Standard costingStandard costingvariance analysisvariance analysis

kaizen costingkaizen costing

Chapter 16

StandardsStandards≠ Predetermined amount for what should Predetermined amount for what should

happenhappen≠ Quantity standardQuantity standard

≠ Quantity of the resource that should be Quantity of the resource that should be consumedconsumed

≠ Cost standardCost standard≠ Cost per unit that should be paid for the resourceCost per unit that should be paid for the resource

≠ Provides a context for evaluating actual Provides a context for evaluating actual amountsamounts

StandardsStandards≠ AdvantagesAdvantages

≠ Provides a context for evaluating actual Provides a context for evaluating actual amountsamounts

≠ Standard costs do not fluctuateStandard costs do not fluctuate

≠ Simplified accountingSimplified accounting

≠ Less expensive than actual costingLess expensive than actual costing

Setting standardsSetting standards≠ Quantity standardsQuantity standards

≠ How much should be consumed?How much should be consumed?≠ Product/process analysisProduct/process analysis

≠ Allowance for normal, unavoidable Allowance for normal, unavoidable inefficienciesinefficiencies

≠ Historical dataHistorical data≠ Is it still relevant?Is it still relevant?

Setting standardsSetting standards≠ Cost standardsCost standards

≠ What should a unit of the resource cost?What should a unit of the resource cost?≠ Normal qualityNormal quality

≠ Normal quantityNormal quantity

≠ Regular supplierRegular supplier

≠ Same shipping methodSame shipping method

≠ Etc.Etc.

Setting standardsSetting standards≠ Other issuesOther issues

≠ What is normal?What is normal?≠ Practical or perfection?Practical or perfection?

≠ Who determines the standard?Who determines the standard?

≠ Who is most familiar with the usage?Who is most familiar with the usage?

≠ Who is most familiar with the cost?Who is most familiar with the cost?

Variance analysis≠ Comparison of standard to actual

results≠ Quantity

≠ Material quantity variance

≠ Labor efficiency variance

≠ Cost≠ Material cost variance

≠ Labor rate variance

Variance analysis≠ Quantity variance formula

≠ Standard price * (actual – standard quantity)≠ Notice what is in the parentheses

≠ Cost variance formula≠ Actual quantity * (actual – standard cost)

≠ Notice what is in the parentheses

≠ I pay for the actual amount I purchase

Variance analysis≠ Favorable or unfavorable?

≠ Favorable if actual is less than standard≠ Implies efficiency or cost savings

≠ Unfavorable if actual is greater than standard

≠ Implies waste or excessive cost

≠ Does not mean “good” or “bad”≠ Any variance is a deviation from what was

supposed to happen

Variance analysis≠ Responsibility

≠ Why did the variance occur?≠ Usage issue

≠ Efficiency or inefficiency

≠ Quality issue

≠ Different material or labor mix

≠ Quantity issue

≠ Discount or surcharge

Variance analysis

Standard quantity per finished unit 12 Standard cost per unit 3.80$

Actual output (finished units) 500

Actual quantity used 5,942 Actual cost per unit 3.75$

Variance analysis

Quantity variance = 3.80$ * ( 5,942 - ( 500 * 12 ))

= 220.40$ Favorable

Price variance = 5,942 *( 3.75$ - 3.80 )

= 297.10$ Favorable

Variance analysis

Standard hours per finished unit 2 Standard rate per hour 12.40$

Actual output (finished units) 500

Actual hours used 1,085 Total actual labor cost 13,237$

Variance analysis

Quantity variance =

=

Price variance =

=

Variance analysis≠ Multiple substitutable inputs

≠ Multiple labor skills, multiple materials

≠ Quantity (efficiency) variances can be broken down further≠ Mix variance

≠ Yield variance

Variance analysis≠ Mix variance

≠ Mix of inputs is different than standard

Difference between actual and standard

proportions of the specific input

*Total

quantity of the

resource class

*Standard

price of the specific input

Variance analysis≠ Yield variance

≠ Actual total quantity of inputs is different than standard

Difference between actual and standard quantity of the resource class

*Standard

input proportion of the specific

resource*

Standard price of the

specific input

Variance analysis

MaterialStandard

price per unitStandard quanity

Proportion of total

X 12.00$ 300 20.0%Y 18.00 450 30.0%Z 32.00 750 50.0%

1,500 100.0%

MaterialActual price

per unitActual

quantityProportion of

totalX 11.50$ 280 17.5%Y 19.20 520 32.5%Z 32.70 800 50.0%

1,600 100.0%

Variance analysis

Material quantity variance

X Y Z TotalActual quantity 280 520 800 Standard quantity 300 450 750 Difference (20) 70 50 Standard price per unit 12.00$ 18.00$ 32.00$ Material quantity variance (240.00)$ 1,260.00$ 1,600.00$ 2,620.00$

Favorable Unfavorable Unfavorable Unfavorable

Material

Variance analysis

Material mix variance

X Y Z TotalActual input proportion 17.5% 32.5% 50.0%Standard input proportion 20.0% 30.0% 50.0%Difference -2.5% 2.5% 0.0%Actual total quantity of inputs 1,600 1,600 1,600 Product (40.0) 40.0 - Standard price of input 12.00$ 18.00 32.00 Material mix variance (480.00)$ 720.00$ -$ 240.00$

Favorable Unfavorable No variance Unfavorable

Material

Variance analysis

Material yield variance

X Y Z TotalActual total inputs 1,600 1,600 1,600 Standard total inputs 1,500 1,500 1,500 Difference 100 100 100 Standard input proportion 20.0% 30.0% 50.0%Product 20.0 30.0 50.0 Standard price of input 12.00$ 18.00$ 32.00$ Material yield variance 240.00$ 540.00$ 1,600.00$ 2,380.00$

Unfavorable Unfavorable Unfavorable Unfavorable

Material

Variance analysis≠ Now what?

≠ Investigation of variances≠ Variance size

≠ Cost/benefit of analysis

≠ Offsetting variances

≠ Controllability

≠ Interactions and tradeoffs

≠ Recurring variances

Variance analysis≠ Criticisms

≠ Variances can be too aggregated≠ Work best in stable, mass production

environment≠ Focus on cost minimization, not qualitative

issues≠ Greater automation reduces variances≠ Standards are often relevant for only a

short time

Standard cost accountingStandard cost accounting≠ Use of standard costs reduces period-to-period Use of standard costs reduces period-to-period

fluctuationsfluctuations

≠ Standard costs are debited to inventory and Standard costs are debited to inventory and CofGS accountsCofGS accounts≠ Variance is the difference between the debit to Variance is the difference between the debit to

inventory and the creditinventory and the credit

≠ Variances are closed to CofGS at end of periodVariances are closed to CofGS at end of period≠ Favorable variances decrease CoGSFavorable variances decrease CoGS

≠ Unfavorable variances increase CofGSUnfavorable variances increase CofGS

Kaizen costingKaizen costing≠ Form of continuous improvementForm of continuous improvement

≠ ProcessProcess≠ Cost reduction goal is establishedCost reduction goal is established

≠ Actual costs are compared to goalActual costs are compared to goal

≠ Actual cost achieved by year end becomes Actual cost achieved by year end becomes the base for next year’s reduction targetthe base for next year’s reduction target