ACC400 Phoenix Standard Cost and Variance Analysis Matrix Assignment

THIS IS A GROUP PROJECT. I’M ONLY RESPONSIBLE FOR THE SECTIONS HIGHLIGHTED ON THE MATRIX. SO I’M NOT DOING ANY AGREEMENTS. BOTH OF MY SECTIONS ARE 2 DISAGREEMENTS EACH STATEMENT FOR A TOTAL OF 4 DISAGREEMENTS. I’VE ATTACHED THE READING AND MATRIX.Read “Standard Cost and Variance Analysis” from the Week 4 Electronic Reserve Reading list. Complete the provided Standard Cost and Variance Analysis Matrix with your Learning Team, providing at least two reasons why you agree with the author’s statements from page 17 and at least two reasons why you would disagree with the author’s statement. Each agreement/disagreement statement should be 125 words, at a minimum.


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Standard Cost and Variance Analysis
ACC/400 Version 2
University of Phoenix Material
Standard Cost and Variance Analysis
Complete this matrix by providing at least 2 reasons why you agree and 2 reasons why you disagree with each of the following author’s
statements (shown on page 17 of the article).
Support your arguments with at least 125 words for each agreement/disagreement.
Author’s Comment
I agree because…
“In the future, I
envision more
companies moving
toward actual cost
systems. Standard
cost variance analysis
will no longer be
required because
inventory transactions
will be recorded at
actual cost.”
“This change will free
up significant
resources in the
finance department
and will allow cost
analysts to function
more as business
partners within the
Copyright © 2014 by University of Phoenix. All rights reserved.
I agree because…
Standard Cost and Variance Analysis
ACC/400 Version 2
“The accounting focus
will shift from variance
analysis to
understanding the
underlying cost
structure of a product
or process,
highlighting significant
cost trends, identifying
cost reduction
opportunities and
educating operations
personnel on the
financial impact of
their day-to-day
“The analyst’s role will
become proactive
instead of reactive.”
Author’s Comment
I disagree because…
“In the future, I
envision more
companies moving
toward actual cost
systems. Standard
cost variance analysis
will no longer be
required because
inventory transactions
will be recorded at
Copyright © 2014 by University of Phoenix. All rights reserved.
I disagree because…
Standard Cost and Variance Analysis
ACC/400 Version 2
actual cost.”
“This change will free
up significant
resources in the
finance department
and will allow cost
analysts to function
more as business
partners within the
“The accounting focus
will shift from variance
analysis to
understanding the
underlying cost
structure of a product
or process,
highlighting significant
cost trends, identifying
cost reduction
opportunities and
educating operations
personnel on the
financial impact of
their day-to-day
Copyright © 2014 by University of Phoenix. All rights reserved.
Standard Cost and Variance Analysis
ACC/400 Version 2
“The analyst’s role will
become proactive
instead of reactive.”
Please proof read and submit consolidated assigment
Copyright © 2014 by University of Phoenix. All rights reserved.
Chapter I 3
Standard Cost and Variance
‘Tonifi´hi´ we will uncinpt tn aiuwcr ¡hive memphvsiral qiiestitmK: I. How did ihv imiver^e come to be?
2. Wttiit is the metmins: of life? tintt.-?. Whui ihc ItcH are staruiani costs all ahoui?”
accounting practices conducted in the early 1990s, 67 percent of the respondents used standard
cost systems.’ Moreover, 87 percent of the respondents employed the same cost system for internal and
external reporting.^
This chapter examines standard cost systems in a real-world set- ting. It covers the advantages and
disadvantages of standard cost sys316
Standard Cost and Variance Analysis 117
terns, explains the standard-setting process, and shows how to perform variance analysis. The discussion
focuses on manufacturing entities, the primary users of standard cost systems. Nevertheless, it also
contains a section on standard costs in the service sector that explains how service organizations can use
these costs.
What Are Standard Costs?
