Chapter 24 – Standard Cost Systems
Financial and Managerial Accounting, 17/e 24-1
24 STANDARD COST SYSTEMS
Chapter Summary
The analysis of standard cost systems begins with the development of standards
for direct materials, direct labor, and manufacturing overhead. These discussions
emphasize that standards are set in accordance with normal and not ideal operating
conditions. This includes setting overhead standards consistent with normal production
volume.
An extended illustration introduces all variance calculations. The variances
isolated include price and quantity variances for direct material and labor, the spending
variance for overhead, and the volume variance. Each variance calculation is shown in
the form of an equation using the familiar three-benchmark diagram. The discussion of
direct material does not distinguish between quantities purchased and used. Thus, the
price and quantity variances are calculated using the same standard quantity. The
treatment of overhead variances follows the “two-way” format. Note, however, that the
illustration contains sufficient detail for those who wish to employ a “three-way” or “four–
way” analysis.
Journal entries are introduced to record standard costs in the work–in-process
inventory account, and to record the variances in appropriate accounts. End-of-period
closing entries to dispose of the variance balances are not discussed in detail.
To close discussion of our illustration, the variances are evaluated from the
perspectives of a number of different managers.
Learning Objectives
1. Define standard costs and explain how they assist managers in controlling costs.
2. Explain the difference between setting ideal standards and setting reasonably
achievable standards.
3. Compute direct materials and direct labor variances and explain the meaning of each.
4. Compute overhead variances and explain the meaning of each.
5. Discuss the causes of specific cost variances.
Chapter 24 – Standard Cost Systems
Brief topical outline
A Standard cost systems
1 Establishing and revising standard costs – see Your Turn (page 1041)
2 Direct material standards
3 Direct labor standards
4 Manufacturing overhead standards – see Case in Point (page 1042)
5 Standard costs and variance analysis: an illustration
6 Materials price and quantity variances
7 Labor rate and efficiency variances – see Case in Point (page 1047)
8 Manufacturing overhead variances
a The overhead spending variance
b The overhead volume variance
c Summary of the overhead cost variances
9 Valuation of finished goods
a What about the cost variance accounts? – see Ethics, Fraud &
Corporate Governance (page 1053)
10 Evaluating cost variances from different perspectives
a Accounting
b Purchasing
c Production
d Quality control
e Factory workers
f Marketing – see Your Turn (page 1053)
g Summary of cost variances
11 A final note: JIT systems and variance analysis
B Concluding remarks
Topical coverage and suggested assignment
Homework Assignment
(To Be Completed Prior to Class)
Class
Meetings
on Chapter
Topical
Outline
Coverage
Discussion
Questions
Brief
Exercises
Exercises
Problems
Critical
Thinking
Cases
1
A
1, 2, 3
1
1
2
A
4, 5, 6
2, 3, 4, 6,
1, 3, 5
2
3
A – B
7, 8
8, 9, 10
6, 7, 9, 10
1
Chapter 24 – Standard Cost Systems
Financial and Managerial Accounting, 17/e 24-3
Comments and observations
Teaching objectives for Chapter 24
1 Explain the basic purpose of a standard cost system.
2 Distinguish between ideal and normal standards and explain the significance of
this distinction to the process of developing standard costs.
3 For each of the six cost variances described in the chapter:
a Explain the nature of the variance
b Discuss possible causes and the manager most likely responsible
c Review the computation of the variance
d Illustrate the journal entry to record the variance and related standard cost
4 Discuss the merits of valuing inventory and the cost of goods sold at standard cost,
with cost variances shown separately, compared with valuing inventory and the cost
of goods sold at actual cost.
5 Describe the year-end disposition of the balances in the variance accounts.
6 Discuss the inherent limitations of a standard cost system.
General comments
Cost control is critical to the competitive position of a business and has thus received
considerable attention in the academic and professional literature. Despite the growing
popularity of just-in-time approaches to the management of costs, we believe traditional
standard cost systems and control via cost variances to be relevant and of vital
importance.
It is important to establish the nature of a standard cost system at the outset. Students
have difficulty appreciating that standard costing is not an alternative to job-order or
process systems, but a variant of those systems. We always spend class time
distinguishing among actual, normal, and standard costs in both job-order and process
environments. Discussion Question 2 and Problem 4, which applies standard costs in a
process system, are helpful in this regard.
