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Chapter

10
Standard Costs and
The Balanced Scorecard
10-2

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Explain how direct materials standards and
direct labour standards are set.
2. Compute the direct materials price and quantity
variances and explain their significance.
3. Compute mix and yield variances for materials
and explain their significance.
4. Compute the direct labour rate and efficiency
variances and explain their significance.
5. Compute the variable manufacturing overhead
spending and efficiency variances.
© McGraw-Hill Ryerson Limited., 2001
10-3

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
6. Understand the advantages of and the potential
problems with using standard costs.
7. Understand how a balanced scorecard fits
together and how it supports a company’s
strategy.
8. Compute the delivery cycle time, the throughput
time and the manufacturing cycle efficiency
(MCE).
9. (Appendix 10A) Prepare journal entries to record
standard costs and variances.
10. (Appendix 10B) Explain the value of learning
curves.
© McGraw-Hill Ryerson Limited., 2001
10-4

Standard Costs

based on carefully
predetermined amounts.

used for planning labour, material


Standard and overhead requirements.
Costs are:
the expected level
of performance.

benchmarks for
measuring performance.

© McGraw-Hill Ryerson Limited., 2001


10-5

Standard Costs
Managers focus on quantities and costs
that exceed standards, a practice known as
management by exception.

Standard
Amount

Direct
Material
Direct Manufacturing
Labour Overhead

Type of Product Cost


© McGraw-Hill Ryerson Limited., 2001
10-6

Setting Standard Costs

Accountants, engineers, personnel


administrators, and production managers
combine efforts to set standards based on
experience and expectations.

© McGraw-Hill Ryerson Limited., 2001


10-7

Setting Standard Costs

Should we use
practical standards
or ideal standards?

Engineer Managerial
Accountant
© McGraw-Hill Ryerson Limited., 2001
10-8

Setting Standard Costs


Practical standards
should be set at levels
that are currently
attainable with
reasonable and
efficient effort.

Production
manager Managerial
Accountant
© McGraw-Hill Ryerson Limited., 2001
10-9

Setting Standard Costs


I agree. Ideal standards,
that are based on
perfection, are
unattainable and
discourage most
employees.

Human
Resources Managerial
Manager Accountant
© McGraw-Hill Ryerson Limited., 2001
10-10

Setting Direct Material Standards

Price Quantity
Standards Standards

Final, delivered Use product


cost of materials, design specifications.
net of discounts.

© McGraw-Hill Ryerson Limited., 2001


10-11

Setting Direct Labour Standards

Rate Time
Standards Standards

Use wage Use time and


surveys and motion studies for
labour contracts. each labour operation.

© McGraw-Hill Ryerson Limited., 2001


10-12

Setting Variable Overhead


Standards
Rate Activity
Standards Standards

The rate is the The activity is the


variable portion of the base used to calculate
predetermined overhead the predetermined
rate. overhead.

© McGraw-Hill Ryerson Limited., 2001


10-13

Standard Cost Card – Variable


Production Cost
A standard cost card for one unit of
product might look like this:

A B AxB
Standard Standard Standard
Quantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 kg. $ 4.00 per kg. $ 12.00
Direct labour 2.5 hours 14.00 per hour 35.00
Variable mfg. overhead 2.5 hours 3.00 per hour 7.50
Total standard unit cost $ 54.50

© McGraw-Hill Ryerson Limited., 2001


10-14

Standards vs. Budgets

A standard is the
expected cost for one
Are standards the unit.
same as budgets? A budget is the
expected cost for all
units.

© McGraw-Hill Ryerson Limited., 2001


10-15

Standard Cost Variances


A standard cost variance is the amount by which
an actual cost differs from the standard cost.

Standard
Product Cost

This variance is unfavourable


because the actual cost
exceeds the standard cost.

© McGraw-Hill Ryerson Limited., 2001


10-16

Standard Cost Variances


First, they point to causes of
I see that there problems and directions
is an for improvement.
unfavourable
variance. Second, they trigger
investigations in departments
But why are having responsibility
variances for incurring the costs.
important to me?

© McGraw-Hill Ryerson Limited., 2001


10-17

Variance Analysis Cycle

Take
Identify Receive
corrective
questions explanations
actions

Conduct next
Analyze
period’s
variances
operations

Begin Prepare standard


cost performance
report

© McGraw-Hill Ryerson Limited., 2001


10-18

Standard Cost Variances

Standard Cost Variances

Price Variance Quantity Variance

The difference between The difference between


the actual price and the the actual quantity and
standard price the standard quantity

© McGraw-Hill Ryerson Limited., 2001


10-19

A General Model for Variance


Analysis

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.

