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Chapter 10

Chapter 10. Standard Costing, Operational Performance Measures, and the Balanced Scorecard. Learning Objective 1. Managing Costs. Standard cost. Actual cost. Comparison between standard and actual performance level. Cost variance. Management by Exception.

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Chapter 10

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  1. Chapter 10 Standard Costing, Operational Performance Measures, and the Balanced Scorecard

  2. Learning Objective1

  3. Managing Costs Standardcost Actualcost Comparison between standard and actual performancelevel Costvariance

  4. Management by Exception Managers focus on quantities and coststhat exceed standards, a practice known asmanagement by exception. Standard Amount DirectMaterial DirectLabor Type of Product Cost

  5. Learning Objective2

  6. Analysis ofHistorical Data TaskAnalysis Setting Standards CostStandards

  7. Participation in Setting Standards Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations.

  8. Practical standardsshould be set at levelsthat are currentlyattainable with reasonable and efficient effort. Perfection versus Practical Standards: A Behavioral Issue Should we usepractical standardsor perfection standards?

  9. Perfection versus Practical Standards: A Behavioral Issue I agree.Perfection standardsareunattainable and therefore discouraging to most employees.

  10. Use of Standards by Service Organizations • Standard cost analysis may be used in any organization with repetitive tasks. • A relationship between tasks and output measures must be established.

  11. Learning Objective3

  12. Price Variance The difference betweenthe actual price and thestandard price The difference betweenthe actual quantity andthe standard quantity Cost Variance Analysis Standard CostVariances QuantityVariance

  13. ActualQuantity Actual Quantity Standard Quantity × × × ActualPrice StandardPrice Standard Price Price Variance Quantity Variance Materials price variance Materials quantity varianceLabor rate variance Labor efficiency varianceVariable overhead Variable overhead spending variance efficiency variance A General Model for Variance Analysis AQ(AP - SP) SP(AQ - SQ) AQ= Actual QuantitySP= Standard PriceAP = Actual PriceSQ= Standard Quantity

  14. Standard price is the amount that should have been paid for the resources acquired. A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual PriceStandard Price Standard Price Price Variance Quantity Variance

  15. A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Standard quantity is the quantity that should have been used.

  16. Standard Costs Let’s use the concepts of the general model to calculate standard cost variances, starting withdirect material.

  17. Zippy Material Variances 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.

  18. Material 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.

  19. Zippy Material Variances 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.

  20. Material Variances Zippy Hanson’s direct-material price variance (MPV)for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.

  21. Zippy Material Variances Hanson’s direct-material price variance (MPV)for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. MPV = AQ(AP - SP) MPV = 1,700 lbs. × ($3.90 - 4.00) MPV = $170 Favorable

  22. Zippy Material Variances 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.

  23. Zippy Material Variances 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

  24. Zippy Material Variances Hanson’s direct-material quantity variance (MQV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.

  25. Zippy Material Variances Hanson’s direct-material quantity variance (MQV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable

  26. Price variance$170 favorable Quantity variance$800 unfavorable Material Variances Summary Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 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

  27. Zippy • 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? Material Variances

  28. Zippy Material 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.

  29. Zippy Price variance increases because quantitypurchased increases. Price variance$280 favorable Material Variances Actual Quantity Actual QuantityPurchased Purchased × × Actual Price Standard Price MPV = AQ(AP - SP)MPV = 2,800 lbs. × ($3.90 - 4.00)MPV = $280 Favorable 2,800 lbs. 2,800 lbs. × × $3.90 per lb. $4.00 per lb. $10,920 $11,200

  30. Zippy Quantity variance is unchanged because actual and standard quantities are unchanged. Quantity variance$800 unfavorable Material Variances Actual QuantityUsedStandard Quantity × × Standard Price Standard Price MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800unfavor. 1,700 lbs. 1,500 lbs. × × $4.00 per lb. $4.00 per lb. $6,800 $6,000

  31. 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 whenmaterial is purchased andthe quantity variance assoon as material is used. Isolation of Material Variances

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

  33. Zippy Labor Variances 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.

  34. Zippy Labor Variances 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.

  35. Zippy Labor Variances 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

  36. Zippy Labor Variances Hanson’s labor rate variance (LRV)for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable.

  37. Zippy Labor Variances Hanson’s labor rate variance (LRV)for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable. LRV = AH(AR - SR) LRV = 1,550 hrs($10.20 - $10.00) LRV = $310 unfavorable

  38. Zippy Labor Variances 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.

  39. Zippy Labor Variances 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

  40. Zippy Labor Variances Hanson’s labor efficiency variance (LEV)for the week was: a. $510 unfavorable. b. $510 favorable. c. $500 unfavorable. d. $500 favorable.

  41. Zippy Labor Variances Hanson’s labor efficiency variance (LEV)for the week was: a. $510 unfavorable. b. $510 favorable. c. $500 unfavorable. d. $500 favorable. LEV = SR(AH - SH) LEV = $10.00(1,550 hrs - 1,500 hrs) LEV = $500 unfavorable

  42. Rate variance$310 unfavorable Efficiency variance$500 unfavorable Labor Variances Summary Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 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

  43. Learning Objective4

  44. What clues help me to determine the variances that I should investigate? Significance of Cost Variances • Size of variance • Dollar amount • Percentage of standard • Recurring variances • Trends • Controllability • Favorable variances • Costs and benefits of investigation

  45. Statistical Control Chart Warning signals for investigation • • Favorable Limit • • • • • Desired Value • Unfavorable Limit • 1 2 3 4 5 6 7 8 9 Variance Measurements

  46. Learning Objective5

  47. Behavioral Impact of Standard Costing 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.

  48. Controllability of Variances Direct-Material Price Variance Direct-Material Quantity Variance Direct-Labor Rate Variance Direct-Labor Efficiency Variance

  49. You used too much time because of poorly trained workers and poor supervision. Interaction among Variances I am not responsible for the unfavorable laborefficiency variance! You purchased cheapmaterial, so it took moretime to process it.

  50. Learning Objective6

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