Chapter 16 Standard costing variance analysis kaizen costing Standards ≠ Predetermined amount for what should happen ≠ Quantity standard ≠ Quantity of the resource that should be consumed ≠ Cost standard ≠ Cost per unit that should be paid for the resource ≠ Provides a context for evaluating actual amounts Standards ≠ Advantages ≠ Provides a context for evaluating actual amounts ≠ Standard costs do not fluctuate ≠ Simplified accounting ≠ Less expensive than actual costing Setting standards ≠ Quantity standards ≠ How much should be consumed? ≠ Product/process analysis ≠ Allowance for normal, unavoidable inefficiencies ≠Historical data ≠ Is it still relevant? Setting standards ≠ Cost standards ≠ What should a unit of the resource cost? ≠ Normal quality ≠ Normal quantity ≠ Regular supplier ≠ Same shipping method ≠ Etc. Setting standards ≠ Other issues ≠ What is normal? ≠ Practical or perfection? ≠ Who determines the standard? ≠ Who is most familiar with the usage? ≠ Who is most familiar with the cost? Variance analysis ≠ Comparison of standard to actual results ≠ Quantity ≠ Material quantity variance ≠ Labor efficiency variance ≠ Cost ≠ Material cost variance ≠ Labor rate variance Variance analysis ≠ Quantity variance formula ≠ Standard price * (actual – standard quantity) ≠ Notice what is in the parentheses ≠ Cost variance formula ≠ Actual quantity * (actual – standard cost) ≠ Notice what is in the parentheses ≠ I pay for the actual amount I purchase Variance analysis ≠ Favorable or unfavorable? ≠ Favorable if actual is less than standard ≠ Implies efficiency or cost savings ≠ Unfavorable if actual is greater than standard ≠ Implies waste or excessive cost ≠ Does not mean “good” or “bad” ≠ Any variance is a deviation from what was supposed to happen Variance analysis ≠ Responsibility ≠ Why did the variance occur? ≠ Usage issue ≠ Efficiency or inefficiency ≠ Quality issue ≠ Different material or labor mix ≠ Quantity issue ≠ Discount or surcharge Variance analysis Standard quantity per finished unit Standard cost per unit Actual output (finished units) Actual quantity used Actual cost per unit 12 $ 3.80 500 5,942 $ 3.75 Variance analysis Quantity variance = $ 3.80 * ( = $ 220.40 Price variance = 5,942 *( = $ 297.10 5,942 - ( 500 * Favorable $ 3.75 Favorable 3.80 ) 12 )) Variance analysis Standard hours per finished unit Standard rate per hour Actual output (finished units) Actual hours used Total actual labor cost 2 $ 12.40 500 1,085 $ 13,237 Variance analysis Quantity variance = = Price variance = = Variance analysis ≠ Now what? ≠ Investigation of variances ≠ Variance size ≠ Cost/benefit of analysis ≠ Offsetting variances ≠ Controllability ≠ Interactions and tradeoffs ≠ Recurring variances Variance analysis ≠ Criticisms ≠ Variances can be too aggregated ≠ Work best in stable, mass production environment ≠ Focus on cost minimization, not qualitative issues ≠ Greater automation reduces variances ≠ Standards are often relevant for only a short time Standard cost accounting ≠ Use of standard costs reduces period-to-period fluctuations ≠ Standard costs are debited to inventory and CofGS accounts ≠ Variance is the difference between the debit to inventory and the credit ≠ Variances are closed to CofGS at end of period ≠ Favorable variances decrease CoGS ≠ Unfavorable variances increase CofGS Kaizen costing ≠ Form of continuous improvement ≠ Process ≠ Cost reduction goal is established ≠ Actual costs are compared to goal ≠ Actual cost achieved by year end becomes the base for next year’s reduction target