© McGraw-Hill Ryerson Limited., 2001


10-20

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.

© McGraw-Hill Ryerson Limited., 2001


10-21

A General Model for Variance


Analysis

Actual Quantity Actual Quantity Standard Quantity


× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

AQ(AP - SP) SP(AQ - SQ)


AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity

© McGraw-Hill Ryerson Limited., 2001


10-22

Standard Costs

Let’s use the


general model to
calculate standard
cost variances,
starting with
direct material.

© McGraw-Hill Ryerson Limited., 2001


10-23

Material Variances Example Zippy

Hanson Inc. has the following direct material


standard to manufacture one Zippy:
1.5 kilograms per Zippy at $4.00 per kilogram

Last week 1,700 kilograms of material were


purchased and used to make 1,000 Zippies.
The material cost a total of $6,630.

© McGraw-Hill Ryerson Limited., 2001


10-24

Material Variances Zippy

What
What isis the
the actual
actual price
price per
per kilogram
kilogram
paid
paid for
for the
the material?
material?
a.
a. $4.00
$4.00 per per kilogram.
kilogram.
b.
b. $4.10
$4.10 per per kilogram.
kilogram.
c.
c. $3.90
$3.90 per per kilogram.
kilogram.
d.
d. $6.63
$6.63 per per kilogram.
kilogram.

© McGraw-Hill Ryerson Limited., 2001


10-25

Material Variances Zippy

What
What isis the
the actual
actual price
price per
per kilogram
kilogram
paid
paid for
for the
the material?
material?
a.
a. $4.00
$4.00 per per kilogram.
kilogram.
b.
b. $4.10
$4.10 per per kilogram.
kilogram.
c.
c. $3.90
$3.90 per per kilogram.
kilogram.
d.
d. $6.63
$6.63 per per kilogram.
kilogram. AP = $6,630 ÷ 1,700 kg.
AP = $3.90 per kg.

© McGraw-Hill Ryerson Limited., 2001


10-26

Material Variances Zippy

Hanson’s
Hanson’s material
material price
price variance
variance (MPV)
(MPV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavourable.
unfavourable.
b.
b. $170
$170 favourable.
favourable.
c.
c. $800
$800 unfavourable.
unfavourable.
d.
d. $800
$800 favourable.
favourable.

© McGraw-Hill Ryerson Limited., 2001


10-27

Material Variances Zippy

Hanson’s
Hanson’s material
material price
price variance
variance (MPV)
(MPV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavourable.
unfavourable.
b.
b. $170
$170 favourable.
favourable.
c.
c. $800
$800 unfavourable.
unfavourable.
MPV = AQ(AP - SP)
d.
d. $800
$800 favourable.
MPV = 1,700 kg. × ($3.90 - 4.00)
favourable.
MPV = $170 Favourable

© McGraw-Hill Ryerson Limited., 2001


10-28

Material Variances Zippy

The
The standard
standard quantity
quantity of
of material
material that
that
should
should have
have been
been used
used toto produce
produce
1,000
1,000 Zippies
Zippies is:
is:
a.
a. 1,700
1,700 kilograms.
kilograms.
b.
b. 1,500
1,500 kilograms.
kilograms.
c.
c. 2,550
2,550 kilograms.
kilograms.
d.
d. 2,000
2,000 kilograms.
kilograms.

© McGraw-Hill Ryerson Limited., 2001


10-29

Material Variances Zippy

The
The standard
standard quantity
quantity ofof material
material that
that
should
should have
have been
been used
used toto produce
produce
1,000
1,000 Zippies
Zippies is:
is:
a.
a. 1,700
1,700 kilograms.
kilograms.
b.
b. 1,500
1,500 kilograms.
kilograms.
c.
c. 2,550
2,550 kilograms.
kilograms.
d. 2,000 SQ = 1,000 units × 1.5 kg per unit
kilograms.
d. 2,000 kilograms.
SQ = 1,500 kg

© McGraw-Hill Ryerson Limited., 2001


10-30

Material Variances Zippy

Hanson’s
Hanson’s material
material quantity
quantity variance
variance (MQV)
(MQV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavourable.
unfavourable.
b.
b. $170
$170 favourable.
favourable.
c.
c. $800
$800 unfavourable.
unfavourable.
d.
d. $800
$800 favourable.
favourable.

