Chapter 11 – Standard Cost and Operating Performance Measures STANDARD COSTS – VARIABLE MANUFACTURING OVERHEAD VARIANCES Management by exception

– An approach that emphasizes focusing on those areas of responsibility where goals and expectations are not being met. Variable overhead efficiency variance – The difference between the actual level of activity (direct labor-hours, machine-hours, or some other base) and the standard activity allowed, multiplied by the variance part of the predetermined overhead rate. Variable overhead rate variance – The difference between the actual variable overhead cost incurred during a period and the standard cost that should have been incurred based on the actual activity of the period. Formulae: AH – actual hours AR – actual rate SR – standard rate SH – standard hours allowed for actual output Variable overhead rate variance = = (AH x AR) – (AH x SR) = AH (AR – SR) Variable overhead efficiency variance = (AH x SR) – (SH x SR) = SR (AH – SH)

OPERATING PERFORMANCE MEASURES Delivery cycle time – The elapsed time from receipt of a customer order to when the completed goods are shipped to the customer. Inspection time – The amount of time spent ensuring that the product is not defective. Manufacturing cycle efficiency (MCE) – Process (value-added) time as a percentage of throughput time. Move time – The time required to move materials or partially completed products from workstation to workstation. Process time – The amount of time work is actually done on the product. Queue time – The amount of time a product spends waiting to be worked on, to be moved, to be inspected, or to be shipped. Throughput (Manufacturing cycle) time – The amount of time required to turn raw materials into completed products. Formula: Manufacturing cycle efficiency (MCE) = Value-added time (Process time) Throughput (Manufacturing cycle) time

. and Martin Company takes all discounts. . . Information concerning the purchase and use of Echol follows: Purchase of Echol Echol is purchased in 15gallon containers at a cost of $115 per container. . .7 days Move time . . . Using the data from (1) and (2) above. . . . . . . . . . . . .6 quarts above is the actual content per bottle). . £0. . . . EXERCISE 11–1 Setting Standards. . . . . . 3. . Shipping costs. . . . . .) About 5% of all Echol used is lost through spillage or evaporation (the 7. .30 per kilogram Receiving and handling cost . makes premium handcrafted chocolate confections in London. Compute the throughput time. Determine the standard price of a kilogram of white chocolate. . . 3. . . . . . If by using Lean Production all queue time during production is eliminated. . . Use of Echol The bill of materials calls for 7. 2. Compute the manufacturing cycle effi ciency (MCE) for the quarter. . . . £0. . . . . . . . . . kilograms of white chocolate per dozen truffl es . the Empire Truffl e. Compute the standard quantity of Echol (in quarts) per salable bottle of cleaning solvent. what will be the new MCE? . 0. . . . . A discount of 2% is offered by the supplier for payment within 10 days. . What percentage of the throughput time was spent in non-value-added activities? 4. . . . Preparing a Standard Cost Card [LO1] Martin Company manufactures a powerful cleaning solvent. . . .0 days Process time . . . Compute the standard purchase price for one quart of Echol. 2. . . . . fi nest grade white chocolate . . 5.. . . . . .03 kilograms Allowance for rejects. . . 0. . . . . . . . . . .70 kilograms Allowance for waste. . . . would like to reduce the amount of time between when a customer places an order and when the order is shipped. amount to $130 for an average shipment of 100 15-gallon containers of Echol.. . . . . . Determine the standard quantity of white chocolate for a dozen truffl es. In addition. . 2. . 3. . This product is made with the fi nest white chocolate and various fi llings. . . Ltd. . . . .6 quarts of Echol per bottle of cleaning solvent. Required: 1. statistical analysis has shown that every 41st bottle is rejected at fi nal inspection because of contamination. . 5. . . The main ingredient in the solvent is a raw material called Echol. The data below pertain only to the white chocolate used in the product (the currency is stated in pounds denoted here as £): Material requirements. .0 days Required: 1. . . . . 0. Compute the delivery cycle time.02 kilogram s Purchase price. .EXERCISE 11–6 Setting Standards [LO1] Victoria Chocolates. . Determine the standard cost of the white chocolate in a dozen truffl es. . prepare a standard cost card showing the standard cost of Echol per bottle of cleaning solvent. . (Each gallon contains four quarts. .04 per kilogram Required: 1. . EXERCISE 11–5 Measures of Internal Business Process Performance [LO5] Management of Mittel Rhein AG of Köln. .50 per kilogram Purchase discount. . . . . . Germany. . . . kilograms of white chocolate per dozen truffl es . . . For the first quarter of operations during the current year the following data were reported: Inspection time . . . The owner of the company is setting up a standard cost system and has collected the following data for Standard Costs and Operating Performance Measures 479 one of the company’s products. . 2. . . . . . . .. . . 14. . which Martin Company must pay. . . . . . . .0 days Queue time . . . . . 0. .3 days Wait time (from order to start of production) . kilograms of white chocolate per dozen truffl es. . . . £7. . . 8% of purchase price Shipping cost from the supplier in Belgium . . 1. . .