Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin
Chapter 10
Standard Costing,
Operational
Performance
Measures, and the
Balanced Scorecard

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Learning
Objective
1
Managing Costs
1-3
Standard
cost
Actual
cost
Comparison between
standard and actual
performance
level
Cost
variance
Management by Exception
1-4
Direct
Material
Managers focus on quantities and costs
that exceed standards, a practice known as
management by exception.
Type of Product Cost
A
m
o
u
n
t

Direct
Labor
Standard
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Learning
Objective
2
Setting Standards
1-6
Analysis of
Historical Data
Task
Analysis
Cost
Standards
Participation in Setting Standards
1-7
Accountants, engineers, personnel
administrators, and production managers
combine efforts to set standards based on
experience and expectations.

Perfection versus Practical
Standards: A Behavioral Issue
1-8
Should we use
practical standards
or perfection
standards?
Practical standards
should be set at levels
that are currently
attainable with
reasonable and
efficient effort.
Perfection versus Practical
Standards: A Behavioral Issue
1-9
I agree. Perfection
standards are
unattainable and
therefore discouraging
to most employees.
Use of Standards by
Service Organizations
1-10
Standard cost
analysis may be used
in any organization
with repetitive tasks.
A relationship
between tasks and
output measures
must be established.
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Learning
Objective
3
Cost Variance Analysis
1-12
Standard Cost Variances
Quantity Variance Price Variance
The difference between
the actual price and the
standard price
The difference between
the actual quantity and
the standard quantity
A General Model for Variance
Analysis
1-13
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
A General Model for Variance
Analysis
1-14
Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price
Price Variance Quantity Variance
Standard price is the amount that should
have been paid for the resources acquired.
A General Model for Variance
Analysis
1-15
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.
Standard Costs
1-16
Lets use the concepts
of the general model to
calculate standard cost
variances, starting with
direct material.
Material Variances
1-17
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.
Zippy
Material Variances
1-18
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.
Zippy
Material Variances
1-19
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.
Zippy
Material Variances
1-20
Hansons direct-material price variance (MPV)
for the week was:

a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Zippy
Material Variances
1-21
Hansons 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
Zippy
Material Variances
1-22
The standard quantity of material that
should 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.
Zippy
Material Variances
1-23
The standard quantity of material that
should 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
Zippy
Material Variances
1-24
Hansons direct-material quantity variance
(MQV) for the week was:

a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Zippy
Material Variances
1-25
Hansons 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
Zippy
Material Variances Summary
1-26
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
Price variance
$170 favorable
Quantity variance
$800 unfavorable
Material Variances
1-27
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?
Zippy
Material Variances
1-28
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.
Zippy
Material Variances
1-29
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
Material Variances
1-30
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.
Zippy
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs
- 1,500 lbs)
MQV = $800unfavor.
Isolation of Material Variances
1-31
I need the variances as soon
as possible so that I can
better identify problems
and control costs.
You accountants just dont
understand the problems
we production managers have.
Okay. Ill start computing
the price variance when
material is purchased and
the quantity variance as
soon as material is used.
Standard Costs
1-32
Now lets calculate
standard cost
variances for
direct labor.
Labor Variances
1-33
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.
Zippy
Labor Variances
1-34
What was Hansons 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.
Zippy
Labor Variances
1-35
What was Hansons 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.
Zippy
AR = $15,810 1,550
hours
AR = $10.20 per hour
Labor Variances
1-36
Hansons labor rate variance (LRV)
for the week was:

a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Zippy
Labor Variances
1-37
Hansons 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
Zippy
Labor Variances
1-38
The standard hours (SH) of labor that
should 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.
Zippy
Labor Variances
1-39
The standard hours (SH) of labor that
should 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
Labor Variances
1-40
Hansons labor efficiency variance (LEV)
for the week was:

a. $510 unfavorable.
b. $510 favorable.
c. $500 unfavorable.
d. $500 favorable.
Zippy
Labor Variances
1-41
Hansons 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
Zippy
Labor Variances Summary
1-42
Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate
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
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Learning
Objective
4
Significance of Cost Variances
1-44
1. Size of variance
1. Dollar amount
2. Percentage of standard
2. Recurring variances
3. Trends
4. Controllability
5. Favorable variances
6. Costs and benefits
of investigation
What clues help me
to determine the
variances that I should
investigate?
Statistical Control Chart
1-45
1 2 3 4 5 6 7 8 9
Variance Measurements
Favorable Limit
Unfavorable Limit
Desired Value