© McGraw-Hill Ryerson Limited., 2001


10-31

Material Variances Zippy

Hanson’s
Hanson’s material
material quantity
quantity variance
variance (MQV)
(MQV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavourable.
unfavourable.
b.
b. $170
$170 favourable.
favourable.
c.
c. $800
$800 unfavourable.
unfavourable.
d.
d. $800
$800 favourable.
favourable.
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 kg - 1,500 kg)
MQV = $800 unfavourable

© McGraw-Hill Ryerson Limited., 2001


10-32

Material Variances Summary Zippy

Actual Quantity Actual Quantity Standard Quantity


× × ×
Actual Price Standard Price Standard Price
1,700 kg. 1,700 kg. 1,500 kg.
× × ×
$3.90 per kg. $4.00 per kg. $4.00 per kg.
= $6,630 = $ 6,800 = $6,000

Price variance Quantity variance


$170 favourable $800 unfavourable
© McGraw-Hill Ryerson Limited., 2001
10-33

Material Variances

The price variance is


Hanson purchased and
computed on the entire
used 1,700 kilograms.
quantity purchased.
How are the variances
computed if the amount The quantity variance is
purchased differs from computed only on the
the amount used? quantity used.

© McGraw-Hill Ryerson Limited., 2001


10-34

Material Variances Continued Zippy

Hanson Inc. has the following material


standard to manufacture one Zippy:
1.5 kilograms per Zippy at $4.00 per kilogram

Last week 2,800 kilograms of material were


purchased at a total cost of $10,920, and
1,700 kilograms were used to make 1,000
Zippies.

© McGraw-Hill Ryerson Limited., 2001


10-35

Material Variances Continued Zippy

Actual Quantity Actual Quantity


Purchased Purchased
× ×
Actual Price Standard Price
2,800 kg. 2,800 kg.
× ×
$3.90 per kg. $4.00 per kg.
= $10,920 = $11,200

Price variance increases


Price variance because quantity
$280 favourable purchased increases.
© McGraw-Hill Ryerson Limited., 2001
10-36

Material Variances Continued Zippy

Actual Quantity
Used Standard Quantity
× ×
Standard Price Standard Price
1,700 kg. 1,500 kg.
× ×
$4.00 per kg. $4.00 per kg.
= $6,800 = $6,000
Quantity variance is
unchanged because
actual and standard Quantity variance
quantities are unchanged. $800 unfavourable
© McGraw-Hill Ryerson Limited., 2001
10-37

Isolation of Material Variances


I’ll start computing
I need the price variance the price variance
sooner so that I can better when material is
identify purchasing problems.
purchased rather than
You accountants just don’t when it’s used.
understand the problems that
purchasing managers have.

© McGraw-Hill Ryerson Limited., 2001


10-38

Responsibility for Material


Variances You used too much material
because of poorly trained
workers and poorly
maintained equipment.
I am not responsible for
Also, your poor scheduling
this unfavourable material
sometimes requires me to
quantity variance.
rush order material at a
You purchased cheap higher price, causing
material, so my people unfavourable price variances.
had to use more of it.

© McGraw-Hill Ryerson Limited., 2001


10-39

Standard Costs

Now let’s calculate


standard cost
variances for
direct labour.

© McGraw-Hill Ryerson Limited., 2001


10-40

Labour Variances Example Zippy

Hanson Inc. has the following direct labour


standard to manufacture one Zippy:
1.5 standard hours per Zippy at $6.00 per
direct labour hour

Last week 1,550 direct labour hours were


worked at a total labour cost of $9,610 to
make 1,000 Zippies.

© McGraw-Hill Ryerson Limited., 2001


10-41

Labour Variances Zippy

What
What waswas Hanson’s
Hanson’s actual
actual rate
rate (AR)
(AR)
for
for labour
labour for
for the
the week?
week?
a.
a. $6.20
$6.20 per
per hour.
hour.
b.
b. $6.00
$6.00 per
per hour.
hour.
c.
c. $5.80
$5.80 per
per hour.
hour.
d.
d. $5.60
$5.60 per
per hour.
hour.

© McGraw-Hill Ryerson Limited., 2001


10-42

Labour Variances Zippy

What
What waswas Hanson’s
Hanson’s actual
actual rate
rate (AR)
(AR)
for
for labour
labour for
for the
the week?
week?
a. $6.20 per hour. AR = $9,610 ÷ 1,550 hours
a. $6.20 per hour. AR = $6.20 per hour
b.
b. $6.00
$6.00 per
per hour.
hour.
c.
c. $5.80
$5.80 per
per hour.
hour.
d.
d. $5.60
$5.60 per
per hour.
hour.

