47. Labor variances are partially controllable by employees within the production department.

For example, production managers/supervisors can influence the: Deployment of highly skilled workers and less skilled workers on tasks consistent with their skill levels. Level of employee motivation within the department. Quality of production supervision. Quality of the training provided to the employees. 50. 51.

48. Labor variances are not entirely controllable by one person or department. For example: The Maintenance Department may do a poor job of maintaining production equipment. This may increase the processing time required per unit, thereby causing an unfavorable labor efficiency variance. The purchasing manager may purchase lower quality raw materials resulting in an unfavorable labor efficiency variance for the production manager. 49. Lets return to the Hanson Company and compute labor variances. The direct labor standard to produce each Zippy is one point five hours at twelve dollars per hour. Last week, it took one thousand five hundred fifty direct labor hours to produce one thousand Zippies, and the total labor cost was eighteen thousand nine hundred ten dollars. Now, we will see several questions based on the information on this screen. Again, you

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may wish to take some notes to use as you answer the questions. Also, just as you did with the material variance questions, try to answer each question before advancing to the solution. Heres your first labor variance question. We find the actual labor rate by dividing the eighteen thousand nine hundred ten dollars total labor cost by one thousand five hundred fifty direct labor hours actually worked. Now that we know the actual labor rate, lets calculate the labor rate variance. We find the labor rate variance by multiplying the actual labor hours worked times the difference between the actual rate per labor hour and the standard rate per labor hour. The three hundred ten dollars unfavorable labor rate variance results because Hanson paid twenty cents per labor hour more than standard for one thousand five hundred fifty labor hours actually worked. Heres your second labor variance question. The total standard hours for labor is the amount of time Hansons employees should have worked to make one thousand Zippies. We find the total standard hours by multiplying the one point five standard hours for one Zippy times the one thousand Zippies made. Now that we know the total standard hours, lets calculate the labor efficiency variance. We find the labor efficiency variance by multiplying the standard rate for one hour of labor times the difference between the actual hours of labor and the standard hours of labor. The six hundred dollars unfavorable labor

efficiency variance results because Hansons employees worked fifty hours more than standard to make one thousand Zippies, and each hour of labor has a standard rate of twelve dollars. 54. Here we see a summary of the labor rate and efficiency variance computations in a convenient three-column format. You may find this three-column format more helpful than the equations that we used to answer the previous two questions. 55. Now that we have studied material and labor variances, lets take a look a variable manufacturing overhead variances. We will return to Glacier Peak Outfitters to illustrate the computation of variable manufacturing spending and efficiency variances. 56. The variable manufacturing overhead spending variance, the difference between the actual total cost for variable manufacturing overhead and the total amount that should have been paid for the actual hours worked, is five hundred dollars unfavorable. The variable manufacturing overhead spending variance is unfavorable because the actual variable manufacturing overhead rate is twenty cents per hour more than the standard variable manufacturing overhead rate. The variable manufacturing overhead efficiency variance, the difference between the standard cost of the actual hours used in production and the standard cost of the hours that should have been used, is four hundred dollars unfavorable. The efficiency variance is unfavorable because the actual quantity of hours is one hundred hours more than the standard quantity of hours allowed.

57. The actual variable manufacturing overhead rate is four dollars and twenty cents per hour, computed by dividing the actual total cost for variable manufacturing overhead by the actual number of hours worked. 58. The standard quantity for labor hours is two thousand four hundred hours, computed by multiplying the standard hours for one parka times the number of parkas made. 59. Part I The equations that we have been using thus far can be factored and used to compute the variable manufacturing overhead variances. Part II We can determine the variable manufacturing overhead spending variance by multiplying the actual hours times the difference between the actual rate and the standard rate. Part III We can determine the variable manufacturing overhead efficiency variance by multiplying the standard rate times the difference between actual hours and standard hours. Now lets return to the Hanson company and compute the variable manufacturing overhead variances. 60. The variable manufacturing overhead standard to produce each Zippy is one point five hours at three dollars per hour. Last week, it took one thousand five hundred fifty hours to produce one thousand Zippies, and the total variable manufacturing overhead cost was five

