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Chapter 17
Inventory & Control
What we will cover:
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Standard costs
Variance Analysis
Standard Cost

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A “budget” for a single unit.
A difference between standard & actual
cost is a variance.
Large variances can be investigated &
hopefully corrected.
Variances can be either
favorable or unfavorable.
Inventory Accounts are
Increased by


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Standard cost of raw materials
Standard cost of labor
Standard cost of factory overhead.
Direct Materials

Price Standard: Cost incurred to acquire
one unit of DM.
– Includes invoice cost + shipping costs.

Quantity Standard: Number of DM units
needed to produce a unit of product.
Direct Materials Variances:
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Price: (AP-SP) x AQ purchased.
Quantity: (AQ used -SQ allowed) x SP
Direct Labor

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Price (or Rate) Standard: Amount that
should be paid per direct labor hour.
Quantity Standard: Amount of time that
should be incurred to produce a
product.
Direct Labor Variances:
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Price: (AP - SP) x AQ of hours
Efficiency: (AQ - SQ allowed) x SP
Overhead:

Price standard: the predetermined OH
rates (chpt.16)
– Often have separate rates for variable and
fixed.
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Quantity standard: amount of volume
(usually DLHs) allowed for production.
– Creates a problem - if volume changes
from amt. used to determine
predetermined OH rate, you automatically
have a variance! Use Normal Activity
Overhead Variances:
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Budget Variance: Actual OH - Flex.
Budget OH
Volume Variance: Flex. Budget OH Applied OH
– Applies only to fixed OH! (Not a volume
variance for variable OH)
At end of accounting period:

Close out all variance accounts to CGS
Points:
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Variances indicate problems - some will
need attention, some will not.
Managers who have control over the
problems should take action.
Just because a variance is favorable
does not mean that all is OK!
The End