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
Multiple substitutable inputs
Multiple labor skills, multiple materials

Quantity (efficiency) variances can be broken down further

Mix variance Yield variance

Variance analysis
Mix variance
Mix of inputs is different than standard
Total quantity of the resource class

Difference between actual and standard proportions of the specific input

Standard price of the specific input

Variance analysis
Yield variance
Actual total quantity of inputs is different than standard
Difference between actual and standard quantity of the resource class Standard input proportion of the specific resource
Standard price of the specific input

Variance analysis
Standard Material price per unit X $ 12.00 Y 18.00 Z 32.00 Standard Proportion of quanity total 300 20.0% 450 30.0% 750 50.0% 1,500 100.0%

Material X Y Z

Actual price per unit $ 11.50 19.20 32.70

Actual Proportion of quantity total 280 17.5% 520 32.5% 800 50.0% 1,600 100.0%

Variance analysis
Material quantity variance X Actual quantity Standard quantity Difference Standard price per unit Material quantity variance 280 300 (20) $ 12.00 $ (240.00) Favorable Material Y Z Total 520 800 450 750 70 50 $ 18.00 $ 32.00 $ 1,260.00 $ 1,600.00 $ 2,620.00 Unfavorable Unfavorable Unfavorable

Variance analysis
Material mix variance X Actual input proportion Standard input proportion Difference Actual total quantity of inputs Product Standard price of input Material mix variance 17.5% 20.0% -2.5% 1,600 (40.0) $ 12.00 Material Y 32.5% 30.0% 2.5% 1,600 40.0 18.00 Z 50.0% 50.0% 0.0% 1,600 32.00 $ 240.00 Unfavorable Total

$ (480.00) $ 720.00 $ Favorable Unfavorable No variance

Variance analysis
Material yield variance X Actual total inputs Standard total inputs Difference Standard input proportion Product Standard price of input Material yield variance 1,600 1,500 100 20.0% 20.0 $ 12.00 $ Material Y 1,600 1,500 100 30.0% 30.0 18.00 $ Z 1,600 1,500 100 50.0% 50.0 32.00 Total

$ 240.00 $ 540.00 $ 1,600.00 $ 2,380.00 Unfavorable Unfavorable Unfavorable Unfavorable

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