Chap010 7e Edited

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

Chapter 10Chapter 10

Standard Costing, Operational

Performance Measures, and the

Balanced Scorecard

Standard Costing, Operational

Performance Measures, and the

Balanced Scorecard


McGraw-Hill/Irwin

Learning Objective

1

Learning Objective

1

Managing CostsManaging Costs

Standardcost

Actualcost

Comparison between standard and actual

performancelevel

Costvariance

Management by ExceptionManagement by Exception

DirectMaterial

Managers focus on quantities and coststhat exceed standards, a practice known as

management by exception.

Type of Product Cost

Am

ou

nt

DirectLabor

Standard


McGraw-Hill/Irwin

Learning Objective

2

Learning Objective

2

Setting StandardsSetting Standards

Analysis ofHistorical Data

TaskAnalysis

CostStandards

Accountants, engineers, personnel administrators, and production managers combine efforts to set standards

based on experience and expectations.

Participation in Setting StandardsParticipation in Setting Standards

Perfection versus Practical Perfection versus Practical Standards: A Behavioral IssueStandards: A Behavioral Issue

Should we usepractical standards

or perfection standards?

Practical standardsshould be set at levels

that are currentlyattainable with reasonable andefficient effort.

I agree. Perfection standards are

unattainable and therefore discouraging

to most employees.

Perfection versus Practical Perfection versus Practical Standards: A Behavioral IssueStandards: A Behavioral Issue

Use of Standards by Use of Standards by Service OrganizationsService Organizations

• Standard cost analysis may be used in any organization with repetitive tasks.

• A relationship between tasks and output measures must be established.


McGraw-Hill/Irwin

Learning Objective

3

Learning Objective

3

Standard Cost Variances

Cost Variance AnalysisCost Variance Analysis

Quantity VariancePrice Variance

The difference betweenthe actual price and the

standard price

The difference betweenthe actual quantity andthe standard quantity

A General Model for Variance A General Model for Variance Analysis Analysis

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Materials price variance Materials quantity variance Labor rate variance Labor efficiency variance Variable overhead Variable overhead spending variance efficiency variance

AQ(AP - SP) SP(AQ - SQ)

AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity




Standard price is the amount that should have been paid for the resources acquired.




Standard quantity is the quantity that should have been used.

Standard CostsStandard Costs

Let’s use the concepts

of the general model to

calculate standard cost

variances, starting with

direct material.

Hanson Inc. has the following direct material standard to manufacture one Zippy:

1.5 pounds per Zippy at $4.00 per pound

Last week 1,700 pounds of material were purchased and used to make 1,000 Zippies.

The material cost a total of $6,630.

Material VariancesMaterial Variances Zippy

What is the actual price per pound paid for the material?

a. $4.00 per pound.

b. $4.10 per pound.

c. $3.90 per pound.

d. $6.63 per pound.


What is the actual price per pound paid for the material?

a. $4.00 per pound.

b. $4.10 per pound.

c. $3.90 per pound.

d. $6.63 per pound.

AP = $6,630 ÷ 1,700 lbs.AP = $3.90 per lb.


Hanson’s direct-material price variance (MPV)for the week was:

a. $170 unfavorable.

b. $170 favorable.

c. $800 unfavorable.

d. $800 favorable.


Hanson’s direct-material price variance (MPV)for the week was:


b. $170 favorable.


d. $800 favorable. MPV = AQ(AP - SP) MPV = 1,700 lbs. × ($3.90 - 4.00) MPV = $170 Favorable


The standard quantity of material thatshould have been used to produce

1,000 Zippies is:

a. 1,700 pounds.

b. 1,500 pounds.

c. 2,550 pounds.

d. 2,000 pounds.


The standard quantity of material thatshould have been used to produce

1,000 Zippies is:

a. 1,700 pounds.

b. 1,500 pounds.

c. 2,550 pounds.

d. 2,000 pounds.

SQ = 1,000 units × 1.5 lbs per unit SQ = 1,500 lbs


Hanson’s direct-material quantity variance (MQV) for the week was:


b. $170 favorable.


d. $800 favorable.


Hanson’s direct-material quantity variance (MQV) for the week was:


b. $170 favorable.


d. $800 favorable.

MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable



1,700 lbs. 1,700 lbs. 1,500 lbs. × × × $3.90 per lb. $4.00 per lb. $4.00 per lb.

