© 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