Standard costs are predetermined costs that are usually expressed on a per unit basis.^ They constitute a
carefully formulated estimate of what future costs should be, based on a desired level of productiv- ity
and process efficiency, and a set of assumptions about the operat- ing environment. The set of factors that
can affect standard costs was discussed in Chapter 10 (see Figures 10-5 and 10-6).
Standard costs generally consist of three major elements: labor, materials, and overhead. How to calculate
each cost element and perform a cost roUup was discussed in Chapter 10. These procedures do not
change under a standard cost system. However, in a standard cost system, the management team
establishes the standards of per- formance up-front, such as the amount of labor hours required, the
expected materials usage, the process yield, and normal scrap levels. These physical standards are priced
and then added together to cal- culate the standard cost of the product or service. Once the standard cost
has been established, it is typically not changed until the next standard-setting cycle.
Standard Costs as a Management Control System
Management control is the process by which managers influence other members of the organization to
implement the organizational strategies. Figure 13-1 depicts the functions of a typical management
control system.** The organization makes plans, implements these plans, and then has a mechanism to
monitor the actual results against the plan. A standard cost system is part ofthe management control
process. Other management control systems are budgets, per- formance evaluations, and quality control.
A control system operates through a repetition of five sequential steps:^
Step 1. Establish standards of performance. Standards of per- formance apply to many aspects of the
organization, such as cost,
18 Costing Principles and Systems
quality, and customer service. Cost standards typically incorporate more than one standard since they
reflect expected levels of manu- facturing performance, such as process yields, product quality, and
overhead spending levels.
Step 2. Measure actual performance. The organization measures the actual results of the process. Manual
or automated data collec- tion systems are required to gather information about the process. In a standard
cost system, the information collected usually includes labor hours, machine hours, and materials usage.
This information is generally collected on the production floor.
Step 3. Analyze performance and compare it with the standards. Once the actual results have been
measured, these are compared against the standard to identify significant deviations in the expected
performance. A standard cost variance is the difference between the actual cost and the standard cost of
a product or service. Managers and their accountants identify and analyze variances on a regular basis.
This process is called variance analysis. Variances often signal problems that may require investigation
and possible action.
Step 4. Construct and implement an action plan. This step is a critical aspect of any management control
system. In a standard cost system, tbe variance analysis will highlight potential problem areas. Then
management must identify the source of the problem and de- velop plans to correct or improve the
situation. The effectiveness of a standard cost system depends on management’s ability to act on the
information provided.
Step 5. Review and revise standards. Modern organizations are in a constant state of change. This
dynamic business environment requires that cost standards be updated periodically to reflect these
cbanges. Typically cost standards are updated at least once a year during the standard-setting process.
However, if the variances are significant, the cost standards should be revised during interim pe- riods.
Advantages and Disadvantages of Standard Costs
Standard costs have multiple uses. They provide a mechanism to control costs by monitoring actual
versus planned results. They are a basis for isolating unanticipated product costs at various points in
Standard Cost and Variance Analysis 3 1 9
Figure 13-1. The Management Control System.
Planning implementation Control
Strategy Revision
Source: Adapted from Accounting Texts and Cases (8th edition), Robert N. An- thony and james S. Reece, McGraw-Hill
Companies, 1989. Used with permission.
the manufacturing process and highlighting areas that require atten- tion.
Standard costs are also used to establish budgets. Physical stan- dards of labor and materials assist the
organization in planning the materials and capacity requirements of the firm. They are used to develop
budgeted unit costs that later become the standard costs for the next fiscal year.
Standard costs can provide a simple means to value inventory. Once standard costs are established, the
total inventory value can be easily calculated by multiplying the units in inventory at the end of an
accounting period by their respective standard costs. Inventory valuation using standard costs is not
accepted by generally accepted accounting principles (GAAP). Companies that use standard cost systems
must adjust their inventory at reasonable intervals using one of the recognized valuation methods.’^
Another use of standard costs is the determination of product profitability. By comparing the expected
selling price to the standard cost, you can understand the product’s contribution to the bottom line. This
information can assist managers in deciding their product mix and directing sales and marketing
Standard costs are used to motivate employees. They provide an incentive to achieve a tangible goal. This
use of standard cost may not be as prevalent as in the past. Manufacturing managers have physical
standards that they use to control and monitor performance on the floor. The standard cost system often
provides information that is too late and too summarized to be useful to production per- sonnel.
