STANDARD COST AND OPERATING PERFORMANCE MEASURES

STANDARD COST serves as yardsticks that measure achievement and lack of achievement. represent what costs should be under attainable and acceptable performance. standards establish desirable minimum costs. indicate what the cost of the time or materials should be. a standard for the future must be more than a projection of the past. Data must be adjusted for changing economic patterns, changing demand and supply characteristics and changing technology. practical standards are light but attainable. They allow normal machine breakdown, normal material loss, expected lost time, employee rest periods and can be attained through reasonable though highly efficient efforts by the average worker at a task.

MANAGING COSTSStandardcostActualcostComparison between standard and actual performancelevelCostvarianceDirectMaterialManagers focus on quantities and coststhat exceed standards, a practice known as management by exception. Type of Product CostAmountDirectLaborStandardOverheadBENEFITS OF STANDARD COSTSManagers and employees become cost conscious.They aid management planning.Standard cost systems integrate managerial, accounting and engineering functions.Using standards can save data processing costs.

LIMITATIONS OF STANDARD COSTSDifficulty may be encountered in determining which variances are material or significant.Other important information such as trends may not be noticed at an early stage.Subordinates may be tempted to cover up unfavorable exceptions or report them at all.The management by exception technique may also affect supervisory employees in an unsatisfactory manner.

Standard Cost VariancesCOST VARIANCE ANALYSISQuantity VariancePrice VarianceThe difference betweenthe actual price and thestandard priceThe difference betweenthe actual quantity andthe standard quantity1. Material Price Variance2. Labor Price Variance3. Overhead Price Variance1. Material Quantity Variance2. Labor Efficiency Variance3. Overhead Efficiency VarianceActual Quantity Actual Quantity Standard Quantity Actual Price Standard Price Standard PricePrice VarianceQuantity Variance AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity GENERAL MODEL: VARIANCE ANALYSISActual Quantity Actual Quantity Standard Quantity Actual Price Standard Price Standard PricePrice VarianceQuantity VarianceGENERAL MODEL: VARIANCE ANALYSISActual price is the amount actuallypaid for the input used.Actual Quantity Actual Quantity Standard Quantity Actual Price Standard Price Standard PricePrice VarianceQuantity VarianceGENERAL MODEL: VARIANCE ANALYSISActual quantity is the amount of directmaterials, direct labor, and variablemanufacturing overhead actually used.GENERAL MODEL: VARIANCE ANALYSISActual Quantity Actual Quantity Standard Quantity Actual Price Standard Price Standard PricePrice VarianceQuantity VarianceStandard price is the amount that should have been paid for the resources acquired.Actual Quantity Actual Quantity Standard Quantity Actual Price Standard Price Standard PricePrice VarianceQuantity VarianceStandard quantity is the quantity that should have been used. GENERAL MODEL: VARIANCE ANALYSISAnalysis ofHistorical DataTaskAnalysisCostStandardsSETTING STANDARDSSETTING STANDARDSMATERIAL STANDARD traditionally contained allowances for waste and shrinkage. Nowadays, the popular zero defect philosophy does not include these allowances.MATERIAL PRICE STANDARD based on operation schedule and bills of material. Cash discounts and handling costs should be considered.STANDARD TIME based on time reports and time and motion study.STANDARD LABOR RATE determined by considering the current rates and competitive markets.OVERHEAD STANDARDS uses budgeted rates based on standard hours or other cost drivers.

DIRECT LABOR VARIANCE ANALYSISACTUAL

AH*ARINPUTS AT STANDARD PRICEAH*SRFLEXIBLE PRODUCTION BUDGETSH*SRRATE VARIANCEEFFICIENCY VARIANCETOTAL VARIANCEwhere:AH actual hoursSR standard labor rateAR actual rateSH standard hours allowedDIRECT LABOR VARIANCE ANALYSISLABOR RATE VARIANCE LRV=(ALR-SLR)*AH

LABOR EFFICIENCY OR TIME VARIANCELE=(AH-SR)*SLRwhere:AH actual hoursSLR standard labor rateALR actual rateSH standard hours allowedDIRECT LABOR VARIANCE ANALYSISLABOR EFFICIENCY VARIANCELEV=(AH*SLR)-(SHAI*SLR)

LABOR YIELD VARIANCELYV=(SHAI*SLR)-(SHAO*SLR)where:SHAI standard based on actual input SLR standard labor rateSHAO standard based on actual outputwhere:AH actual hoursSLR standard labor rateSHAI standard based on actual inputif different materials are usedPOSSIBLE CAUSES OF LABOR RATE VARIANCEInexperience workers hired.Change in labor rate particularly peak seasonUse of an employee having wage classification other than that assumed.Use of a greater number of higher paid employees in the group than anticipated.

