STANDARD COSTING AND VARIANCE ANALYSIS After the lecture, class and recommended readin !

ou should "e a"le to# • Outline the nature and $ur$ose of an o$erational control s!stem and the role of "ud ets, standards and %ariances& • E'$lain ho( standard costs are set and define "asic, ideal and currentl! attaina"le standards • Com$ile fle'i"le "ud ets and from these calculate la"our, materials o%erhead and sales %ariances and reconcile actual $rofit (ith "ud eted $rofit • Identif! the causes of %ariances and discuss the factors leadin to the decision to in%esti ate %ariances • Discuss the limitations of traditional standard costin s!stems and assess alternati%es

Essential Reading Drur! Cha$ters )*, )+ and ), -$a es .,) and .,/0 ./*1 Drur! C -)2221 3Standard costin # a techni4ue at %ariance (ith modern mana ement56, 7ana ement Accountin , No%em"er Graham C, L!all D and 8u't! A -)22*1 3Cost control# the mana ers $ers$ecti%e6 7ana ement Accountin , Octo"er 9a$lan RS and Norton D8 -*:::1 3The ;alanced Scorecard < 7easures that Dri%e 8erformance&6 =ar%ard ;usiness Re%ie(, >anuar!0?e"ruar!, $a es @)0@2& Recommended Reading Go(thor$e# Cha$ter )/ Atrill and 7cLane!, Cha$ter @

Sta es in the $lannin $rocess -Drur! *::+, $a e *,+1
)& Esta"lish o"Aecti%es

*& Identif! $otential courses of actions -i&e& strate ies1 Lon term $lannin $rocess

B& E%aluate alternati%e strate ic o$tions

.& Select alternati%e courses of action

+& Im$lement lon 0term $lan in the form of the annual "ud et

,& 7onitor actual results Annual "ud etin $rocess

@& Res$ond to di%er ences from $lan

?eed"acC control Ste$s are taCen to et o$erations "acC on tracC as soon as there is a si nal that the! ha%e one (ron -see a"o%e1 ?eed for(ard controls 8redictions are made a"out (hat could o (ron and then ste$s taCen to a%oid that outcome e& & in the $re$aration of "ud ets .

$a e B.=OD IS VARIANCE ANALYSIS CARRIED OET5 -Drur! *::+.*1 Standard cost of actual out$ut recorded for each res$onsi"ilit! centre Actual costs traced to each res$onsi"ilit! centre Standard and actual costs com$ared and %ariances anal!sed and re$orted Variances in%esti ated and correcti%e action taCen Standards monitored and adAusted to reflect chan es in standard usa e andFor $rices .

first fle' the "ud et • ?le' the "ud et for chan es in acti%it! le%el -chan es in units of out$ut1 • Calculate the differences "et(een "ud et and actual out$ut < these are termed H%ariancesI • Reconcile the ori inal "ud eted $rofit and actual $rofit Relationshi$ "et(een the "ud eted and actual $rofit -7cLane! J Atrill *::*.ud eted $rofit $lus All fa%oura"le %ariances minus All ad%erse -unfa%oura"le1 %ariances e4uals Actual $rofit .• 8re$are the "ud et usin standard costs and "ud eted $rices G# Should (e com$are the "ud eted out$ut (ith the actual out$ut to calculate the %ariances5 A# No. $a e B2/1 .

:1 Standard costin is most suited for or anisations (here the acti%ities are common or re$etiti%e& The e'am$les (e shall use (ill "e for manufacturin or anisations& . *::+.D=AT ARE STANDARD COSTS AND 8RICES5 Standard costs These are $redetermined costs& The! are tar et costs that should "e incurred under efficient o$eratin conditionsKon a $er unit "asis -Drur!. $a e B.

"ut not im$ossi"le.0B. to achie%e& Can "e set at %arious le%els of difficult!& .. so not %er! useful for control& Ideal Re$resent $erfect $erformance& standard 7inimum costs under the most s efficient o$eratin conditions& Can "e demoti%atin and unliCel! to "e used in $ractice& Currentl! attaina"le standards Costs that should "e incurred under efficient o$eratin conditions& Difficult.asic cost standards Left unchan ed o%er lon $eriods of time& =el$s to esta"lish efficienc! trends& Seldom used.@1 . $a es B. as the! do not re$resent current tar et costs.T!$es of cost standard -Drur! *::+.