Finally, standard costs are said to reduce the paperwork inAppropriate Action
320 Costing Principles atid Sysiems
volved in recording inventory transactions. This statement is less true today than it was 20 or 25 years
ago. Current inventory manage- ment systems can record inventory transactions at actual cost with no
incremental paperwork or record-keeping. However, standard costs provide more direct traceability
between the physical move- ment of inventory and the values reported in the general ledger. For example,
suppose a cost analyst wanted to verify the cost of sales figure reported in the monthly income statement.
He could multiply the standard cost per unit times the number of units sold to obtain the standard cost of
sales for the period. Under an actual cost system, he would have to obtain the cost of each inventory
transaction at the time it was recorded in the general ledger and then sum all these transactions to
calculate the cost of sales. A standard cost system makes it easier to reconcile and report inventory flows
because tbe cost does not vary from period to period.
Standard cost systems have three major drawbacks. One is the lack of flexibility, hi most organizations,
standard costs are prepared once ayear.’Once set, they are rarely changed. This accounting prac- tice is in
direct conflict with current management thinking that em- phasizes flexihle processes and adaptability to
the environment.
The second major drawback is the complexity of standard cost systems. Generally these systems are not
user friendly. They are de- signed by accountants and for accountants witbout considering the needs of
manufacturing personnel. Moreover, variance analysis often adds a layer of complexity to the recordkeeping process that makes it difficult to understand and analyze cost behavior. Accoun- tants spend a
substantial amount of time and effort analyzing cost variances instead of helping line managers identify
problems and opportunities in a more timely manner.
The third drawback is that standard costs do not necessarily re- flect the actual costs incurred. If cost
variances are significant, the actual cost may be higher or lower than the standard. Cost variances,
however, are commonly reported as an aggregate number and are rarely used to calculate the actual
manufacturing cost per unit on a regular basis. Standard costs, which management uses as the basis of
many business decisions during the year, may or may not reflect
tbe actual manufacturing costs of the product.
Standard cost systems can be a valuable tool if they are properly
designed and administered by the management team in coordination with the finance department. It is
particularly appropriate for or- ganizations that operate in a stable environment and have not implemented
sophisticated computer applications to help run the
Standard Cost and Variance Analysis
business. Management control should take place on the production floor or on the service frontline, not in
the finance department. Cost analysts should spend less time analyzing cost variances and more time
helping managers understand their cost structure and how their decisions affect product or service costs.
The Standard-Setting Process
Standard setting usually occurs once a year during the budget prepa- ration process. Accountants
generally coordinate the process and are responsible for issuing the guidelines, setting due dates,
assigning responsibilities, and communicating management expectations. Fig- ure 13-2 summarizes the
steps in setting standards and who is re- sponsible for each step. The steps are in sequential order,
although some may be done in parallel with others. Some areas have joint responsibility for a task—for
example, the review of the bill of mate- rials and the routing file. This joint responsibility encourages consensus building among areas and ensures the accuracy of the information provided. In some companies
that I have visited, the engineering group reviews the labor standards and the hill of materi- als, with little
input from production personnel. This process results in lahor standards that are perceived as too tight hy
the production employees and hills of materials that do not accurately reflect what is happening on the
production floor.
Once the responsible parties have submitted all the information, the cost analyst prices the physical
standards and performs the cost rollup. She then reviews the information for reasonableness and
highlights inconsistencies, problems, or opportunities to manage- ment. The mechanics of this calculation
were discussed in detail in Chapter 10.
How to Set Standards
Physical standards of performance are the basis of standard costs. Management defines the specifications
for the quantities of lahor, material, and other services that should be consumed in the manu- facture of a
product or the delivery of a service. These physical stan- dards are priced to obtain the standard cost.