Warning signals for investigation
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Learning
Objective
5
Behavioral Impact of Standard
Costing
1-47
If I buy cheaper materials, my direct-
materials expenses will be lower than
what is budgeted. Then Ill get my bonus.
But we may lose customers because of
lower quality.
Controllability of Variances
1-48
Direct-Material
Price Variance
Direct-Labor
Rate Variance
Direct-Material
Quantity Variance
Direct-Labor
Efficiency Variance
Interaction among Variances
1-49
I am not responsible for
the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
time to process it.
You used too much
time because of poorly
trained workers and
poor supervision.

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Learning
Objective
6
Standard Costs and Product
Costing
1-51
Standard material and labor costs
are entered into Work-in-Process
inventory instead of actual costs.
Standard cost variances
are closed directly to
Cost of Goods Sold.
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Learning
Objective
7
Advantages of Standard Costing
1-53
Management by
Exception
Stable Product
Costs
Sensible Cost
Comparisons
Advantages
Performance
Evaluation
Employee
Motivation
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Learning
Objective
8
Criticisms of Standard Costing
1-55
Not specific
Focus on cost
minimization
Too aggregate,
too late
Disadvantages
Too much focus
on direct-labor
Narrow
definition
Stable production
required
Shorter life
cycles
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Learning
Objective
9
Operational Control Measures in Todays
Manufacturing Environment
1-57
Operational Performance Measures in
Todays Manufacturing Environment
1-58
Raw Material &
Scrap Control
Quality
Lead time
Cost of scrap
Total cost
Inventory Control
Average value
Average holding time
Ratio of inventory
value to sales
revenue
Operational Performance Measures in
Todays Manufacturing Environment
1-59
Machine Performance
Availability
Downtime
Maintenance records
Setup time
Product Quality
Warranty claims
Customer complaints
Defective products
Cost of rework
Operational Performance Measures in
Todays Manufacturing Environment
1-60
Production
Manufacturing
cycle time
Velocity
Manufacturing
cycle efficiency
Delivery
% of on-time deliveries
% of orders filled
Delivery cycle time
Operational Performance Measures in
Todays Manufacturing Environment
1-61
Productivity
Aggregate
productivity
Partial productivity
Innovation and
Learning
Percentage of sales
from new products
Cost savings from
process
improvements
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Learning
Objective
10
The Balanced Scorecard
1-63
Financial
Learning and Growth
Internal
Operations
Customer
Vision and
Strategy
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Learning
Objective
11
Use of Standard Costs
for Product Costing
1-65
Actual quantity at
standard cost
Raw-material Inventory
Unfavorable Favorable
variance variance
Direct-Material Price Variance
Actual quantity at
actual cost
Account Payable
Use of Standard Costs
for Product Costing
1-66
Unfavorable Favorable
variance variance
Direct-Material Quantity Variance
Standard quantity
at standard price
Work-in-Process Inventory
Actual quantity at
standard cost
Raw-material Inventory
Use of Standard Costs
for Product Costing
1-67
Unfavorable Favorable
variance variance
Direct-Labor Rate Variance
Actual quantity at
actual cost
Wages Payable
Standard quantity
at standard price
Work-in-Process Inventory
Unfavorable Favorable
variance variance
Direct-Labor Efficiency Variance
Use of Standard Costs
for Product Costing
1-68
Unfavorable Favorable
variance variance
Cost of Goods Sold
End of Chapter 10
1-69
Lets set the
standard a
little higher.