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Standard Costing, Operational Performance Measures, and the Balanced Scorecard

10. Chapter Ten. Standard Costing, Operational Performance Measures, and the Balanced Scorecard. Managing Costs. Standard performance level. Actual performance level. Comparison between standard and actual performance level. Cost variance. Standard Costs are . Standard Costs.

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Standard Costing, Operational Performance Measures, and the Balanced Scorecard

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

  2. Managing Costs Standardperformancelevel Actualperformancelevel Comparison between standard and actual performancelevel Costvariance

  3. Standard Costs are Standard Costs Based on carefullypredetermined amounts. Used for planning labor and material requirements. The expected levelof performance. Benchmarks formeasuring performance.

  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. Analysis ofHistorical Data TaskAnalysis Setting Standards CostStandards

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

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

  8. Perfection versus Practical Standards: A Behavioral Issue I agree. Perfection standards areunattainable and therefore discouraging to most employees.

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

  10. Variance Analysis Cycle Takecorrective actions. Identifyquestions. Receive explanations. Conduct next period’s operations. Analyze variances. Prepare standard cost performance report. Begin

  11. Standard Cost Variances Price Variance Quantity Variance The difference betweenthe actual price and thestandard price The difference betweenthe actual quantity andthe standard quantity Cost Variance Analysis

  12. 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 Price Standard Price Standard Price Price Variance Quantity Variance

  13. 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 allowed for the actual good output.

  14. Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price 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 Quantity SP = Standard PriceAP = Actual Price SQ = Standard Quantity

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

  16. 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.

  17. 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.

  18. 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.

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

  20. Zippy Material Variances Hanson’s 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

  21. 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.

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

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

  24. Zippy Material Variances Hanson’s 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

  25. 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

  26. 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

  27. 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.

  28. Zippy Price variance increases because quantity purchased increases. Price variance$280 favorable Material 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

  29. Zippy Quantity variance is unchanged because actual and standard quantities are unchanged. Quantity variance$800 unfavorable Material Variances 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

  30. 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

  31. You used too much material because of poorly trained workers and poorly maintained equipment. Also, your poor scheduling sometimes requires me to rush order material at a higher price, causing unfavorable price variances. I am not responsible for this unfavorable materialquantity variance. You purchased cheapmaterial, so my peoplehad to use more of it. Responsibility for 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. Labor Rate Variance – A Closer Look Using highly paid skilled workers toperform unskilled tasks results in anunfavorable rate variance. High skill,high rate Low skill,low rate Production managers who make work assignmentsare generally responsible for rate variances.

  44. Poorlytrainedworkers Poorqualitymaterials UnfavorableEfficiencyVariance Poorsupervisionof workers Poorlymaintainedequipment Labor Efficiency Variance –A Closer Look

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

  46. Responsibility for Labor Variances Maybe I can attribute the laborand material variances to personnel for hiring the wrong peopleand training them poorly.

  47. 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

  48. Display variations in a process and help to analyze the variationsover time. Distinguish between random variationsand variations thatshould be investigated. Provide a warning signal when variationsare beyond a specified level. A Statistical Approach ControlCharts

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

  50. Standard Costs and Product Costing Standard material and labor costsare entered into the manufacturingaccounts instead of actual costs. Standard cost variancesare closed directly toCost of Goods Sold.

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