RESPONSIBILITYProduction line supervisorsPersonnel DepartmentPOSSIBLE CAUSES OF LABOR EFFICIENCY VARIANCEGood or poor training of workers.Poor materials or faulty equipment.Good or poor supervision of work.Experience or lack of experience on the job.Insufficient equipmentMachine breakdownNon-standard materials being used

RESPONSIBILITYProduction line supervisorsProduction Planning DepartmentPurchasing DevelopmentDIRECT MATERIAL VARIANCE ANALYSISACTUAL

AQ*APINPUTS AT STANDARD PRICEAQ*SPFLEXIBLE PRODUCTION BUDGETSQ*SPPRICE VARIANCEQUANTITY VARIANCETOTAL VARIANCEwhere:AQ actual quantitySP standard priceAP actual priceSQ standard quantityDIRECT MATERIAL VARIANCE ANALYSISMATERIAL PRICE VARIANCE MPV=(AP-SP)*AQP

MATERIAL QUANTITY VARIANCEMQV=(AQ-SQ)*SPwhere:AP actual priceSP standard priceAQP actual quantity purchasedSQ standard material quantityAQ actual quantityDIRECT MATERIAL VARIANCE ANALYSISMATERIAL MIX VARIANCEMMV=(AQ*SP)-(TAI*ASP)

MATERIAL YIELD VARIANCEMYV=(TAI*ASP)-(SQ*SP)where:TAI total actual input ASP average standard priceSQ standard quantitySP standard pricewhere:AQ actual quantitySP standard price per materialTAI total actual inputASP average standard priceif different materials are usedPOSSIBLE CAUSES OF MATERIAL PRICE VARIANCEFluctuations in market prices of materialsPurchasing from distant suppliersFailure to take cash discounts availablePurchasing materials of substandard quality or in uneconomical lotsUnfavorable purchase contract terms

RESPONSIBILITYPurchasing DepartmentProduction Planning DepartmentPOSSIBLE CAUSES OF MATERIAL QUANTITY OR USAGE VARIANCEWaste and loss of material in handling and processing.Substitution of defective nonstandard materials.Spoilage or production of excess scrapLack of proper tools or machinesVariation in yields from materials

RESPONSIBILITYProduction line supervisorsVARIABLE OVERHEAD VARIANCE ANALYSISACTUALVARIABLE OVERHEADINPUTS AT STANDARD PRICEAH*SVORFLEXIBLE PRODUCTION BUDGETSH*SVORSPENDING VARIANCEEFFICIENCY VARIANCETOTAL VARIANCEwhere:AH actual hoursSVOR standard variable overhead rateSH standard hoursVARIABLE OVERHEAD VARIANCE ANALYSISVARIABLE OVERHEAD SPENDING VARIANCE VOSV=AVOH-(AH*SVOR)

VARIABLE OVERHEAD EFFICIENCY VARIANCEVOEV=(AH-SH)*SVORwhere:AH actual hoursSH standard hoursAVOH actual variable overheadSVOR standard VORPOSSIBLE CAUSES OF VARIABLE OVERHEAD SPENDING VARIANCEActual costs were different from those expected.Increase in energy cost.Waste in using supplies.Avoidable machine breakdownsWrong grade of indirect material and indirect laborLack of operators or tools

RESPONSIBILITYSupervisors of cost centersPOSSIBLE CAUSES OF VARIABLE OVERHEAD EFFICIENCY VARIANCEAttributable to efficiency in using the base on which variable overhead is applied.

RESPONSIBILITYProduction line supervisorsPOSSIBLE CAUSES OF CAPACITY OR VOLUME VARIANCE (FIXED OVERHEAD)Poor production schedulingUnusual machine breakdownsStorms or strikesFluctuations over timeDecrease in customer demandExcess plant capacityShortage of skilled workersRESPONSIBILITYProduction line supervisorsTop sales executivesTop management