:::1 -.ud eted $rofit .).:::1 -/.*+ -.Numerical E'am$le -ada$ted from Ne(man *::*.:::1 L./..B+: ../..:.::: units M L+:Funit +C $er unit M LBFC * hours M L/Fhr * hours M L)Fhr * hours M L*&+:Fhr L *::./.B+:1 -.::: Actual data for the $eriod Sales Direct materials Direct la"our Varia"le $roduction o%erheads ?i'ed $roduction o%erheads .::: -.)+: units *).*+: hours L *:+.+::1 -/..**+1 -)2.:::1 -*:.*+:C /. i nores idle time %ariances1 Ori inal "ud et data -usin standard costs1 Sales Direct materials Direct la"our Varia"le $roduction o%erheads ?i'ed $roduction o%erheads .:::1 L..ud eted $rofit .

000 +C ' .000 48.ud et -.::: units N *:.::: hours ' L/ N 64..225 19.:::C ' LB N 60..*+: hours 68.)+: units N *:.*+:C 61..::: N /.::: hours ' L) N 8.350 Direct la"our /.350 .ud eted $rofit 8.425 *)..)+: units1 +C ' ..::: ' L+: N 200.000 20.500 Varia"le $roduction o%erheads ?i'ed $roduction o%erheads .000 ?le'ed "ud et -.Ori inal .000 /.@+:C ' LB N 62.000 48.)+: units1 Variance s Actual results -.000 *hrs ' .::: units1 Sales Direct materials ..250 205..

Difference "et(een Ori inal .ud et Sales and Actual Sales N Sales Price Variance -Drur! calls this the sales mar in $rice %ariance1 .ud et 8rofit N Sales Volume Variance -Drur! calls this the sales mar in %olume %ariance1 Difference "et(een ?le'ed .ud et 8rofit and ?le'ed .

Difference "et(een 7aterial ?le'ed .ud et and Actual 7aterials N Total Direct 7aterials Variances Can "e "roCen do(n into# 7aterials 8rice Variance and 7aterials Esa e Variance Material Price Variance# Dhat did (e $a! for the 4uantit! of materials (e actuall! "ou ht com$ared to (hat (e had "ud eted for5 De "ou ht -in C 1# De $aid# De (ould ha%e e'$ected to $a!# Variance N Materials sage Variance# =o( much materials did (e use com$ared to (hat (e thou ht (e should ha%e used5 DorC this out at "ud eted costs& De used# De e'$ected to use# This is a C difference DorC this out at "ud eted cost $er C N .

Difference "et(een La"our ?le'ed "ud et and Actual Results N Direct La"our Variances Can "e "roCen do(n into# La"our Rate Variance and La"our Efficienc! Variance !a"our Rate Variance# Dhat did (e $a! for the hours (e actuall! used com$ared to (hat (e had "ud eted for5 !a"our E##icienc$ Variance# =o( much la"our did (e use com$ared to (hat (e thou ht (e should ha%e used& DorC this out at "ud eted costs& .

see Drur!& In the DorCsho$ e'am$le this %ariance is not "roCen do(n1 Difference "et(een ?i'ed O%erheads ?le'ed "ud et and Actual Results N ?i'ed O%erhead E'$enditure Variance .Difference "et(een Varia"le O%erheads ?le'ed "ud et and Actual Results N Varia"le O%erheads Variance Can "e "roCen do(n into# Varia"le O%erhead E'$enditure Variance and Varia"le O%erhead Efficienc! Variance -This "reaCdo(n is not al(a!s done. "ut the techni4ue is the same as for the la"our %ariances.

O$eratin Statement -reconciliation of $rofit1 L Ori inal "ud eted $rofit O Sales %olume %ariance N ?le'ed "ud et $rofit Sales $rice %ariance O 7aterials $rice %ariance 0 7aterials usa e %ariance 0 La"our rate %ariance O La"our efficienc! %ariance O Varia"le o%erhead e'$enditure %ariance O ?i'ed o%erhead e'$enditure %ariance N Actual $rofit ?a%oura"le ?a%oura"le Ad%erse Ad%erse ?a%oura"le ?a%oura"le ?a%oura"le .

