Module+15000+III+Explanation+and+Examples

III. Module 15000 Explanation and Examples ajh

A **standard price** is the amount that should be paid for the quantity of material used. For example, if we were making t-shirts, the standard price would tell us how much we should pay for the materials to make the t-shirts. A **standard quantity** tells us how much of the material to use. In the t-shirt example, the standard quantity would tell us how much material and thread to use for each t-shirt. The **standard unit cost** is calculated as: Standard Price X Standard Quantity = **(SP) X (SQ)**
 * 1) **What are Unit Standards?**


 * Ideal standards** would give us the most that we could possibly produce if everything worked as it should. **Currently attainable standards** would be the most we could produce with our current conditions which are more realistic and take into account the possibility that something could happen to stop production. Kaizen standards were developed in Japan. //Kai// means “continuous” and //zen// means “improvement.” Companies that adopt a Kaizen philosophy are continuous trying to improve the way they make the product or provide the service. In activity-based costing methods, standards are created and used to put a cost on certain activities.

Standard Costing Systems are used to help manage costs, to plan, control, make decisions and cost products. Standard costing helps managers improve and reduce costs so that the company can be more profitable. Managers utilize standard costing for comparison with the company's results and their budgets. This can help them find areas where improvements need to be made on product costing and will also help them make better decisions.

2. **What are Standard Cost Sheets?**
 * Standard Cost Sheets** show the makeup of all costs for a product or service. Example: t-shirts manufacturing:
 * **Description** || **Standard Price** ||  || **Standard Usage** || **Standard Cost** || **Total** ||   ||
 * Direct materials: ||  ||   ||   ||   ||   ||   ||
 * Fabric || $1.50 || X || 1.25 yards || $1.88 ||  ||   ||
 * Thread || 0.03 || X || .25 spool || 0.08 ||  ||   ||
 * Total direct materials ||  ||   ||   ||   || $1.96 ||   ||
 * Direct labor: ||  ||   ||   ||   ||   ||   ||
 * Machine operator || $12.00 || X || .05 hour || $0.60 ||  ||   ||
 * Total direct labor ||  ||   ||   ||   || 0.6 ||   ||
 * Overhead: ||  ||   ||   ||   ||   ||   ||
 * Variable overhead || $10.00 || X || .05 hour || $0.50 ||  ||   ||
 * Fixed overhead || $20.00 || X || .05 hour || 1.00 ||  ||   ||
 * Total overhead ||  ||   ||   ||   || $1.50 ||   ||
 * **Total standard unit cost** ||  ||   ||   || **$4.06** ||   ||

3. **How is Variance Analysis Calculated and Used?** The **total budget variance** is the actual amount that the product cost minus the standard cost that was estimated. This tells managers where the differences in cost occurred. It is calculated as:


 * Total budget variance = (Actual Price X Actual Quantity) – (Standard price X Standard Quantity) = (AP X AQ) – (SP X SQ)**

The total budget variance can be divided into price variance and usage variance. **Direct Materials Price Variance** is the difference in what was paid for the direct materials and the standard price (what was estimated) for materials and is calculated:


 * MPV = (Actual quantity purchased × Actual price) − (Actual quantity purchased × Standard price) **

A **favorable** Materials Price Variance happens when the price that was paid for direct materials is less than the standard price that was estimated. If there is an **unfavorable** Materials Price Variance, the price paid for direct materials is higher than the standard price that was calculated.


 * Direct Materials Usage Variance** is the difference in the amount of materials used in a product and the amount that were estimated for that product multiplied by the standard price.


 * MUV = (SP X AQ) – (SP X SQ)**

MUV is **favorable** if the amount used is less than the amount calculated for the standard. This means that you did not use as much material as you estimated. MUV is **unfavorable** if the actual amount used is more than the amount calculated for the standard.

Direct Labor Rate Variance (LRV) is the amount of difference in the wages paid to direct labor employees and the amount of wages estimated to be paid: **(AR X AH) – (SR X AH)**. For example, AH were 250; SR is $12.00; AR is $11.60. (11.60 X 250) – (12.00 X 250) = (2900) – (3,000) = $100 Favorable. The LRV in this example is favorable because the costs of the materials were less than those estimated using the Standard Rate.
 * A. What are Direct Materials Price and Usage Variances?**

Direct Labor Efficiency Variance (LEV) is the amount of difference in the direct labor hours used and the amount of direct labor hours estimated. LEV calculation: **(AH-SH)SR**. From the example above, AH = 250; SR = $12.00; SH = 268. (250 - 242)12.00 = (8)12 = $96 unfavorable. The LEV is unfavorable because it took more hours than were estimated to produce the product.

When companies take a look at the direct material and direct labor variances, they usually have control limits that tell them which range of variance is acceptable. If a variance falls outside of the control limits, further investigation is usually made to understand what caused the variance so that it can be corrected in the future. Purchasing agents are usually responsible for any direct materials price variances in a company because they are the ones who purchase the materials. Direct material usage variances are the responsibility of the production managers who need to make sure to make the most use out of the materials. Direct labor variances can be caused from changes in the labor market where more highly skilled workers require higher wages, etc.

Sources: Cornerstones of Cost Accounting, 1st Edition, 2011. Don R. Hansen - Oklahoma State University and Maryanne M. Mowen - Oklahoma State University. http://www.accountingformanagement.com/direct_materials_standard_and_variances.htm www.motivationalcentral.com/**kaizen**.htm