In covering standard costs, we find that some students fail to associate standard costs
with the flow of manufacturing costs through a cost accounting system. Rather, they
view the computation of cost variances as calculations made independently of the
recording function. Problems 3 through 8 and Case 2 are designed to show that standard
costs are indeed an integral part of the cost accounting system. To reinforce this point,
you may wish to call to students’ attention the fact that the use of standard costs in a
process cost system eliminates the need for tedious calculations of cost per equivalent
unit, since standard cost is the cost per equivalent unit. Again, Problem 4 makes this
point nicely.
In covering standard costs it is crucial not to focus solely upon mechanics.
Whenever we compute a variance, we believe that it is important to discuss the nature
Chapter 24 – Standard Cost Systems
and the probable cause of that variance. Exercises 5 and 6 and Case 1 are all designed
to focus upon the interpretation of cost variance information. Finally, we recommend an
in-class review of Exercise 7. On the surface, this exercise appears quite mechanical.
Actually, it is both conceptual and comprehensive in nature. Students able to explain
their answers to this exercise have acquired a thorough understanding of “cost variances.”
We view standard cost systems as an essential component of responsibility
accounting systems and as an extension of flexible budgeting.
Supplemental Exercises
Group Exercise
As a group read and solve Problem 6 in your text. Organize a role play for the class
to illustrate your interpretation of the variance information in the problem. One member
of the group should act as company controller or cost accountant and present the variance
results to a meeting of managers played by members of the group. Group members
should take on the roles of purchasing manager, production superintendent, marketing
manager and, employee grievance representative. Each “manager” should interpret the
control significance of the variances he or she is responsible for and explain the
corrective actions, if any, planned.
Internet Exercise
Search the web for an article dealing with the topics of cost control or standard cost
variance analysis. Obtain a copy of the article and write a brief report summarizing its
major points.
Chapter 24 – Standard Cost Systems
Financial and Managerial Accounting, 17/e 24-5
CHAPTER 24 NAME # ________________________
10-MINUTE QUIZ A SECTION
Use the following data for questions 1 through 3.
The following budget for the 80,000-unit normal production level was prepared by the
Montgomery Corporation for September:
Normal Output (80,000 Units)
Standard Variable Costs: Direct materials $35,000
Direct labor 44,000
Variable overhead 26,400
Standard Fixed Costs: Manufacturing overhead 57,200
Total manufacturing costs $162,600
During September, the Production Department actually produced 90,000 units at a total
manufacturing cost of $165,000.
1 Refer to the above data. Which of the following is not an accurate
budgeted amount for an output level of 90,000 units?
a Total overhead cost, $86,900
b Total manufacturing costs, $183,150
c Direct materials, $39,375
d Direct labor, $49,500
2 Refer to the above data. A summary of Montgomery’s performance in
September would not show:
a Actual total costs under budget by $1,000.
b Total costs of $175,775 budgeted for 90,000 units.
c Actual total costs over budget by $10,775.
d Overhead applied to production of $64,350.
3 Refer to the above data. The cost-volume relationship used to prepare
the flexible budget for this department includes:
a Manufacturing overhead cost of $1.00 per unit.
b Fixed cost of $0.65 per unit.
c Total cost of $1.90 per unit.
d Variable costs of $1.32 per unit.
4 Under standard cost procedures, any differences between actual costs
and standard costs are:
a Ignored until the end of the fiscal period, when they are shown
in footnotes to the income statement.
b Recorded in variance accounts.
c Added to or subtracted from the standard cost amount
immediately.
d Treated as extraordinary production gains or losses.
5 If the actual number of direct labor hours used exceeds the standard
direct labor hours allowed, this indicates:
a An unfavorable labor efficiency variance.
b A favorable labor efficiency variance.
c An unfavorable labor rate variance.
d An unfavorable total labor variance.
Chapter 24 – Standard Cost Systems
CHAPTER 24 NAME # ________________________
10-MINUTE QUIZ B SECTION
Use the following data for questions 1 through 3.
Matson Company incurred actual direct labor costs of $70,500 in April for 6,000 direct labor
hours, although the standard labor cost for output produced was only $67,200 (6,400 hours at
$10.50 per hour).
1 Refer to the above data. Matson’s labor rate variance for April is:
a $7,500 unfavorable.
b $8,000 unfavorable.
c $4,200 favorable.
d $3,300 unfavorable.
2 Refer to the above data. Matson’s labor efficiency variance for April is:
a $3,300 unfavorable.
b $7,500 unfavorable.
c $4,700 favorable.
d $4,200 favorable.