+::1 -*./..++: *...::: Add fa%oura"le %ariances# Sales %olume %ariance 7aterials $rice %ariance La"our efficienc! %ariance Varia"le o%erhead e'$enditure %ariance ?i'ed o%erhead e'$enditure %ariance *.Or# Ori inal "ud eted $rofit .B+: .::: .:@+1 -)./..+::1 -.:: .:: @+ ).*+ Less ad%erse %ariances# Sales $rice %ariance 7aterials usa e %ariance La"our rate %ariance N Actual $rofit -*.:@+1 L.

8ER8OSES O? STANDARD COSTING -Drur! *::+./1 • 8ro%idin a $rediction of future costs that can "e used for decision0maCin $ur$oses • 8ro%idin a challen in tar et • Assistin in settin "ud ets • Actin as a control de%ice • Sim$lif!in the tasC of tracin costs to $roducts for $rofit measurement and in%entor! %aluation . $a es B.@0B.

Should %ariances al(a!s "e in%esti ated5 -7cLane! J Atrill *::*1 • Si nificant ad%erse %ariances ma! indicate a fault that could $ro%e %er! costl! • Cost0"enefit anal!sis < Cee$ insi nificant %ariances under re%ie( • Si nificant fa%oura"le %ariances should also "e in%esti ated -7cLane! J Atrill sa! H$ro"a"l!I1 Note the concentration on ad%erse %ariances in 7cLane! J Atrill -*::*1 .

ro(n -)2221 • DemsCi -)2.REASONS ?OR VARIANCES ?rom .@1 di%ided %ariances into $lannin and o$erational %ariances& Ad%ocated isolatin $ermanent chan es and maCin an Hafter the factI "ud et& • Variances should "e anal!sed as# o 8lannin -uncontrolla"le1 %ariances Arise from the difference "et(een the ori inal $lanned $erformance and the re%ised $lanned $erformance These %ariances $ro%ide a checC on forecastin sCills and also hel$ to $ro%ide a re%ised "ase for use in for(ard $lannin o O$erational -controlla"le1 %ariances Arise from efficiencies or inefficiencies "et(een tar et and actual results These %ariances $ro%ide a more rele%ant focus for mana ement control action .

and la"our rateFla"our efficienc! %ariances affect each other5 .Some e'am$les of reasons for %ariances -Drur! *::+1 • Sales %olume %ariance -ad%erse1 • Economic recession • Increase in sellin $rice • Direct materials usa e %ariance -ad%erse1 • Careless handlin of materials • Su"standard materials • 8ilfera e Consider inter$la! of %ariances < ho( mi ht materials usa eFmaterials $rice %ariance.

ro(n )2221 Sur%e! results. use of %ariance anal!sis# • 8u't! and L!all sur%e! -)2/21 0 2:PQ Drur! et al sur%e! -)22B1 0 @.STANDARD COSTING < A STATES C=EC9 -.P Current de"ate -centred on the HmodernI "usiness en%ironment1 • Rate of chan e of $roduct t!$e and desi n is s(ift • Customer demand is for s$eed! a%aila"ilit! of $roducts • 8roduct life c!cles are shorter • There are hi her 4ualit! standards .

This has chan ed the (a! "usinesses o$erate. as follo(s# • >IT s!stems allied to fle'i"le manufacturin s!stems res$ond to customer demand • TG7 $ro rammes aim at continuous im$ro%ement and effecti%e $ro%ision of %alue0 added acti%ities • Greater em$hasis on the %alue chain • Chan es to A.C and tar et costin • Im$ro%ed s$eed and fle'i"ilit! of information a%aila"ilit! e& & online information in a com$uter inte rated manufacturin en%ironment .

CRITICIS7S O? STANDARD COSTING -Drur! )222Q . effect on 4ualit!1 • 7oti%ates "eha%iour that is inconsistent (ith TG7 $hiloso$h! • O%erem$hasises the im$ortance of direct la"our • Dela! in feed"acC re$ortin • Standards are a static "ase a ainst (hich actual e%ents are measured -standards can 4uicCl! "ecome out of dateQ also see $ro"lem (ith TG7 a"o%e1 . "ulC $ )222Q 7cLane! J Atrill *::*1 • Im$act of the chan in cost structure 0 standard costin is most suited (here there are direct and %aria"le costs • Inconsistenc! (ith a >IT $hiloso$h! -su$$lier chains.