$6,630 $ 6,800 $6,000

Price variance$170 favorable

Quantity variance$800 unfavorable

Material Variances SummaryMaterial Variances Summary

The price variance is computed on the entire

quantity purchased.

The quantity variance is computed only on the

quantity used.

Hanson purchased and used 1,700 pounds.

How are the variances computed if the amount purchased differs from

the amount used?

ZippyMaterial VariancesMaterial Variances

Hanson Inc. has the following material standard to manufacture one Zippy:

1.5 pounds per Zippy at $4.00 per pound

Last week 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700 pounds were used to make 1,000

Zippies.


Material VariancesMaterial Variances

Actual Quantity Actual Quantity Purchased Purchased × × Actual Price Standard Price

2,800 lbs. 2,800 lbs. × × $3.90 per lb. $4.00 per lb.

$10,920 $11,200

Price variance$280 favorable

Price variance increases because quantity

purchased increases.

Zippy

MPV = AQ(AP - SP)MPV = 2,800 lbs. × ($3.90 - 4.00)MPV = $280 Favorable

Actual Quantity Used Standard Quantity × × Standard Price Standard Price

1,700 lbs. 1,500 lbs. × × $4.00 per lb. $4.00 per lb.

$6,800 $6,000

Quantity variance$800 unfavorable

Quantity variance is unchanged because actual and standard

quantities are unchanged.


MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs

- 1,500 lbs) MQV = $800unfavor.

Isolation of Material VariancesIsolation of Material Variances

I need the variances as soonas possible so that I canbetter identify problems

and control costs.

You accountants just don’tunderstand the problems

we production managers have.

Okay. I’ll start computingthe price variance when

material is purchased andthe quantity variance assoon as material is used.

Standard CostsStandard Costs

Now let’s calculate standard cost variances for direct labor.

Hanson Inc. has the following direct labor standard to manufacture one Zippy:

1.5 standard hours per Zippy at $10.00 per direct labor hour

Last week 1,550 direct labor hours were worked at a total labor cost of $15,810 to

make 1,000 Zippies.

Labor VariancesLabor Variances Zippy

What was Hanson’s actual rate (AR)for labor for the week?

a. $10.20 per hour.

b. $10.10 per hour.

c. $9.90 per hour.

d. $9.80 per hour.


What was Hanson’s actual rate (AR)for labor for the week?

a. $10.20 per hour.

b. $10.10 per hour.

c. $9.90 per hour.

d. $9.80 per hour.


AR = $15,810 ÷ 1,550 hours AR = $10.20 per hour

Hanson’s labor rate variance (LRV)for the week was:


b. $310 favorable.


d. $300 favorable.


Hanson’s labor rate variance (LRV)for the week was:


b. $310 favorable.


d. $300 favorable.

Labor VariancesLabor Variances

LRV = AH(AR - SR) LRV = 1,550 hrs($10.20 - $10.00) LRV = $310 unfavorable

Zippy

The standard hours (SH) of labor thatshould have been worked to produce

1,000 Zippies is:

a. 1,550 hours.

b. 1,500 hours.

c. 1,700 hours.

d. 1,800 hours.


The standard hours (SH) of labor thatshould have been worked to produce

1,000 Zippies is:

a. 1,550 hours.

b. 1,500 hours.

c. 1,700 hours.

d. 1,800 hours.


SH = 1,000 units × 1.5 hours per unit SH = 1,500 hours

Zippy

Hanson’s labor efficiency variance (LEV)for the week was:


b. $510 favorable.


d. $500 favorable.


Hanson’s labor efficiency variance (LEV)for the week was:


b. $510 favorable.


d. $500 favorable.


LEV = SR(AH - SH) LEV = $10.00(1,550 hrs - 1,500 hrs) LEV = $500 unfavorable

Zippy

Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate

Labor Variances SummaryLabor Variances Summary

Rate variance$310 unfavorable

Efficiency variance$500 unfavorable

1,550 hours 1,550 hours 1,500 hours × × ×$10.20 per hour $10.00 per hour $10.00 per hour

$15,810 $15,500 $15,000


McGraw-Hill/Irwin

Learning Objective

4

Learning Objective

4

• Size of variance– Dollar amount– Percentage of standard

• Recurring variances• Trends• Controllability• Favorable variances• Costs and benefits of

investigation

Significance of Cost VariancesSignificance of Cost Variances

What clues help me to determine the

variances that I should investigate?

