - SR) where
AH = Actual hours used
AR = Actual rate per hour
SR = Standard rate per hour
oalas direct-labor rate variance for June
is computed as follows
Direct-labor rate variance = AH(AR - SR)
= 5,00 ($1 - $18)
=$5,00 unfavorable
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$  

Mhat caused oala to spend more than the
anticipated amount on direct labor?

oala used only 5,00 hours of direct labor, which is < standard
quantity of ,000 hours, given actual output of ,000 tents. The
increased efficiency does not fully offset the unexpectedly high
wage rate.
Direct-labor efficiency variance = (AH X SR) - (SH X SR) =
SR(AH - SH) where
AH = Actual hours used
SH = Standard hours allowed
oalas direct - labor efficiency variance for June
is computed as follows
Direct - labor efficiency variance = SR(AH - SH)
= $18 (5,00 - ,000) = $1,800 favorable
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Mh  h    s    yp s fd         d   
 b ,p     dqu   y       s     pu df 
   hyp ,  dh   dd d  b     p   
         d   qu y      

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In some manufacturing processes, a certain amount


of defective production or spoilage is normal.

Example 1,000 liters of chemicals are normally required in a


chemical process in order to obtain 800 liters of good output.
If total good output in February is 5,000 liters, what is the
standard allowed quantity of input?

ood output quantity = 80% X Input quantity

ood output quantity ÷ 80% = Input quantity allowed

5,000 liters of good = ,250 liters of


output ÷ 80% input allowed
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Mhat constitutes an exception?

How does a manager know when to follow up


on a cost variance and when to ignore it?

Size of Variance

Absolute Amount
ë
RULE OF THUB
Relative Amount

Investigate variances that are either greater than $10,000 or


greater than 10 percent of standard cost
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àO V E O S OS
September $6,000 F 6.0%
October 6,400 F 6.4%
November 3,200 F 3.2%
December 6,200 F 6.2%

None of the variances are greater than $10,000 or Standard


10%, but this variance should be investigated direct
labor cost
because it has occurred at a reasonably
is $100,000
high amount for four months
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M N N % S N S
September $250 U 0.25%
October 840 U 0.84%
November 4,000 U 4.0%
December 9,300 U 9.3%

None of the variances are greater than $10,000 or Standard


10%, but this variance should be investigated direct
because it has an unfavorable trend. labor
is $100,000
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Controllability Favorable Variances


A manager is more likely It is as important to investigate
to investigate a variance significant favorable variances as
that is controllable by well as significant unfavorable
someone in the variances
organization than one
that is not

Cost and Benefits of


Investigation
The decision whether to
investigate a variance is a cost -
benefit decision
 
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A STATISTICAL CONTROL CHART plots cost variances


across time and compares them with a statistically
determined critical value that triggers an investigation

Favorable
variances Investigate
1 standard
deviation
X
Critical X
X Time
value
X X
1 standard X
deviation
Unfavorable Jan. Feb. arch April ay June
variances
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Standard costs, budgets, and variances are used to
evaluate the performance of individuals and departments

They can profoundly influence behavior when they are used to


determine salary increases, bonuses, and promotions
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Direct-material price variance The purchasing manager
et the best prices available for purchased goods and services through
skillful purchasing practices

Direct-material quantity variance The production supervisor


Skillful supervision and motivation of production employees, coupled with
the careful use and handling of materials, contribute to minimal waste

Direct-labor rate variance The production supervisor


enerally results from using a different mix of employees than that anticipated
when the standard were set

Direct- labor efficiency variance The production supervisor


otivating employees toward production goals and effective work schedules
improves efficiency
 
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Interaction among variances often occur making it difficult to


determine the responsibility for a particular variance

Variances in one part of the value chain can be due to root causes
in another part of the chain

#
  
Physical Human
resources w

 "
resources

Research
and Produc- Distri- Customer
Design Supply arketing
develop- tion bution service
ment
 
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Mork-in-Process Inventory Finished-oods Inventory

Direct-material cost
Direct-labor cost Product cost transferred
when product is finished
anufacturing
Overhead Product cost transferred when product is sold

Cost of oods Sold Income Summary

Expense closed into


Income Summary at end
of accounting period
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Cost of oods Sold

Variances are
temporary Unfavorable Favorable
accounts, like variances variances
represent represent
revenue and costs of costs of
expense operating operating
accounts, and inefficiently, efficiently,
they are closed relative to the relative to the
out at the end of standards, and standards, and
thus cause thus cause
the accounting the Cost of the Cost of
period. oods Sold oods Sold
to be to be
higher lower
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Reduced
Emphasis on
importance of
aterial and
labor standards
Real-time O/H costs
Information
Shorter Systems
Product Life Cost
Cycles Drivers

Shifting Cost
Benchmarkin Structures
g High
Quality/Zero
Non-Value- Defects
Added Costs
 
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AIZEN COSTIN is the process of cost reduction during the
manufacturing phase of a product. Improvement is the goal and
responsibility of each worker.

Cost per product unit


Current year
cost base Actual cost
reduction
aizen goal achieved
cost reduction
rate
Actual cost
performance
of the Cost base
current year for next
Time
year
12/1/x0 12/1/x1
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