{"id":91,"date":"2024-09-27T17:48:22","date_gmt":"2024-09-27T17:48:22","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/managerialaccounting\/chapter\/putting-it-together-standard-cost-systems\/"},"modified":"2024-10-01T18:19:54","modified_gmt":"2024-10-01T18:19:54","slug":"putting-it-together-standard-cost-systems","status":"publish","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/managerialaccounting\/chapter\/putting-it-together-standard-cost-systems\/","title":{"raw":"Putting it Together: Standard Cost Systems","rendered":"Putting it Together: Standard Cost Systems"},"content":{"raw":"Under full absorption costing, manufacturing companies determine the cost of each unit of product by accumulating the cost of direct materials, direct labor, and manufacturing overhead and dividing that by the number of units manufactured.\r\n\r\nLet\u2019s take another look at Boulevard Blanks, and look back to the budget v. actual report:\r\n
\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Boulevard Blanks\r\nPartial Income Statement\r\nFor the month ended July 31, 20XX<\/caption>\r\n
<\/th>\r\nActual<\/th>\r\nBudget<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n
Sales revenue<\/td>\r\n$\u00a0 \u00a0 \u00a0 \u00a0 178,200.00<\/td>\r\n$\u00a0 \u00a0 \u00a0 \u00a0 178,200.00<\/td>\r\n<\/tr>\r\n
Subcategory, <\/span>Variable manufacturing costs<\/strong><\/td>\r\nSingle Line<\/span><\/td>\r\nSingle Line<\/span><\/td>\r\n<\/tr>\r\n
\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct materials<\/td>\r\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 38,080.00<\/td>\r\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 38,880.00<\/td>\r\n<\/tr>\r\n
\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Labor<\/td>\r\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 46,500.00<\/td>\r\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 43,740.00<\/td>\r\n<\/tr>\r\n
\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Allocated overhead<\/td>\r\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 1,395.00<\/td>\r\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 1,944.00<\/td>\r\n<\/tr>\r\n
Subcategory, <\/span>Fixed manufacturing costs<\/strong><\/td>\r\n<\/tr>\r\n
\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Allocated overhead<\/td>\r\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 13,485.00<\/td>\r\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 13,365.00<\/td>\r\n<\/tr>\r\n
Cost of Goods Manufactured and sold<\/td>\r\nSingle Line<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 99,460.00<\/td>\r\nSingle Line<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 97,929.00<\/td>\r\n<\/tr>\r\n
Gross Profit<\/td>\r\nSingle Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 78,740.00Double line<\/span><\/td>\r\nSingle Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 80,271.00Double line<\/span><\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n \r\n\r\nWe\u2019re assuming a just-in-time inventory system here, meaning that units produced and units sold are the same. We don\u2019t have to take beginning and ending inventory into account that way, which makes our calculations simpler.\r\n\r\nOur production records show that we produced 1,620 units, and we see that the total cost of units manufactured was $99,460, so the cost per unit rounded to the nearest penny was $61.40. (99460 \/ 1620 = 61.395061728\u2026)\r\n\r\nOur budgeted cost per unit was $60.45, so our actual costs per unit were almost a dollar over budget. That may not seem like a lot, but consider that the gross profit has to cover selling, general, and administrative expenses. If those expenses run $79,000 per month, we just went from a budgeted profit to an actual loss.\r\n\r\nSee below for a summary of the six variances discussed in this module.\r\n
    \r\n \t
  • Standard Cost = SC (sometimes called Standard Price or SP)<\/li>\r\n \t
  • Standard Quantity = SQ<\/li>\r\n \t
  • Actual Cost = AC (sometimes called Actual Price or AP)<\/li>\r\n \t
  • Actual Quantity = AQ<\/li>\r\n<\/ul>\r\n
    \r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Direct materials cost variance\r\n(sometimes called the price variance)<\/td>\r\n(AC \u2013 SC) x AQ\r\nOR\r\n(AC x AQ) \u2013 (SC x AQ)\r\nWhere Quantity = raw materials used\/purchased<\/td>\r\n<\/tr>\r\n
    Direct materials efficiency variance\r\n(sometimes called the usage variance)<\/td>\r\n(AQ \u2013 SQ) x SC\r\nOR\r\n(AQ x SC) \u2013 (SQ x SC)\r\nWhere Quantity = raw materials used\/purchased<\/td>\r\n<\/tr>\r\n
    Direct labor cost variance\r\n(sometimes called the rate variance)<\/td>\r\n(AC \u2013 SC) x AQ\r\nOR\r\n(AC x AQ) \u2013 (SC x AQ)\r\nWhere Quantity = direct labor hours incurred<\/td>\r\n<\/tr>\r\n
    Direct labor efficiency variance\r\n(sometimes called the usage variance)<\/td>\r\n(AQ \u2013 SQ) x SC\r\nOR\r\n(AQ x SC) \u2013 (SQ x SC)\r\nWhere Quantity = direct labor hours incurred<\/td>\r\n<\/tr>\r\n
    Variable overhead cost variance\r\n(sometimes called the spending variance)<\/td>\r\n(AC \u2013 SC) x AQ\r\nOR\r\n(AC x AQ) \u2013 (SC x AQ)\r\nWhere Quantity = allocation base, such as direct labor hours incurred<\/td>\r\n<\/tr>\r\n
    Variable overhead efficiency variance<\/td>\r\n(AQ \u2013 SQ) x SC\r\nOR\r\n(AQ x SC) \u2013 (SQ x SC)\r\nWhere Quantity = allocation base, such as direct labor hours incurred<\/td>\r\n<\/tr>\r\n
    Fixed OH variance =<\/td>\r\nActual fixed overhead \u2013 Budgeted fixed overhead<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n \r\n\r\nRemember, variances are expressed at the absolute values, meaning we do not show negative or positive numbers. We express variances in terms of FAVORABLE or UNFAVORABLE, and negative is not always bad or unfavorable just as positive is not always good or favorable.\r\n\r\n
    Keep these in mind:\r\n
      \r\n \t
    • When actual materials are more than standard (or budgeted), we have an UNFAVORABLE variance.<\/li>\r\n \t
    • When actual materials are less than the standard, we have a FAVORABLE variance.<\/li>\r\n \t
    • The same rule applies to direct labor. If actual direct labor (either hours or dollars) is more than the standard, we have an UNFAVORABLE variance. A FAVORABLE variance occurs when actual direct labor is less than the standard.<\/li>\r\n<\/ul>\r\n<\/section> ","rendered":"