thousand one hundred fifteen dollars. Now, we will see several questions based on the information on this screen. Again, you may wish to take some notes to use as you answer the questions. Also, just as you did with the material and labor variance questions, try to answer each question before advancing to the solution. 61. Heres your first variable manufacturing overhead variance question. 62. We find the actual variable manufacturing overhead rate by dividing the five thousand one hundred fifteen dollars total variable manufacturing overhead cost by one thousand five hundred fifty direct labor hours actually worked. Now that we know the actual variable manufacturing overhead rate, lets calculate the variable manufacturing overhead spending variance. We find the variable manufacturing overhead spending variance by multiplying the actual hours worked times the difference between the actual variable manufacturing overhead rate per hour and the standard variable manufacturing overhead rate per hour. The four hundred sixty-five dollars unfavorable variable manufacturing overhead rate variance results because Hansons actual variable manufacturing overhead rate per labor hour is thirty cents per hour more than the standard variable manufacturing overhead rate per hour for the one thousand five hundred fifty labor hours actually worked.

63. Heres your second variable manufacturing overhead variance question. 64. The total standard hours is the amount of time Hansons employees should have worked to make one thousand Zippies. We find the total standard hours by multiplying the one point five standard hours for one Zippy times the one thousand Zippies made. Now that we know the total standard hours, lets calculate the variable manufacturing overhead efficiency variance. We find the variable manufacturing overhead efficiency variance by multiplying the standard rate for variable manufacturing overhead times the difference between the actual hours of labor and standard hours of labor. The one hundred fifty dollars unfavorable variable manufacturing overhead efficiency variance results because Hansons employees worked fifty hours more than standard to make one thousand Zippies at a standard variable manufacturing overhead rate of three dollars per hour. 65. Just as we did with labor and material variances, we can summarize the variable manufacturing overhead variance computations in a convenient threecolumn format. You may find this threecolumn format more helpful than the equations that we used to answer the previous two questions. 66. All variances are not worth investigating. Methods for highlighting a subset of variances as exceptions include:

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Looking at the size of the variance. Looking at the size of the variance relative to the amount of spending. Plotting variance analysis data on a statistical control chart is helpful in variance investigation decisions. Variances are investigated if: They are unusual relative to the normal level of random fluctuation. An unusual pattern emerges in the data. Standard cost systems offer many advantages including: Standard costs are a key element of the management by exception approach that helps managers focus their attention on the most important issues. Standards that are viewed as reasonable by employees can serve as benchmarks that promote economy and efficiency. Standard costs can greatly simplify bookkeeping. Standard costs fit naturally into a responsibility accounting system. The use of standard costs can also present a number of problems. For example: Standard cost variance reports are usually prepared on a monthly basis and are often released days or weeks after the end of the month; hence, the information can be outdated. If variances are misused as a club to negatively reinforce employees, morale may suffer and employees may make dysfunctional decisions. Labor variances make two important assumptions. First, they assume that

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the production process is labor-paced; if labor works faster, output will go up. Second, the computations assume that labor is a variable cost. These assumptions are often invalid in todays automated manufacturing environment where employees are essentially a fixed cost. In some cases, a favorable variance can be as bad or worse than an unfavorable variance. Excessive emphasis on meeting the standards may overshadow other important objectives such as maintaining and improving quality, ontime delivery, and customer satisfaction. Just meeting standards may not be sufficient; continual improvement may be necessary to survive in a competitive environment. A balanced scorecard consists of an integrated set of performance measures that are derived from and support a companys strategy. Importantly, the measures included in a companys balanced scorecard are unique to its specific strategy. The balanced scorecard enables top management to translate its strategy into four groups of performance measures financial, customer, internal business process, and learning and growth that employees can understand and influence.

71. The premise of these four groups of measures is that learning is necessary to improve internal business processes, which in turn improves the level of

customer satisfaction, which in turn improves financial results. Note the emphasis on improvement, not just attaining some specific objective. 72. The balanced scorecard relies on nonfinancial measures in addition to financial measures for two reasons: Financial measures are lag indicators that summarize the results of past actions. Non-financial measures are leading indicators of future financial performance. Top managers are ordinarily responsible for financial performance measures not lower level managers. Non-financial measures are more likely to be understood and controlled by lower level managers. 73. While the entire organization has an overall balanced scorecard, each responsible individual should have his or her own personal scorecard as well. A personal scorecard should contain measures that can be influenced by the individual being evaluated and that support the measures in the overall balanced scorecard. 74. A balanced scorecard, whether for an individual or the company as a whole, should have measures that are linked together on a cause-and-effect basis. Each link can be read as a hypothesis in the form If we improve this performance measure, then this other performance measure should also improve. In essence, the balanced scorecard lays out a theory of how a company can take concrete actions to attain desired outcomes. If the theory proves false or the company alters its strategy, the

