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STANDARD COSTS & VARIANCE ANALYSIS SLIDES PREPARED BY S. M. HUSSAM HAIDER TIRMIZI INSTITUTE ORASOFT
earning !b"ectives:
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Its all about standards and benchmarks. It is important to measure actual values against goals and standards. Responsibility should be commensurate with controllability.
E%&"ain 'o( standard osts ar! d!)!"o&!d. Ca" +"at! and int!r&r!t )arian !s ,or dir! t -at!ria". Ca" +"at! and int!r&r!t )arian !s ,or dir! t "a/or. Ca" +"at! and int!r&r!t )arian !s ,or -an+,a t+rin1 o)!r'!ad. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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Standard Costs
The term standard cost re#ers to the cost that management believes should be incurred to produce a good or service under anticipated conditions. The primary bene#it o# a standard cost system is that it allows #or comparison o# standard versus actual costs. $i##erences are re#erred to as standard cost variances and should be investigated i# signi#icant.
earning !b"ectives:
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E%&"ain 'o( standard osts ar! d!)!"o&!d. Ca" +"at! and int!r&r!t )arian !s ,or dir! t -at!ria". Ca" +"at! and int!r&r!t )arian !s ,or dir! t "a/or. Ca" +"at! and int!r&r!t )arian !s ,or -an+,a t+rin1 o)!r'!ad. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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E%&"ain 'o( standard osts ar! d!)!"o&!d. Ca" +"at! and int!r&r!t )arian !s ,or dir! t -at!ria". Ca" +"at! and int!r&r!t )arian !s ,or dir! t "a/or. Ca" +"at! and int!r&r!t )arian !s ,or -an+,a t+rin1 o)!r'!ad. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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'udgeted cost: the cost% at standard% o# the total number o# budgeted units.
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)*plain how standard costs are developed. Ca" +"at! and int!r&r!t )arian !s ,or dir! t -at!ria". Ca" +"at! and int!r&r!t )arian !s ,or dir! t "a/or. Ca" +"at! and int!r&r!t )arian !s ,or -an+,a t+rin1 o)!r'!ad. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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)*plain how standard costs are developed. Ca" +"at! and int!r&r!t )arian !s ,or dir! t -at!ria". Ca" +"at! and int!r&r!t )arian !s ,or dir! t "a/or. Ca" +"at! and int!r&r!t )arian !s ,or -an+,a t+rin1 o)!r'!ad. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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speci#ied by #ormulas or recipes. developed #rom price lists provided by suppliers. determined time and motion studies conducted by industrial engineers.
)*plain how standard costs are developed. Ca" +"at! and int!r&r!t )arian !s ,or dir! t -at!ria". Ca" +"at! and int!r&r!t )arian !s ,or dir! t "a/or. Ca" +"at! and int!r&r!t )arian !s ,or -an+,a t+rin1 o)!r'!ad. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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speci#ied by #ormulas or recipes. developed #rom price lists provided by suppliers. determined time and motion studies conducted by industrial engineers. developed #rom analyses o# past data.