Figure 13-2. The Standard-Setting Procesa. Task
Issue calendar, management guidelines, key assumptions, and identify tasks and responsibilities
Determine new product transfers and process or product design changes
Review and update bill of materials structures
Review and update labor standards and routing file
Obtain sales or production forecasts
Issue salary guidelines Review historical cost data, pending contract negotiations, expected cost increases
8. Set raw materials standards
Budget overhead spending levels
Calculate overhead rates
Perform cost roUup
Review and analyze costs
Finalize cost standards
Materials Quantity Standards
Responsibility Accounting
Engineering/production Engineering/production Production planning
Human resources Purchasing/materials
accounting Purchasing/materials
management Production and support
departments Accounting Accounting All Accounting/all
Malerial quantity standards are based on the standard bill of materi- als (BOM), which is developed from
the product specifications. These standards identify the type of material required and the amount that
should he used to manufacture the product. There are three methods that can be used to set materials
quantity standards:«
• Engineering studies. These studies identify the best type of material for the purpose and the proper
quantity to use. They focus on finding those materials that will provide the hest combination of quantity,
production methods, quality, functionality, and cost. Many companies rely on engineering studies to set
their materials quantity standards.
Costing Principles and Systems
Standard Cost and Variance Analysis 333
• Analysis of past experience. This method considers the mate- rials consumption patterns for the same or
similar products in prior periods. The standards are based on historical data that may include an
undetermined amount of waste and excess usage. This shortcom- ing may he minimized by an arbitrary
reduction in the quantity of materials allowed to compensate for known excess usage. In contrast to the
use of engineering studies, this method does not focus on finding the best materials available that meet
manufacturing criteria. However, it is a less costly method and may he quite satisfactory depending on the
company’s business needs.
• Test runs under controlled conditions. In this method, stan- dards are defined by running tests under
conditions that can be stan- dardized and controlled. It avoids one of the principal drawbacks of the past
experience method in that external causes of variations can be isolated and eliminated during the test runs.
The physical quantity standards are converted to cost standards by multiplying the standard quantity by
the standard materials price per unit. Materials price standards should represent the expected cost of
materials for the time period covered by the standard-setting cycle.
Labor Standards
Labor standards have been used extensively to improve productivity and reduce costs. These standards
are established by determining the time required to complete an operation when working under standard
conditions. In setting lahor standards, it is important not only to time the operation but also to take into
account other factors that may influence the effectiveness with which an employee per- forms a task—for
example, the facilities layout, the condition of the equipment, the quality of the materials, and employee
There are two methods that can be used to set labor standards. The first method relies on the use of
experts, who determine what the standard should be and how it should he set. These experts can be
company employees or outside consultants. The second method relies on a variety of industrial
engineering techniques such as time and motion studies, work sampling, work activity analysis, and detailed flowcharting.^
Labor performance standards are converted to cost standards by multiplying the standard labor time by
the standard labor rate,
324 Cosiing Principles and Systems
which represents the expected cost of direct labor employees over the standards period. It is largely
determined by external factors such as labor regulations or minimum wage laws. However, a man- ager
usually has discretion over the mix of employees used in an operation and in this manner can affect the
standard labor rate for that particular operation.
Overhead Standards
The technique for setting overhead standards differs from labor and materials because the overhead
category covers a variety of costs. Some of these costs are fixed, such as building depreciation, and others
vary with the level of activity, such as electricity. The first step is to develop a budget for the indirect
costs that will be charged to the product or service. This budget is usually developed by a cost center. The
total indirect costs for each cost center are divided by a measure of activity that is then used to assign the
overhead costs to the product or service. The finance department typically determines the overhead
assignment methodology and calculates the standard overhead rate. Generally a manufacturing facility
has multiple over- head rates. Chapter 10 discussed how to calculate the overhead rate and how to use this
rate to assign indirect costs to a product (see Figures 10-8 and 10-9). Traditional standard cost systems
have used direct labor hours, machine hours, or unit volume to assig …
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