      Under full absorption costing, manufacturing companies determine the cost of each unit of product by accumulating the cost of direct materials, direct labor, and manufacturing overhead and dividing that by the number of units manufactured.<\/p>\n

      Let\u2019s take another look at Boulevard Blanks, and look back to the budget v. actual report:<\/p>\n

      \n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
      Boulevard Blanks
      \nPartial Income Statement
      \nFor the month ended July 31, 20XX<\/caption>\n
      <\/th>\nActual<\/th>\nBudget<\/th>\n<\/tr>\n<\/tbody>\n
      Sales revenue<\/td>\n$\u00a0 \u00a0 \u00a0 \u00a0 178,200.00<\/td>\n$\u00a0 \u00a0 \u00a0 \u00a0 178,200.00<\/td>\n<\/tr>\n
      Subcategory, <\/span>Variable manufacturing costs<\/strong><\/td>\nSingle Line<\/span><\/td>\nSingle Line<\/span><\/td>\n<\/tr>\n
      \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct materials<\/td>\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 38,080.00<\/td>\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 38,880.00<\/td>\n<\/tr>\n
      \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Labor<\/td>\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 46,500.00<\/td>\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 43,740.00<\/td>\n<\/tr>\n
      \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Allocated overhead<\/td>\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 1,395.00<\/td>\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 1,944.00<\/td>\n<\/tr>\n
      Subcategory, <\/span>Fixed manufacturing costs<\/strong><\/td>\n<\/tr>\n
      \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Allocated overhead<\/td>\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 13,485.00<\/td>\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 13,365.00<\/td>\n<\/tr>\n
      Cost of Goods Manufactured and sold<\/td>\nSingle Line<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 99,460.00<\/td>\nSingle Line<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 97,929.00<\/td>\n<\/tr>\n
      Gross Profit<\/td>\nSingle Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 78,740.00Double line<\/span><\/td>\nSingle Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 80,271.00Double line<\/span><\/td>\n<\/tr>\n
      <\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

