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11-1
CHAPTER 11
Chapter
11-2
Study Objectives
1. Distinguish between a standard and a budget.
2. Identify the advantages of standard costs.
3. Describe how companies set standards.
4. State the formulas for determining direct materials and direct
labor variances.
5. State the formulas for determining manufacturing overhead
variances.
6. Discuss the reporting of variances.
7. Prepare an income statement for management under a standard
costing system.
8. Describe the balanced scorecard approach to performance
evaluation.
Chapter
11-3
Standard Costs and Balanced Scorecard
Analyzing and
The Need for Setting Reporting Balanced
Standards Standard Costs Variances from Scorecard
Standards
Chapter
11-5 LO 1 Distinguish between a standard and a budget.
The Need for Standards
Advantages of Standard Costs Illustration 11-1
Chapter
11-7 LO 3 Describe how companies set standards.
Setting Standard Costs—
Costs—a Difficult Task
Chapter
11-8 LO 3 Describe how companies set standards.
Setting Standard Costs—
Costs—a Difficult Task
Review Question
Most companies that use standards set them at a(n):
a. optimum level.
b. ideal level.
c. normal level.
d. practical level.
Chapter
11-9 LO 3 Describe how companies set standards.
Setting Standard Costs—
Costs—a Difficult Task
A Case Study
To establish the standard cost of producing a product,
it is necessary to establish standards for each
manufacturing cost element—
direct materials,
direct labor, and
manufacturing overhead.
The standard for each element is derived from the
standard price to be paid and the standard quantity to
be used.
Chapter
11-10 LO 3 Describe how companies set standards.
Setting Standard Costs—
Costs—a Difficult Task
Direct Materials
The direct materials price standard is the cost per
unit of direct materials that should be incurred.
Illustration 11-2
Chapter
11-11 LO 3 Describe how companies set standards.
Setting Standard Costs—
Costs—a Difficult Task
Direct Materials
The direct materials quantity standard is the
quantity of direct materials that should be used per
unit of finished goods.
Illustration 11-3
Review Question
The direct materials price standard should include an
amount for all of the following except:
a. receiving costs.
b. storing costs.
c. handling costs.
d. normal spoilage costs.
Chapter
11-13 LO 3 Describe how companies set standards.
Setting Standard Costs—
Costs—a Difficult Task
Direct Labor
The direct labor price standard is the rate per hour
that should be incurred for direct labor.
Illustration 11-4
Chapter
11-14 LO 3 Describe how companies set standards.
Setting Standard Costs—
Costs—a Difficult Task
Direct Labor
The direct labor quantity standard is the time that
should be required to make one unit of the product.
Illustration 11-5
Manufacturing Overhead
For manufacturing overhead, companies use a
standard predetermined overhead rate in setting
the standard.
This overhead rate is determined by dividing
budgeted overhead costs by an expected standard
activity index, such as standard direct labor hours or
standard machine hours.
Chapter
11-16 LO 3 Describe how companies set standards.
Setting Standard Costs—
Costs—a Difficult Task
Manufacturing Overhead
The company expects to produce 13,200 gallons during the
year at normal capacity. It takes 2 direct labor hours
for each gallon. Illustration 11-6
Chapter
11-19 LO 3 Describe how companies set standards.
Analyzing and Reporting Variances
Review Question
A variance is favorable if actual costs are:
a. less than budgeted costs.
b. less than standard costs.
c. greater than budgeted costs.
d. greater than standard costs
Chapter
11-20 LO 3 Describe how companies set standards.
Analyzing and Reporting Variances
Chapter
11-21 LO 3 Describe how companies set standards.
Analyzing and Reporting Variances
Chapter
11-22 LO 3 Describe how companies set standards.
Analyzing and Reporting Variances
$73,500 - $76,000
(15,000 x $4.90) (15,200 x $5.00) = $2,500 F
$73,500 - $75,000
(15,000 x $4.90) (15,000 X $5.00) = $1,500 F
Total Variance
1 - 3
$181,780 - $182,400
(14,900 X $12.20) (15,200 X $12.00) = $620 F
$181,780 - $178,800
(14,900 X $12.20) (14,900 X $12.00) = $2,980 U
Labor
Actual Hours Standard Hours
- Quantity
x Standard Rate x Standard Rate =
Variance
(AH) x (SR) (SH) x (SR)
(LQV)
$178,800 - $182,400
(14,900 X $12.00) (15,200 X $12.00) = $3,600 F
Total Variance
1 - 3
Chapter
11-35 LO 5 State the formulas for determining manufacturing overhead variances.
Analyzing and Reporting Variances
* Standard per unit overhead cost ($18) ÷ 2 direct labor hours per unit.
Chapter
11-36 LO 5 State the formulas for determining manufacturing overhead variances.
Analyzing and Reporting Variances
Chapter
11-37 LO 5 State the formulas for determining manufacturing overhead variances.
Analyzing and Reporting Variances
Budgeted Overhead:
Normal capacity (in hours) 15,000
Less: Standard hours allowed 15,200
200
Fixed overhead rate ($6/2) $ 3
Overhead volume variance 600 F
Chapter
11-39 LO 5 State the formulas for determining manufacturing overhead variances.
Analyzing and Reporting Variances
Chapter
11-40 LO 5 State the formulas for determining manufacturing overhead variances.
Analyzing and Reporting Variances
Reporting Variances
All variances should be reported to appropriate levels
of management as soon as possible.
Presentation
of Variances
In income statements
prepared for
management under a
standard cost
accounting system,
cost of goods sold is
stated at standard
cost and the
variances are
disclosed separately.
Review Question
Which of the following is incorrect about variance
reports?
a. They facilitate “management by exception”.
b. They should only be sent to the top level of
management.
c. They should be prepared as soon as possible.
d. They may vary in form, content, and frequency
among companies.
Chapter
11-45 LO 8 Describe the balanced scorecard approach to performance evaluation.
Balanced Scorecard
Review Question
Which of the following would not be an objective
used in the customer perspective of the balanced
scorecard approach?
a. Percentage of customers who would recommend
product to a friend.
b. Customer retention.
c. Brand recognition.
d. Earning per share.
Chapter
11-46 LO 8 Describe the balanced scorecard approach to performance evaluation.
Balanced Scorecard
Chapter
11-47 LO 8 Describe the balanced scorecard approach to performance evaluation.
All About YOU: Balancing Costs and Quality in Health
Care
Think About It
•Doctors and medical staff are under pressure to see
more patients each day.
•With insurance companies pushing for reduced medical
costs, every facet of medicine has been standardized and
analyzed.
•What are the potential implications of the quality of
health care?
•Medical costs for a family of four hit $13,383 in 2006.
•The United States spends more on a per person basis,
and as a percentage of GDP than most other countries.
•Yet more than 40 million Americans have no health
Chapter coverage.
11-48
Copyright
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use of these programs or from the use of the information
contained herein.”
Chapter
11-49