)*plain how standard costs are developed. Ca" +"at! and int!r&r!t )arian !s ,or dir! t -at!ria". Ca" +"at! and int!r&r!t )arian !s ,or dir! t "a/or. Ca" +"at! and int!r&r!t )arian !s ,or -an+,a t+rin1 o)!r'!ad. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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)*plain how standard costs are developed. Ca" +"at! and int!r&r!t )arian !s ,or dir! t -at!ria". Ca" +"at! and int!r&r!t )arian !s ,or dir! t "a/or. Ca" +"at! and int!r&r!t )arian !s ,or -an+,a t+rin1 o)!r'!ad. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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E%&"ain 'o( standard osts ar! d!)!"o&!d. Calculate and interpret variances #or direct material. Calculate and interpret variances #or direct labor. Calculate and interpret variances #or manu#acturing overhead. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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E%&"ain 'o( standard osts ar! d!)!"o&!d. Calculate and interpret variances #or direct material. Ca" +"at! and int!r&r!t )arian !s ,or dir! t "a/or. Ca" +"at! and int!r&r!t )arian !s ,or -an+,a t+rin1 o)!r'!ad. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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E%&"ain 'o( standard osts ar! d!)!"o&!d. Calculate and interpret variances #or direct material. Ca" +"at! and int!r&r!t )arian !s ,or dir! t "a/or. Ca" +"at! and int!r&r!t )arian !s ,or -an+,a t+rin1 o)!r'!ad. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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E%&"ain 'o( standard osts ar! d!)!"o&!d. Ca" +"at! and int!r&r!t )arian !s ,or dir! t -at!ria". Calculate and interpret variances #or direct labor. Ca" +"at! and int!r&r!t )arian !s ,or -an+,a t+rin1 o)!r'!ad. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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E%&"ain 'o( standard osts ar! d!)!"o&!d. Ca" +"at! and int!r&r!t )arian !s ,or dir! t -at!ria". Calculate and interpret variances #or direct labor. Ca" +"at! and int!r&r!t )arian !s ,or -an+,a t+rin1 o)!r'!ad. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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E%&"ain 'o( standard osts ar! d!)!"o&!d. Ca" +"at! and int!r&r!t )arian !s ,or dir! t -at!ria". Ca" +"at! and int!r&r!t )arian !s ,or dir! t "a/or. Calculate and interpret variances #or manu#acturing overhead. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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E%&"ain 'o( standard osts ar! d!)!"o&!d. Ca" +"at! and int!r&r!t )arian !s ,or dir! t -at!ria". Ca" +"at! and int!r&r!t )arian !s ,or dir! t "a/or. Calculate and interpret variances #or manu#acturing overhead. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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E%&"ain 'o( standard osts ar! d!)!"o&!d. Calculate and interpret variances #or direct material. Calculate and interpret variances #or direct labor. Calculate and interpret variances #or manu#acturing overhead. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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Mana1!-!nt /# E% !&tion
'ecause investigation o# standard cost variances is itsel# a costly activity% management must decide which variances to investigate. Most managers practice management by e*ception. :hat is ;e*ceptional<= >sually an absolute dollar amount or a percentage dollar amount.
E%&"ain 'o( standard osts ar! d!)!"o&!d. Ca" +"at! and int!r&r!t )arian !s ,or dir! t -at!ria". Ca" +"at! and int!r&r!t )arian !s ,or dir! t "a/or. Ca" +"at! and int!r&r!t )arian !s ,or -an+,a t+rin1 o)!r'!ad. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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E%&"ain 'o( standard osts ar! d!)!"o&!d. Ca" +"at! and int!r&r!t )arian !s ,or dir! t -at!ria". Ca" +"at! and int!r&r!t )arian !s ,or dir! t "a/or. Ca" +"at! and int!r&r!t )arian !s ,or -an+,a t+rin1 o)!r'!ad. Dis +ss 'o( t'! -ana1!-!nt /# !% !&tion a&&roa ' is a&&"i!d to in)!sti1ation o, standard ost )arian !s.
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)*plain how standard costs are developed. Calculate and interpret variances #or direct material. Calculate and interpret variances #or direct labor. Calculate and interpret variances #or manu#acturing overhead. $iscuss how the management by e*ception approach is applied to investigation o# standard cost variances.
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0This is an un#avorable price variance1 >sage o# raw materials inventory: Accountdr. cr. :ork in 2rocess Inventory Material 4uantity Aariance Raw Material Inventory * * *
:ork in 2rocess Inventory 0std.1 * abor Rate Aariance abor )##iciency Aariance * *
&alaries 2ayable 0actual1 * 0Bote: both the labor rate variance and e##iciency variance are un#avorable1
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Actual overhead is recorded in the manu#acturing overhead account. !verhead is applied to :ork in 2rocess Inventory at the standard cost. The di##erence between actual overhead and overhead applied at standard is closed and overhead variances are identi#ied. More
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Account
dr. cr. * *
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Account
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dr. cr. *
C"osin1 Varian ! A
o+nts
At the end o# the accounting period% the temporary variance accounts must be closed. As a practical matter this is usually accomplished by debiting or crediting the variances to cost o# goods sold. Account dr. cr. * * *