© McGraw-Hill Ryerson Limited., 2001


10-43

Labour Variances Zippy

Hanson’s
Hanson’s labour
labour rate
rate variance
variance (LRV)
(LRV) for
for
the
the week
week was:
was:
a.
a. $310
$310 unfavourable.
unfavourable.
b.
b. $310
$310 favourable.
favourable.
c.
c. $300
$300 unfavourable.
unfavourable.
d.
d. $300
$300 favourable.
favourable.

© McGraw-Hill Ryerson Limited., 2001


10-44

Labour Variances Zippy

Hanson’s
Hanson’s labour
labour rate
rate variance
variance (LRV)
(LRV) for
for
the
the week
week was:
was:
a.
a. $310
$310 unfavourable.
unfavourable.
b.
b. $310
$310 favourable.
favourable.
c.
c. $300 LRV = AH(AR - SR)
$300 unfavourable.
unfavourable.
LRV = 1,550 hrs($6.20 - $6.00)
d.
d. $300
$300 favourable.
favourable.
LRV = $310 unfavourable

© McGraw-Hill Ryerson Limited., 2001


10-45

Labour Variances Zippy

The
The standard
standard hours
hours (SH)
(SH) of
of labour
labour that
that
should
should have
have been
been worked
worked to
to produce
produce
1,000
1,000 Zippies
Zippies is:
is:
a.
a. 1,550
1,550 hours.
hours.
b.
b. 1,500
1,500 hours.
hours.
c.
c. 1,700
1,700 hours.
hours.
d.
d. 1,800
1,800 hours.
hours.

© McGraw-Hill Ryerson Limited., 2001


10-46

Labour Variances Zippy

The
The standard
standard hours
hours (SH)
(SH) of
of labour
labour that
that
should
should have
have been
been worked
worked toto produce
produce
1,000
1,000 Zippies
Zippies is:
is:
a.
a. 1,550
1,550 hours.
hours.
b.
b. 1,500
1,500 hours.
hours.
c.
c. 1,700
1,700 hours.
hours.
d.
d. 1,800
1,800 hours.
hours.
SH = 1,000 units × 1.5 hours per unit
SH = 1,500 hours

© McGraw-Hill Ryerson Limited., 2001


10-47

Labour Variances Zippy

Hanson’s
Hanson’s labour
labour efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was:
was:
a.
a. $290
$290 unfavourable.
unfavourable.
b.
b. $290
$290 favourable.
favourable.
c.
c. $300
$300 unfavourable.
unfavourable.
d.
d. $300
$300 favourable.
favourable.

© McGraw-Hill Ryerson Limited., 2001


10-48

Labour Variances Zippy

Hanson’s
Hanson’s labour
labour efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was:
was:
a.
a. $290
$290 unfavourable.
unfavourable.
b.
b. $290
$290 favourable.
favourable.
c.
c. $300
$300 unfavourable.
unfavourable.
d.
d. $300
$300 favourable.
favourable.
LEV = SR(AH - SH)
LEV = $6.00(1,550 hrs - 1,500 hrs)
LEV = $300 unfavourable
© McGraw-Hill Ryerson Limited., 2001
10-49

Labour Variances Summary Zippy

Actual Hours Actual Hours Standard Hours


× × ×
Actual Rate Standard Rate Standard Rate
1,550 hours 1,550 hours 1,500 hours
× × ×
$6.20 per hour $6.00 per hour $6.00 per hour
= $9,610 = $9,300 = $9,000

Rate variance Efficiency variance


$310 unfavourable $300 unfavourable
© McGraw-Hill Ryerson Limited., 2001
10-50

Labour Rate Variance –


A Closer Look
Using highly paid skilled workers to
perform unskilled tasks results in an
unfavourable rate variance.

High skill, Low skill,


high rate low rate

Production
Production managers
managers who
who make
make workwork assignments
assignments
are
are generally
generally responsible
responsible for
for rate
rate variances.
variances.

© McGraw-Hill Ryerson Limited., 2001


10-51

Labour Efficiency Variance –


A Closer Look
Poorly Poor
trained quality
workers materials

Unfavourable
Efficiency
Variance
Poor Poorly
supervision maintained
of workers equipment
© McGraw-Hill Ryerson Limited., 2001
10-52

Responsibility for Labour


Variances

I am not responsible for


the unfavourable labour You used too much
efficiency variance! time because of poorly
trained workers and
You purchased cheap poor supervision.
material, so it took more
time to process it.