measures within the scorecard are subject to change. 75. Incentive compensation for employees probably should be linked to balanced scorecard performance measures. However, this should only be done after the organization has been successfully managed with the scorecard for some time perhaps a year or more. Managers must be confident that the measures are reliable, not easily manipulated, and understandable by those being evaluated with them. 76. Assume that Jaguar pursues a strategy as shown on your screen. 77. If employee skills in installing options increases, then the number of options available should increase and the time to install an option should decrease. If the number of options available increases and the time to install an option decreases, then customer satisfaction with options should increase. 78. If the customer satisfaction with options increases, then the number of cars sold should increase. 79. If the time to install an option decreases and the customer satisfaction with options increases, then the contribution per car should increase. 80. If the number of cars sold and the contribution per car increase, then the profit should increase. 81. When interpreting its performance, Jaguar will be looking for a trend of continual improvement. These trends are better identified with graphic feedback. For example:

Assume that Jaguars time to install an option performance over ten weeks is as shown on your screen It is much easier to spot trends or unusual performance if this data is presented graphically as shown. 82. Delivery cycle time is the elapsed time from when a customer order is received to when the completed order is shipped. Throughput (manufacturing cycle) time is the amount of time required to turn raw materials into completed products. This includes process time, inspection time, move time, and queue time. Process time is the only value-added activity of the four times mentioned. 83. Manufacturing cycle efficiency (MCE) is computed by dividing value-added time by manufacturing cycle (throughput) time. A manufacturing cycle efficiency less than one indicates that non-valueadded time is present in the production process. Next we will look at a series of questions dealing with delivery performance measures. 84. Heres your first question on delivery performance measures asking for a computation of throughput time. 85. Throughput time is the sum of process time, inspection time, move time, and queue time. The total for these four times is ten point four days. 86. Heres your second question on delivery performance measures asking for a computation of manufacturing cycle efficiency. 87. Manufacturing cycle efficiency is found by dividing value-added time by throughput time. Process time is the only value-

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added time. Process time of zero point two days divided by throughput time of ten point four days results in a manufacturing cycle efficiency of one point nine percent. Heres your third question on delivery performance measures asking for a computation of delivery cycle time. Delivery cycle time is the sum of wait time plus throughput time. The total for these two times is thirteen point four days. Standard costs and variance analysis can be used without formal journal entries. However, recording inventories and cost of goods sold using standard costs simplifies bookkeeping since it eliminates the need to keep track of the actual costs of each unit. We will use the information from the Glacier Peak Outfitters example earlier in the chapter to illustrate journal entries for labor and material variances. A summary of the standard cost variance computations for Glacier Peak Outfitters labor and material variances is shown on your screen. The first entry is to to record the purchase of materials. A favorable materials price variance is recorded with a credit. The second entry is to record the use of material. The use of material involves a transfer of material from the asset account raw materials inventory to the asset account work-in-process inventory. An unfavorable materials quantity variance is record with a debit. Note that the price variance is recorded at purchase, and the quantity variance is recorded sometime later as materials are used.

92. Here we see the entry for the incurrence of direct labor. Both labor variances are unfavorable and are recorded with debits. Variable manufacturing overhead variances are usually not recorded in the accounts separately, but rather are determined as part of the general analysis of overhead that is covered in the next chapter. 93. Entries into the various accounts are made at standard cost not actual cost. Differences between actual and standard costs are entered into special accounts that accumulate the various standard cost variances. Standard cost variance accounts are usually closed out to Cost of Goods Sold at the end of the period. Unfavorable variances increase Cost of Goods Sold, and favorable variances decrease Cost of Goods Sold. 94. Standards are used for both the cost and quantity of resources used in manufacturing goods or providing services. Comparing standards to actual performance results in either favorable or unfavorable variances. Variance analysis leads to better cost control and performance evaluation. A balanced scorecard consists of an integrated set of performance measures that are derived from and support a companys strategy. The balanced scorecard enables top management to translate its strategy into four groups of performance measures financial, customer, internal business process, and learning and growth that employees can understand and influence.