Business Finance
ACC400 Phoenix Standard Cost and Variance Analysis Matrix Assignment

ACC400

University of Phoenix

Question Description

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 organization.” Copyright © 2014 by University of Phoenix. All rights reserved. I agree because… 1 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 decisions.” “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… 2 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 organization.” “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 decisions.” Copyright © 2014 by University of Phoenix. All rights reserved. 3 Standard Cost and Variance Analysis ACC/400 Version 2 Joseph Joseph “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. 4 Chapter I 3 Standard Cost and Variance Analysis 'Tonifíhí 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?" S 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 strategies. 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 Feedback 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 9. 10. 11. 12. 13. Budget overhead spending levels Calculate overhead rates Perform cost roUup Review and analyze costs Finalize cost standards Materials Quantity Standards Responsibility Accounting Engineering Engineering/production Engineering/production Production planning Human resources Purchasing/materials management/ 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 training. 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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Final Answer

Attached.

Surname 1
Name:
Instructor:
Course:
Date:
Team Matrix
The attached word document addresses the question “Team Matrix” as follows:
1. Disagrees with the statement “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.”
2. Disagrees with the statement “This change will free up significant resources in the
finance department and will allow cost analysts to function more as business partners
within the organization.”


Surname 1
Name:
Instructor:
Course:
Date:
Standard Cost and Variance Analysis

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

Copyright © 2014 by University of Phoenix. All rights reserved.

I agree because…

Surname 2

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
organization.”
“The accounting
focus will shift from
variance analysis to

Copyright © 2014 by University of Phoenix. All rights reserved.

Surname 3

understanding the
underlying cost
stru...

Voigt34 (577)
University of Maryland

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