Statistical Control ChartStatistical Control Chart

1 2 3 4 5 6 7 8 9

Variance Measurements

Favorable Limit

Unfavorable Limit

Desired Value • • •• •

••

••

Warning signals for investigation


McGraw-Hill/Irwin

Learning Objective

5

Learning Objective

5

If I buy cheaper materials, my direct-materials expenses will be lower than

what is budgeted. Then I’ll get my bonus. But we may lose customers because of

lower quality.

Behavioral Impact of Standard Behavioral Impact of Standard CostingCosting

Controllability of VariancesControllability of Variances

Direct-Material Price Variance

Direct-Labor Rate Variance

Direct-Material Quantity Variance

Direct-Labor Efficiency Variance

Interaction among VariancesInteraction among Variances

I am not responsible for the unfavorable labor

efficiency variance!

You purchased cheapmaterial, so it took more

time to process it.

You used too much time because of poorly

trained workers and poor supervision.


McGraw-Hill/Irwin

Learning Objective

6

Learning Objective

6

Standard Costs and Product Standard Costs and Product CostingCosting

Standard material and labor costsare entered into Work-in-Process inventory instead of actual costs.

Standard material and labor costsare entered into Work-in-Process inventory instead of actual costs.

Standard cost variancesare closed directly toCost of Goods Sold.

Standard cost variancesare closed directly toCost of Goods Sold.


McGraw-Hill/Irwin

Learning Objective

7

Learning Objective

7

Advantages of Standard CostingAdvantages of Standard Costing

Management byException

Stable Product Costs

Less Expensive

Sensible CostComparisons

Advantages

PerformanceEvaluation

EmployeeMotivation


McGraw-Hill/Irwin

Learning Objective

8

Learning Objective

8

Criticisms of Standard CostingCriticisms of Standard Costing

Not specific

Focus on cost minimization

Consistency due to automation

Too aggregate, too late

DisadvantagesToo much focus on direct-labor

Narrow definition

Stable production required

Shorter life cycles

Adapting Standard-Costing SystemsAdapting Standard-Costing Systems

Reduced focus on labor

Focus on material and overhead

Identify Cost Drivers

Shifting cost structures

Elimination of non-value added costs

Shorter product life cycles

Impact of TQM and JIT

Real-Time Information Systems

Nonfinancial Measures

Benchmarking


McGraw-Hill/Irwin

Learning Objective

9

Learning Objective

9

Operational Control Measures in Operational Control Measures in Today’s Manufacturing EnvironmentToday’s Manufacturing Environment

Operational Performance Measures in Operational Performance Measures in Today’s Manufacturing EnvironmentToday’s Manufacturing Environment

Raw Material & Scrap Control

Quality Lead timeCost of scrapTotal cost

Inventory Control Average value Average holding time Ratio of inventory

value to sales revenue

Machine Performance Availability Downtime Maintenance records Setup time

Product Quality Warranty claims Customer complaints Defective products Cost of rework



Production• Manufacturing cycle

time• Velocity• Manufacturing cycle

efficiency

Delivery• % of on-time deliveries• % of orders filled• Delivery cycle time

Productivity Aggregate

productivity Partial productivity

Innovation and Learning

Percentage of sales from new products

Cost savings from process improvements



McGraw-Hill/Irwin

Learning Objective

10

Learning Objective

10

The Balanced ScorecardThe Balanced ScorecardFinancial

Learning and Growth

Internal OperationsCustomer

Vision and

Strategy


McGraw-Hill/Irwin

Learning Objective

11

Learning Objective

11

Use of Standard CostsUse of Standard Costsfor Product Costingfor Product Costing

Actual quantity atstandard cost

Raw-material Inventory

Unfavorable Favorablevariance variance

Direct-Material Price Variance

Actual quantity atactual cost

Account Payable


Direct-Material Quantity Variance

Standard quantityat standard price

Work-in-Process Inventory


Actual quantity atstandard cost

Raw-material Inventory


Direct-Labor Rate Variance

Actual quantity atactual cost

Wages Payable

Standard quantityat standard price

Work-in-Process Inventory



Direct-Labor Efficiency Variance



Cost of Goods Sold

End of Chapter 10End of Chapter 10

Let’s set the standard alittle higher.

Chap010 7e Edited

Documents

Transcript of Chap010 7e Edited