© McGraw-Hill Ryerson Limited., 2001


10-53

Responsibility for Labour


Variances

Maybe I can attribute the labour


and material variances to personnel
for hiring the wrong people
and training them poorly.

© McGraw-Hill Ryerson Limited., 2001


10-54

Standard Costs

Now let’s calculate


standard cost
variances for the
last of the variable
production costs –
variable
manufacturing
overhead.
© McGraw-Hill Ryerson Limited., 2001
10-55

Variable Manufacturing
Overhead Variances Example Zippy

Hanson Inc. has the following variable


manufacturing overhead standard to
manufacture one Zippy:
1.5 standard hours per Zippy at $3.00 per
direct labour hour

Last week 1,550 hours were worked to make


1,000 Zippies, and $5,115 was spent for
variable manufacturing overhead.

© McGraw-Hill Ryerson Limited., 2001


10-56

Variable Manufacturing
Overhead Variances Zippy

What
What waswas Hanson’s
Hanson’s actual
actual rate
rate (AR)
(AR) for
for
variable
variable manufacturing
manufacturing overhead
overhead raterate
for
for the
the week?
week?
a.
a. $3.00
$3.00 per
per hour.
hour.
b.
b. $3.19
$3.19 per
per hour.
hour.
c.
c. $3.30
$3.30 per
per hour.
hour.
d.
d. $4.50
$4.50 per
per hour.
hour.

© McGraw-Hill Ryerson Limited., 2001


10-57

Variable Manufacturing
Overhead Variances Zippy

What
What waswas Hanson’s
Hanson’s actual
actual rate
rate (AR)
(AR) for
for
variable
variable manufacturing
manufacturing overhead
overhead raterate
for
for the
the week?
week?
a.
a. $3.00
$3.00 per
per hour.
hour.
b.
b. $3.19
$3.19 per
per hour.
hour.
AR = $5,115 ÷ 1,550 hours
c. $3.30 per hour.
c. $3.30 per hour. AR = $3.30 per hour
d.
d. $4.50
$4.50 per
per hour.
hour.

© McGraw-Hill Ryerson Limited., 2001


10-58

Variable Manufacturing
Overhead Variances Zippy

Hanson’s
Hanson’s spending
spending variance
variance (SV)
(SV) for
for
variable
variable manufacturing
manufacturing overhead
overhead for
for
the
the week
week was:
was:
a.
a. $465
$465 unfavourable.
unfavourable.
b.
b. $400
$400 favourable.
favourable.
c.
c. $335
$335 unfavourable.
unfavourable.
d.
d. $300
$300 favourable.
favourable.

© McGraw-Hill Ryerson Limited., 2001


10-59

Variable Manufacturing
Overhead Variances Zippy

Hanson’s
Hanson’s spending
spending variance
variance (SV)
(SV) for
for
variable
variable manufacturing
manufacturing overhead
overhead forfor
the
the week
week was:
was:
a.
a. $465
$465 unfavourable.
unfavourable.
b.
b. $400
$400 favourable.
favourable.
SV = AH(AR - SR)
c.
c. $335
$335 unfavourable.
unfavourable.
SV = 1,550 hrs($3.30 - $3.00)
d.
d. $300
$300 favourable.SV = $465 unfavourable
favourable.

© McGraw-Hill Ryerson Limited., 2001


10-60

Variable Manufacturing
Overhead Variances Zippy

Hanson’s
Hanson’s efficiency
efficiency variance
variance (EV)
(EV) for
for
variable
variable manufacturing
manufacturing overhead
overhead for
for the
the
week
week was:
was:
a.
a. $435
$435 unfavourable.
unfavourable.
b.
b. $435
$435 favourable.
favourable.
c.
c. $150
$150 unfavourable.
unfavourable.
d.
d. $150
$150 favourable.
favourable.

