per lb. Direct labor hours 14.00 per hour Total standard unit cost

© The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Production Cost A standard cost card for one unit of product might look like this: A A x B Standard Standard Standard Quantity Price Cost Inputs or Hours or Rate per Unit Direct materials 3.0 lbs.

4.00 per lb.

12.00 Direct labor

2.5 hours 14.00

per hour 35.00 Variable mfg. overhead 2.5 hours

3.00 per hour

7.50 Total standard unit cost

54.50 B © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Are standards the same as budgets? A standard is the expected cost for one unit. A budget is the expected cost for all units. © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill P ro d u ct C o s t Standard This variance is unfavorable because the actual cost exceeds the standard cost. A standard cost variance is the amount by which an actual cost differs from the standard cost. © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill I see that there is an unfavorable variance. But why are variances important to me? First, they point to causes of problems and directions for improvement. Second, they trigger investigations in departments having responsibility for incurring the costs. © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Prepare standard cost performance report Conduct next period’s operations Analyze variances Identify questions Receive explanations Take corrective actions Begin © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Price Variance The difference between the actual price and the standard price Standard Cost Variances Quantity Variance The difference between the actual quantity and the standard quantity © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Standard price is the amount that should have been paid for the resources acquired. © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Price Variance Quantity Variance Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Analysis Standard quantity is the quantity allowed for the actual good output. © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Analysis AQAP - SP SPAQ - SQ AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity Price Variance Quantity Variance A ctual Q uantity A ctual Q uantity S tandard Q uantity × × × A ctual P rice S tandard P rice S tandard Price © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Let’s use the general model to calculate standard cost variances, starting with direct material . © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Hanson Inc. has the following direct material standard to manufacture one Zippy: 1.5 pounds per Zippy at 4.00 per pound Last week 1,700 pounds of material were purchased and used to make 1,000 Zippies. The material cost a total of 6,630. Zippy © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill What is the actual price per pound paid for the material? a. 4.00 per pound. b. 4.10 per pound. c. 3.90 per pound. d. 6.63 per pound. What is the actual price per pound paid for the material? a. 4.00 per pound. b. 4.10 per pound. c. 3.90 per pound. d. 6.63 per pound. Zippy © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill What is the actual price per pound paid for the material? a. 4.00 per pound. b. 4.10 per pound. c. 3.90 per pound. d. 6.63 per pound. What is the actual price per pound paid for the material? a. 4.00 per pound. b. 4.10 per pound. c. 3.90 per pound. d. 6.63 per pound. AP = 6,630 ÷ 1,700 lbs. AP = 3.90 per lb. Zippy © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Hanson’s material price variance MPV for the week was: a. 170 unfavorable. b. 170 favorable. c. 800 unfavorable. d. 800 favorable. Hanson’s material price variance MPV for the week was: a. 170 unfavorable. b. 170 favorable. c. 800 unfavorable. d. 800 favorable. Zippy © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Hanson’s material price variance MPV for the week was: a. 170 unfavorable. b. 170 favorable. c. 800 unfavorable. d. 800 favorable. Hanson’s material price variance MPV for the week was: a. 170 unfavorable . b. 170 favorable. c. 800 unfavorable. d. 800 favorable. MPV = AQAP - SP MPV = 1,700 lbs. × 3.90 - 4.00 MPV = 170 Favorable Zippy © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill The standard quantity of material that should have been used to produce 1,000 Zippies is: a. 1,700 pounds. b. 1,500 pounds. c. 2,550 pounds. d. 2,000 pounds. The standard quantity of material that should have been used to produce 1,000 Zippies is: a. 1,700 pounds. b. 1,500 pounds. c. 2,550 pounds. d. 2,000 pounds. Zippy © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill The standard quantity of material that should have been used to produce 1,000 Zippies is: a. 1,700 pounds. b. 1,500 pounds. c. 2,550 pounds. d. 2,000 pounds. The standard quantity of material that should have been used to produce 1,000 Zippies is: a. 1,700 pounds. b. 1,500 pounds. c. 2,550 pounds. d. 2,000 pounds. SQ = 1,000 units × 1.5 lbs per unit SQ = 1,500 lbs Zippy © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Hanson’s material quantity variance MQV for the week was: a. 170 unfavorable. b. 170 favorable. c. 800 unfavorable. d. 800 favorable. Hanson’s material quantity variance MQV for the week was: a. 170 unfavorable. b. 170 favorable. c. 800 unfavorable. d. 800 favorable. Zippy © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Hanson’s material quantity variance MQV for the week was: a. 170 unfavorable. b. 170 favorable. c. 800 unfavorable. d. 800 favorable. Hanson’s material quantity variance MQV for the week was: a. 170 unfavorable. b. 170 favorable. c. 800 unfavorable. d. 800 favorable. MQV = SPAQ - SQ MQV = 4.001,700 lbs - 1,500 lbs MQV = 800 unfavorable Zippy © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill 1,700 lbs. 1,700 lbs. 1,500 lbs. × × × 3.90 per lb. 4.00 per lb. 4.00 per lb. = 6,630 = 6,800 = 6,000 Price variance 170 favorable Quantity variance 800 unfavorable Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Zippy © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Hanson purchased and used 1,700 pounds. How are the variances computed if the amount purchased differs from the amount used? The price variance is computed on the entire quantity purchased . The quantity variance is computed only on the quantity used . © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Hanson Inc. has the following material standard to manufacture one Zippy: 1.5 pounds per Zippy at 4.00 per pound Last week 2,800 pounds of material were purchased at a total cost of 10,920, and 1,700 pounds were used to make 1,000 Zippies. Zippy © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Actual Quantity Actual Quantity Purchased Purchased × × Actual Price Standard Price 2,800 lbs. 2,800 lbs. × × 3.90 per lb. 4.00 per lb. = 10,920 = 11,200 Price variance 280 favorable Price variance increases because quantity purchased increases. Zippy © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Actual Quantity Used Standard Quantity × × Standard Price Standard Price 1,700 lbs. 1,500 lbs. × × 4.00 per lb. 4.00 per lb. = 6,800 = 6,000 Quantity variance 800 unfavorable Quantity variance is unchanged because actual and standard quantities are unchanged. Zippy © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill I need the price variance sooner so that I can better identify purchasing problems. You accountants just don’t understand the problems that purchasing managers have. I’ll start computing the price variance when material is purchased rather than when it’s used. © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Variances I am not responsible for this unfavorable material quantity variance. You purchased cheap material, so my people had to use more of it. You used too much material because of poorly trained workers and poorly maintained equipment. Also, your poor scheduling sometimes requires me to rush order material at a higher price, causing unfavorable price variances. © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Now let’s calculate standard cost variances for direct labor . © The McGraw-Hill Companies, Inc., 2000 IrwinMcGraw-Hill Hanson Inc. has the following direct labor standard to manufacture one Zippy:

1.5 standard hours per Zippy at 6.00 per direct labor hour