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CH 16 Standard Costing, Variance Analysis, Kaizen Costing

This document discusses standard costing and variance analysis. It defines standards as predetermined amounts for what should happen in terms of quantity and cost. Variance analysis compares actual results to standards to determine variances which can be favorable or unfavorable. It provides formulas for calculating quantity and cost variances and discusses investigating the causes of variances and responsibilities. The document also notes some criticisms of variance analysis and introduces kaizen costing as a form of continuous improvement where actual costs become the new base for further cost reductions.

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Manoranjan Sarangi
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422 views18 pages

CH 16 Standard Costing, Variance Analysis, Kaizen Costing

This document discusses standard costing and variance analysis. It defines standards as predetermined amounts for what should happen in terms of quantity and cost. Variance analysis compares actual results to standards to determine variances which can be favorable or unfavorable. It provides formulas for calculating quantity and cost variances and discusses investigating the causes of variances and responsibilities. The document also notes some criticisms of variance analysis and introduces kaizen costing as a form of continuous improvement where actual costs become the new base for further cost reductions.

Uploaded by

Manoranjan Sarangi
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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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 * ( 5,942 - ( Favorable 500 * 12 ))

= $ 220.40

Price variance

5,942 *(

$ 3.75 Favorable

3.80 )

= $ 297.10

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 years reduction target

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