3 Refer to the above data. The journal entry to record direct labor costs
relating to work performed in April includes:
a A debit to Work-in–Process Inventory for $70,500.
b A credit to Labor Rate Variance for $7,500.
c A credit to Labor Efficiency Variance for $4,200.
d A credit to Direct Labor for $67,200.
4 Smith’s actual manufacturing costs for May totaled $72,000, whereas
budgeted manufacturing costs (at standard) were $80,000. A
comparison of the budgeted costs and actual amounts:
a Is not significant unless the budgeted and actual figures are
based upon the same level of production.
b Demonstrates that Smith’s Manufacturing Department operated
very efficiently during May.
c Indicates that production cost per unit was 10% below budgeted
cost per unit.
d Indicates that Smith produced only 90% of the number of units
budgeted for production in May.
5 When standard costs are used in a cost accounting system, the transfer of
units from the Finished Goods Inventory to the Cost of Goods Sold
account involves:
a A debit to the Cost of Goods Sold account for the actual cost of
units transferred.
b A credit to the Finished Goods Inventory account for the
standard cost of units transferred.
c Recording a cost variance for the difference between the actual
and standard cost of units transferred.
d The elimination of any cost variances relating to units sold.
Chapter 24 – Standard Cost Systems
Financial and Managerial Accounting, 17/e 24-7
CHAPTER 24 NAME # _____________________
10-MINUTE QUIZ C SECTION
Serene Sound produces a high quality audio tape used in the recording industry. Serene
allocates variable overhead to production at a rate of $12 per batch manufactured. The
company’s monthly fixed overhead costs average $72,000. An average of 500 batches per month
is considered normal. During June, Serene produced 450 batches of audio tape and incurred
actual overhead costs of $79,500.
1 Compute the following amounts:
a Total overhead applied to production in June amounted to $__________.
b Total overhead budgeted in June for the 450 batches manufactured amounted to
$__________.
c Serene’s overhead spending variance was $__________ (favorable/unfavorable).
d Serene’s overhead volume variance was $__________ (favorable/unfavorable).
2 In the space provided, prepare the journal entry to dispose of any over- or under-applied
overhead directly to cost of goods sold.
Chapter 24 – Standard Cost Systems
CHAPTER 24 NAME # ______________________
10-MINUTE QUIZ D SECTION
Job no. 007 involved the production of 100 units of product JR. The total
standard and actual costs for materials and direct labor on this job are shown below:
Direct materials:
Standard: 390 pounds @ $7.00 per pound $2,730
Actual: 410 pounds @ $7.10 per pound $2,911
Direct labor:
Standard: 160 hours @ $22 per hour $3,520
Actual: 150 hours @ $23 per hour $3,450
1 Compute the following cost variances for job no. 007. Indicate whether each variance is
favorable (F) or unfavorable (U).
a Materials price variance: $__________
b Materials quantity variance: $__________
c Labor rate variance: $__________
d Labor efficiency variance: $__________
2 In the space below, provide the journal entry to record the cost of direct materials used
on job no. 007.
Chapter 24 – Standard Cost Systems
Financial and Managerial Accounting, 17/e 24-9
SOLUTIONS TO CHAPTER 24 10-MINUTE QUIZZES
QUIZ A QUIZ B
QUIZ C
1
a [($72,000 500 batches) + $12] x 450 batches = $70,200
2
QUIZ D
Chapter 24 – Standard Cost Systems
Assignment Guide to Chapter 24
Brief Exercises
Exercises
Problems
Cases
Net
1 – 10
1 – 15
1
2
3
4
5
6
7
8
9
1
2
4
3
Time estimate (in minutes)
< 15
< 15
40
40
25
30
25
40
30
30
30
25
50
30
30
Difficulty rating
E
E
M
M
M
S
M
M
M
M
M
S
S
M
M
Learning Objectives:
1, 6
1, 6, 14, 15
√
√
√
1. Define standard costs and explain
how they assist managers in
controlling costs.
2. Explain the difference between
setting ideal standards and setting
reasonably achievable standards.
1, 5
1
3. Compute direct materials and direct
labor variances and explain the
meaning of each.
2, 6, 7, 8, 9
1, 2, 3, 4, 6,
7, 13, 14
√
√
√
√
√
√
√
√
√
4. Compute overhead variances and
explain the meaning of each.
3, 4, 10
1, 2, 4, 5, 9,
10, 11, 12
√
√
√
√
√
5. Discuss the causes of specific cost
variances.
1, 4, 5, 6
1, 3, 4, 5, 6,
8, 11, 14, 15
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√
√
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