Tài chính kế toán - Chapter 10: Standard costs for control: direct material and direct labour

Chapter 10Standard costs for control: direct material and direct labour10-1Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithOutlineControlling costsSetting standardsCalculating standard cost variancesInvestigating significant variances and taking corrective actionBehavioural impact of standard costingCost control through assigning responsibilityStandard costs for product costing10-2Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithControlling costsBusinesses are in control when operations proceed to plan and objectives are achievedControl systems provide regular information to assist in control, which is an essential part of effective resource managementNecessary requirements for controlA predetermined or standard performance levelA measure of actual performanceA comparison between standard performance and actual performance10-3(cont.)Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith10-4Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithControlling costs (cont.)Standard costing is a part of the budgetary control systemAll control systems have three basic parts:A predetermined or standard cost is developedA standard cost is a budgeted cost of one unit of productIncludes cost of material, labour and overheadThe actual cost incurred in the product process is measuredThe actual cost is compared to the standard cost to determine a cost variance10-5Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Controlling costs (cont.)Standard cost variances are used to evaluate actual performance and control costsStandard costs can be developed for direct material, direct labour and overheads When cost variances are significant, the cause of the variance must be investigatedMay result in operations being changed to bring cost back in line with standardsManagement may reconsider whether the standard costs are appropriate benchmarks10-6Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithSetting standardsA variety of methods may be used to set cost standardsAnalysis of historical dataCan provide a good basis for predicting future costsMay need to be adjusted to reflect expected movements in price levels or technological changes in the product processMust be used with care as changes can make those costs irrelevant and can include inefficiencies of the past10-7Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Setting standards (cont.)Engineering methodsThe focus is on what the product should cost in the futureThere is a need to determine how much material should be required and how much direct labour should be used in the production processTime and motion studies may be conducted to determine how long it should take for workers to perform each step in a production processIn practice, both historical cost analysis and engineering methods may be used togetherParticipation in standard setting may lead to greater commitment to meeting those standards10-8Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Setting standards (cont.)Perfection standards reflect minimum attainable costs under nearly perfect operating conditionsAssumes peak efficiency, the lowest material and labour prices, the use of the best quality materials and no production disruptionsPerfection standardsMay motivate people to achieve the lowest cost possible, as the standard is theoretically attainable May discourage employees from working hard as the standards are unlikely to be achievedMay encourage employees to sacrifice quality to achieve low costs10-9Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Setting standards (cont.)Practical standards are the minimum attainable costs under normal operating conditions, with allowances made for downtime and wastageMay encourage more positive and productive attitudes among employees compared to perfection standardsIncluding allowances for idle time, material wastage or normal spoilage, may encourage inefficiency and wasteSome companies build continuous improvements into standards to make them more demanding10-10Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Setting standards (cont.)Benchmarking of costs may involveIdentifying companies that have the best cost performance Assessing their level of costsIdentifying the cost performance gap that needs to be closedCost standards may be formulated to achieve external performance standards over the medium to long term10-11Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithDirect material standardsStandard material quantity The total amount of direct material required to produce one unit of productStandard material priceThe total delivered cost of direct material required to produce one unit of productBased on ordering a certain quality of material in specific order quantities from a specified supplier10-12Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithDirect labour standardsStandard direct labour The number of labour hours normally needed to manufacture one unit of productsStandard labour rateThe total hourly cost of wages, including on-costsOn-costs are extra salary-related costs that all companies have to pay and are usually treated as part of the cost of labour10-13Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith10-14Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithStandard costs given actual output10-15Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithDirect material variancesDirect material price varianceA measure of the effect on cost of purchasing at a price that is different from standard = PQ(AP – SP)Where PQ = quantity purchased AP = actual price SP = standard price10-16Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Direct material variances (cont.)Sometimes the direct material price variance is calculated using the quantity of materials used in production (AQ) rather than the quantity of material purchased (PQ) = AQ(AP – SP)Where AQ = actual quantity of material used in production AP = actual price SP = standard price10-17Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Direct material variances (cont.)Direct material quantity varianceA measure of the effect on cost of using a different quantity of material in production compared with the standard quantity that should have been used for the actual production output = SP(AQ – SQ)Where SP = standard price AQ = actual quantity used SQ = standard quantity used, given actual output10-18Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith10-19Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithDirect labour variancesDirect labour rate varianceA measure of the effect on cost of paying a different labour rate, compared with standard = AH(AR – SR)Where AH = actual hours used AR = actual rate per hour SR = standard rate per hour10-20Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Direct labour variances (cont.)Direct labour efficiency varianceA measure of the effect on cost of using a different number of direct labour hours, compared with the standard hours that should have been used for the actual production output = SR(AH – SH)Where AH = actual hours used SH = standard hours allowed, given actual output SR = standard rate per hour10-21Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith10-22Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithInvestigating significant variances and taking corrective actionsManagement by exceptionOnly significant cost variances are reported and investigatedWhich variances are significant?Size of variance Recurring variancesTrends Controllability 10-23Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Investigating significant variances and taking corrective actions (cont.)Favourable variances warrant similar investigation to unfavourable variancesMay reveal efficiencies and new practices that can be used againInvestigating variances may includeTalking with managers and employees familiar with the operations to find causesWritten reports to explain significant variances and possible corrective actions10-24Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithA statistical approach to variance investigationVariances may be caused by random fluctuations which may not require correctionStatistical control charts plot standard cost variances across time and compare them with a critical value Highlight the variances which should be investigatedCritical value is a multiple of the standard deviation of the normal distribution of that cost variance10-25Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithCosts and benefits of investigationCosts includeTime spent investigating the problemDisruption to the production process due to the investigationCost of implementing corrective actions Benefits includeReduced costs if the cause of the variance is eliminatedCauses of favourable variances may improve work practicesManagement judgment and experience is used to weigh up these considerations10-26Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithBehavioural impact of standard costingStandard costing can be used to evaluate the performance of managers, employees and departmentsComparing individuals’ performance with standards or budgets can be used to determine salary increases, bonuses and promotionsThese practices can profoundly influence behaviourMotivate positive behavioursEncourage the manipulation of data and reports and dysfunctional activities and decisions10-27Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithCost control through assigning responsibilityCost control is accomplished through the efforts of individual managers and employees Managers held responsible for certain cost standardsNeed to be able to control these outcomes and be involved in setting the standardsInteractions between variances make it difficult to assign responsibility for particular variancesNot all favourable variances are desirableUnfavourable variances do not always indicate a problemSource of the variance may lie in a different area of the firm than where the variance is being reported10-28Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithStandard costs for product costingStandard costing systemAll inventories are recorded at standard costVariances are closed off at the end of the accounting periodTo cost of goods sold expenseProrate variances between WIP, FG and COGS, if significant10-29Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith10-30Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithSummaryStandard costing systems can be used for cost control, through the calculation of cost variancesCost variances can be calculated for direct material (price and quantity) and direct labour (rate and efficiency)Decision rules will guide which cost variances are significant and thus need to be investigatedVariance reporting can form part of a responsibility accounting systemStandard costs can be used for product costing purposes for external reporting10-31Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith