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Chapter 10
Lecture Notes
Chapter theme: This chapter extends our study of
management control by explaining how standard costs
I. Standard costs – setting the stage
A. Basic definitions/concepts
i. A standard is a benchmark or “norm” for
measuring performance. In managerial accounting,
two types of standards are commonly used by
manufacturing, service, food, and not-for-profit
organizations:
1. Quantity standards specify how much of
an input should be used to make a product or
provide a service. For example:
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ii. Management by exception is a system of
management in which standards are set for various
operating activities, with actual results compared
to these standards. Any deviations that are
deemed significant are brought to the attention of
management as “exceptions.”
iii. The variance analysis cycle is a continuous
process used to identify and solve problems:
1. The cycle begins with the preparation of
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2. These reports highlight variances which are
differences between actual results and what
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3. The variances raise questions such as:
a. Why did this variance occur?
b. Why is this variance larger than it
was last period?
II. Setting standard costs
A. General concepts
i. Standards should be designed to encourage
efficient future operations, not just a repetition of
past inefficient operations.
ii. Standards tend to fall into one of two categories:
1. Ideal standards can only be attained under
the best of circumstances. They allow for no
work interruptions and they require
employees to work at 100% peak efficiency
all of the time.
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B. Setting direct materials standards
i. The standard price per unit for direct materials
should reflect the final, delivered cost of the
materials.
C. Setting direct labor standards
i. The standard rate per hour for direct labor
includes not only wages earned but also fringe
benefits and other labor costs.
ii. The standard hours per unit reflects the labor
hours required to complete one unit of product.
D. Setting variable manufacturing overhead standards
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E. The standard cost card
i. The standard cost card is a detailed listing of the
standard amounts of direct materials, direct
labor, and variable overhead inputs that should
go into a unit of product, multiplied by the standard
price or rate that has been set for each input.
III. Using standards in flexible budgets
A. Activity and spending variances
B. Quantity and price variances
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IV. A general model for standard cost variance analysis
A. Quantity and price variances
i. A quantity variance is the difference between how
much of an input was actually used and how much
should have been used and is stated in dollar terms
using the standard price of the input.
B. Quantity and price standards
i. Price and quantity standards are determined
separately because quantity and price variances
usually have different causes. In addition:
1. Different managers are usually
responsible for buying and for using
inputs. For example:
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material used.
2. The buying and using activities occur at
different points in time. For example:
a. Raw material purchases may be held
in inventory for a period of time
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C. The general model—an overview
i. Quantity and price variances can be computed for
all three variable cost elements – direct materials,
direct labor, and variable manufacturing
overhead – even though the variances have
different names as shown.
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1. The actual quantity represents the actual
amount of direct materials, direct labor, and
variable manufacturing overhead used.
2. The standard quantity represents the
standard quantity allowed for the actual
output of the period.
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3. The actual price represents the actual
amount paid for the input used.
4. The standard price represents the amount
that should have been paid for the input
used.
V. Using standard costs—direct materials variances
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A. Glacier Peak Outfitters – an example
i. The materials quantity variance, defined as the
difference between the quantity of materials used in
production and the quantity that should have been
used according to the standard, is $50 unfavorable.
kilograms.
ii. The materials price variance, defined as the
difference between what is paid for a quantity of
materials and what should have been paid
according to the standard, is $21 favorable.
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iii. Supporting/additional computations
1. The standard quantity of 200 kilograms was
computed as shown.
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B. Direct materials variances—points of clarification:
i. The purchasing manager and production
manager are usually held responsible for the
materials price variance, and materials quantity
variance, respectively.
ii. The materials variances are not always entirely
controllable by one person or department. For
example:
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express delivery of raw materials resulting
Quick Check – direct materials variance calculations
VI. Using standard costs—direct labor variances
Learning Objective 2: Compute the direct labor
efficiency and rate variances and explain their
significance.
A. Glacier Peak Outfitters – continued (assume the
information as shown)
i. The labor efficiency variance, defined as the
difference between the actual quantity of labor
hours and the quantity allowed according to the
standard, is $1,000 unfavorable.
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ii. The labor rate variance, defined as the difference
between the actual average hourly wage paid and
the standard hourly wage, is $1,250 unfavorable.
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more than the standard wage rate by $0.50
per hour.
iii. Supporting/additional computations
B. Direct labor variances—points of clarification:
i. Labor variances are partially controllable by
employees within the Production Department. For
example, production managers/supervisors can
influence:
ii. However, labor variances are not entirely
controllable by one person or department. For
example:
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