1 .• Their main o"Aecti%e is control. there are still uses for standard costin and %ariance anal!sis < for a "alanced %ie( read Graham. (ith conformance to standards and the elimination of an! %ariances < this is seen as restricti%e and inhi"itin -$ro"lem for >IT and TG7 s!stems1 • Can ha%e ad%erse effects on $erformance if the linC "et(een cost and acti%it! is not (ell understood. %ariances ma! "e out of a mana er6s control • Areas of res$onsi"ilit! ma! not ha%e clear lines of demarcation E%en (ith these criticisms. L!all and 8u't! )22* -in Room *@.

(hich has to ha$$en e%en in a TG7 en%ironment E%en (here automated in$ut of materials occurs.STANDARD COSTING < A STATES C=EC9 -continued1 Area 8lannin 8oints in fa%our of standard costin Standards ma! "e useful as "uildin "locCs for "ud etin . $erformance monitorin ma! "e enhanced "! the use of controlla"le standards Control Decision maCin 8erformance measurement . it ma! still "e rele%ant to anal!se costs of chan es from $lan E'istin standards ma! "e the startin $oint for the estimated costs of ne( $roducts Dhen $roduct mi' is sta"le.

8roduct $ricin Ese of standards can aid the construction of accurate cost estimates for $ricin & Tar et costs ma! "e com$ared (ith current standards to hi hli ht the H a$sI in costin < %alue en ineerin techni4ues mi ht then "e a$$lied 7onitorin standards o%er time can hel$ to identif! situations that are Hout of controlI -useful in TG7 en%ironments1 Im$ro%ement and chan e .

H%alue en ineerin I.. and so on& • Drur!. deals (ith alternati%e (a!s of im$ro%in $erformance& It also e'$lains some of the terminolo ! used a"o%e e& & Htar et costin I.Q 9a$lan and Norton -*:::1 • Drur!.AN ALTERNATIVE < T=E . HAust0in0timeI. as one (a! of inte ratin $erformance measurement and strate !& . Htotal 4ualit! mana ementI. H"usiness $rocess re0en ineerin I.ALANCE SCORECARD AND STRATEGIC 7ANAGE7ENT ACCOENTING Drur! Cha$ters )+ and ). Cha$ter ). introduces the "alanced scorecard. Cha$ter )+.

• 9a$lan and Norton de%ised and later refined the notion of the H"alanced scorecardI o Aim of the scorecard# to $ro%ide a com$rehensi%e frame(orC for translatin a com$an!6s strate ic o"Aecti%es into a coherent set of $erformance measures o Each or anisation must decide (hat are its critical $erformance measures < this (ill %ar! o%er time and "e linCed to the strate ! of the or anisation o 8erformance measures must "e tied to strate ies .

usiness Goals =o( do customers see us5 Customer Goals 8ers$ecti%e 7easures Inno%ation Learnin Goals And 8ers$ecti%e 7easures Can (e continue to im$ro%e and create %alue5 .alanced Scorecard ?inancial Goals 8ers$ecti%e 7easures =o( do (e looC to shareholders5 Dhat must (e e'cel at5 8ers$ecti%e 7easures .9a$lan and Norton6s .

engineering e##icienc$ 8ctual introduction sc(edule %s &lan Inno%ation and Learnin Goals 4ec(nolog$ leaders(i& Manu#acturing learning Product #ocus Manu#acturing e5cellence 6esign &roducti%it$ 4ime to mar.e$ accounts3 "usiness Ran.e) &roducts 8ers$ecti%e 7easures / o# sales #rom ne) &roducts / o# sales #rom &ro&rietar$ &roducts -n0time deli%er$ 1de#ined "$ customer2 S(are o# . $ield Silicon e##icienc$.e$ accounts .et s(are and R-E Customer Goals .e) &roduct introduction %s com&etition Res&onsi%e su&&l$ Pros&er Pre#erred su&&lier 'ustomer &artners(i& Internal . unit .ing "$ .usiness Goals 4ec(nolog$ ca&a"ilit$ 8ers$ecti%e 7easures Manu#acturing geometr$ %s7 com&etition '$cle time.9a$lan and Norton )22* < E'am$le ECI Cor$orate 7ission# HTo "e num"er one in deli%erin %alue to customersI ?inancial Goals Sur%i%e Succeed 8ers$ecti%e 7easures 'as( #lo) *uarterl$ sales gro)t( and o&erating income "$ di%ision +ncreased mar.e) &roduct introduction .um"er o# coo&erati%e engineering e##orts 8ers$ecti%e 7easures 4ime to de%elo& ne5t generation Process time to maturit$ Percent o# &roducts t(at e9ual 80/ o# sales .

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