       <\/p>\n

      We\u2019re assuming a just-in-time inventory system here, meaning that units produced and units sold are the same. We don\u2019t have to take beginning and ending inventory into account that way, which makes our calculations simpler.<\/p>\n

      Our production records show that we produced 1,620 units, and we see that the total cost of units manufactured was $99,460, so the cost per unit rounded to the nearest penny was $61.40. (99460 \/ 1620 = 61.395061728\u2026)<\/p>\n

      Our budgeted cost per unit was $60.45, so our actual costs per unit were almost a dollar over budget. That may not seem like a lot, but consider that the gross profit has to cover selling, general, and administrative expenses. If those expenses run $79,000 per month, we just went from a budgeted profit to an actual loss.<\/p>\n

      See below for a summary of the six variances discussed in this module.<\/p>\n

        \n
      • Standard Cost = SC (sometimes called Standard Price or SP)<\/li>\n
      • Standard Quantity = SQ<\/li>\n
      • Actual Cost = AC (sometimes called Actual Price or AP)<\/li>\n
      • Actual Quantity = AQ<\/li>\n<\/ul>\n
        \n\n\n\n\n\n\n\n\n\n
        Direct materials cost variance
        \n(sometimes called the price variance)<\/td>\n        		(AC \u2013 SC) x AQ
        \nOR
        \n(AC x AQ) \u2013 (SC x AQ)
        \nWhere Quantity = raw materials used\/purchased<\/td>\n<\/tr>\n
        Direct materials efficiency variance
        \n(sometimes called the usage variance)<\/td>\n        		(AQ \u2013 SQ) x SC
        \nOR
        \n(AQ x SC) \u2013 (SQ x SC)
        \nWhere Quantity = raw materials used\/purchased<\/td>\n<\/tr>\n
        Direct labor cost variance
        \n(sometimes called the rate variance)<\/td>\n        		(AC \u2013 SC) x AQ
        \nOR
        \n(AC x AQ) \u2013 (SC x AQ)
        \nWhere Quantity = direct labor hours incurred<\/td>\n<\/tr>\n
        Direct labor efficiency variance
        \n(sometimes called the usage variance)<\/td>\n        		(AQ \u2013 SQ) x SC
        \nOR
        \n(AQ x SC) \u2013 (SQ x SC)
        \nWhere Quantity = direct labor hours incurred<\/td>\n<\/tr>\n
        Variable overhead cost variance
        \n(sometimes called the spending variance)<\/td>\n        		(AC \u2013 SC) x AQ
        \nOR
        \n(AC x AQ) \u2013 (SC x AQ)
        \nWhere Quantity = allocation base, such as direct labor hours incurred<\/td>\n<\/tr>\n
        Variable overhead efficiency variance<\/td>\n(AQ \u2013 SQ) x SC
        \nOR
        \n(AQ x SC) \u2013 (SQ x SC)
        \nWhere Quantity = allocation base, such as direct labor hours incurred<\/td>\n<\/tr>\n
        Fixed OH variance =<\/td>\nActual fixed overhead \u2013 Budgeted fixed overhead<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

         <\/p>\n

        Remember, variances are expressed at the absolute values, meaning we do not show negative or positive numbers. We express variances in terms of FAVORABLE or UNFAVORABLE, and negative is not always bad or unfavorable just as positive is not always good or favorable.<\/p>\n

        Keep these in mind:<\/p>\n
          \n
        • When actual materials are more than standard (or budgeted), we have an UNFAVORABLE variance.<\/li>\n
        • When actual materials are less than the standard, we have a FAVORABLE variance.<\/li>\n
        • The same rule applies to direct labor. If actual direct labor (either hours or dollars) is more than the standard, we have an UNFAVORABLE variance. A FAVORABLE variance occurs when actual direct labor is less than the standard.<\/li>\n<\/ul>\n<\/section>\n

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