© McGraw-Hill Ryerson Limited., 2001


10-61

Variable Manufacturing
Overhead Variances Zippy

Hanson’s
Hanson’s efficiency
efficiency variance
variance (EV)
(EV) for
for
variable
variable manufacturing
manufacturing overhead
overhead forfor the
the
week
week was:
was:
a.
a. $435
$435 unfavourable.
unfavourable.
b.
b. $435
$435 favourable.
favourable. 1,000 units × 1.5 hrs per unit
c.
c. $150
$150 unfavourable.
unfavourable.
d.
d. $150
$150 favourable.
favourable.
EV = SR(AH - SH)
EV = $3.00(1,550 hrs - 1,500 hrs)
EV = $150 unfavourable
© McGraw-Hill Ryerson Limited., 2001
10-62

Variable Manufacturing
Overhead Variances Zippy

Actual Hours Actual Hours Standard Hours


× × ×
Actual Rate Standard Rate Standard Rate
1,550 hours 1,550 hours 1,500 hours
× × ×
$3.30 per hour $3.00 per hour $3.00 per hour
= $5,115 = $4,650 = $4,500

Spending variance Efficiency variance


$465 unfavourable $150 unfavourable
© McGraw-Hill Ryerson Limited., 2001
10-63

Variable Manufacturing Overhead


Variances – A Closer Look

IfIf variable
variable overhead
overhead isis applied
applied on
on the
the basis
basis
of
of direct
direct labour
labour hours,
hours, the
the labour
labour efficiency
efficiency
and
and variable
variable overhead
overhead efficiency
efficiency variances
variances
will
will move
move in
in tandem.
tandem.

© McGraw-Hill Ryerson Limited., 2001


10-64

Variance Analysis and


Management by Exception

Larger variances, in
How do I know which dollar amount or as
variances to a percentage of the
investigate? standard, are
investigated first.

© McGraw-Hill Ryerson Limited., 2001


10-65

Advantages of Standard Costs

Possible reductions Management by


in production costs exception

Advantages

Improved cost control Better Information


and performance for planning and
evaluation decision making

© McGraw-Hill Ryerson Limited., 2001


10-66

Emphasis on negative Favourable variances


may impact morale. may be misinterpreted.

Potential Continuous
Standard cost Problems improvement
reports may may be more
not be timely. important than
meeting standards.

Labour quantity standards Emphasizing standards


and efficiency variances may exclude other
may not be appropriate. important objectives.

© McGraw-Hill Ryerson Limited., 2001


10-67

The Balanced Scorecard


Management
Management translates
translates its
its strategy
strategy into
into
performance
performance measures
measures that
that employees
employees
understand
understand and
and accept.
accept.

Financial Customers

Performance
measures
Internal Learning
business and growth
processes
© McGraw-Hill Ryerson Limited., 2001
10-68

The Balanced Scorecard


How do we look
to the owners?

In which internal How can we


business processes continually learn,
must we excel? grow, and improve?

How do we look
to customers?

© McGraw-Hill Ryerson Limited., 2001


10-69

The Balanced Scorecard


Learning improves
business processes.

Improved business
processes improve
customer satisfaction.

Improving customer
satisfaction improves
financial results.
© McGraw-Hill Ryerson Limited., 2001
10-70

Delivery Performance Measures


Order Production Goods
Received Started Shipped

Process Time + Inspection Time


Wait Time + Move Time + Queue Time

Throughput Time

Delivery Cycle Time

Process time is the only value-added time.

© McGraw-Hill Ryerson Limited., 2001


10-71

Delivery Performance Measures


Order Production Goods
Received Started Shipped

Process Time + Inspection Time


Wait Time + Move Time + Queue Time

Throughput Time

Delivery Cycle Time

Manufacturing
Value-added time
Cycle =
Efficiency Throughput time
© McGraw-Hill Ryerson Limited., 2001
Appendix

10A
General Ledger Entries to
Record Variances
10-73

Journal Entries - Material Variances


✒ Price variance
Dr Raw Materials
Dr Materials Price Variance (U)
Cr Materials Price Variance (F)
Cr Accounts Payable
✒ Quantity variance
Dr Work in Process
Dr Materials Quantity Variance (U)
Cr Materials Quantity Variance (F)
Cr Raw Materials
© McGraw-Hill Ryerson Limited., 2001
10-74

Journal Entries - Labour Variances


✒ Rate variance
Dr Work in Process
Dr Labour Rate Variance (U)
Cr Labour Rate Variance (F)
Cr Wages Payable
✒ Efficiency variance
Dr Work in Process
Dr Labour Efficiency Variance (U)
Cr Labour Efficiency Variance (F)
Cr Wages Payable
© McGraw-Hill Ryerson Limited., 2001
Appendix

10B
The Learning Curve
10-76

The Learning Curve

! Productivity in hours per unit will


decrease as an employee produces more
units.
! Used to set and revise standard labour
hours in a repetitive task environment.
! Used for labour intensive manufacturing.

© McGraw-Hill Ryerson Limited., 2001


10-77

End of Chapter 10

© McGraw-Hill Ryerson Limited., 2001