ACC585ARes Chap 10

Chapter 10
Standard Costing,
Operational
Performance
Measures, and the
Balanced Scorecard
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning
Objective
1
10-2
Managing Costs
Standard Actual
cost cost
Comparison between
standard and actual
performance
level
Cost
variance
10-3
Management by Exception
Managers focus on quantities and costs
that exceed standards, a practice known as
management by exception.
Standard
Amount
Direct
Material
Direct
Labor
Type of Product Cost

10-4
Learning
Objective
2
10-5
Setting Standards
Cost
Standards
Analysis of Task
Historical Data Analysis
10-6
Participation in Setting Standards
Accountants, engineers, personnel administrators, and
production managers combine efforts to set standards
based on experience and expectations.
10-7
Perfection versus Practical
Standards: A Behavioral Issue
Practical standards
should be set at levels
that are currently
attainable with
Should we use reasonable and
practical standards efficient effort.
or perfection
standards?
10-8
Perfection versus Practical
Standards: A Behavioral Issue
I agree. Perfection
standards are
unattainable and
therefore discouraging
to most employees.
10-9
Use of Standards by
Service Organizations
• Standard cost
analysis may be used
in any organization
with repetitive tasks.
• A relationship
between tasks and
output measures
must be established.
10-10
Learning
Objective
3
10-11
Cost Variance Analysis
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
10-12
A General Model for Variance
Analysis
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
AQ(AP
Materials price- SP)
variance SP(AQ
Materials - SQ)
quantity variance
Labor rate variance Labor efficiency variance
AQ =Variable
Actual overhead
Quantity SP = Standard
Variable overheadPrice
AP =spending
Actual Price
variance SQ = Standard
efficiency Quantity
variance
10-13
Analysis
× × ×
Standard price is the amount that should

have been paid for the resources acquired.
10-14
Analysis
× × ×
Standard quantity is the quantity that should

have been used.
10-15
Standard Costs
Let’s use the concepts

of the general model to
calculate standard cost
variances, starting with
direct material.
10-16
Material Variances Zippy
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.
10-17
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.
10-18
What is the actual price per pound

paid for the material?
a. $4.00 per pound.

b. $4.10 per pound.
AP = $6,630 ÷ 1,700 lbs.
c. $3.90 per pound.
AP = $3.90 per lb.
d. $6.63 per pound.
10-19
Hanson’s direct-material price variance (MPV)

for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
10-20
Hanson’s direct-material price variance (MPV)

for the week was:
b. $170 favorable.
MPV = AQ(AP - SP)
d. $800 favorable. MPV = 1,700 lbs. × ($3.90 - 4.00)
MPV = $170 Favorable
10-21
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.
10-22
The standard quantity of material that

should have been used to produce
1,000 Zippies is:
SQ = 1,000 units × 1.5 lbs per unit
SQ = 1,500 lbs
a. 1,700 pounds.
b. 1,500 pounds.
c. 2,550 pounds.
d. 2,000 pounds.
10-23
Hanson’s direct-material quantity variance

(MQV) for the week was:
b. $170 favorable.
d. $800 favorable.
10-24
Hanson’s direct-material quantity variance

(MQV) for the week was:
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs - 1,500 lbs)
MQV = $800 unfavorable
b. $170 favorable.
d. $800 favorable.
10-25
Material Variances Summary

× × ×
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 Quantity variance

$170 favorable $800 unfavorable
10-26
Hanson purchased and The price variance is

used 1,700 pounds. computed on the entire
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.
10-27
Hanson Inc. has the following material

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.
10-28
Actual Quantity Actual Quantity

Purchased Purchased
× × MPV = AQ(AP - SP)
Actual Price Standard Price
MPV = 2,800 lbs.
2,800 lbs. 2,800 lbs. ×
× × ($3.90 - 4.00)
$3.90 per lb. $4.00 per lb. MPV = $280
Favorable
$10,920 $11,200
Price variance increases

Price variance because quantity
$280 favorable purchased increases.
10-29
Actual Quantity
Used Standard Quantity
× ×
MQV = SP(AQ - SQ) Standard Price Standard Price
MQV = $4.00(1,700 lbs
- 1,500 lbs) 1,700 lbs. 1,500 lbs.
MQV = $800unfavor. × ×
$4.00 per lb. $4.00 per lb.
$6,800 $6,000
Quantity variance is
unchanged because
actual and standard Quantity variance
quantities are unchanged. $800 unfavorable
10-30
Isolation of Material Variances
I need the variances as soon
as possible so that I can
better identify problems Okay. I’ll start computing
and control costs. the price variance when
You accountants just don’t material is purchased and
understand the problems the quantity variance as
we production managers have. soon as material is used.
10-31
Standard Costs
Now let’s calculate

standard cost
variances for
direct labor.
10-32
Labor Variances Zippy
Hanson Inc. has the following direct labor

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.
10-33
What was Hanson’s 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.
10-34
What was Hanson’s actual rate (AR)

for labor for the week?
a. $10.20 per hour.

b. $10.10 per hour.
AR = $15,810 ÷ 1,550 hours
c. $9.90 per hour. AR = $10.20 per hour
d. $9.80 per hour.
10-35
Hanson’s labor rate variance (LRV)

for the week was:
b. $310 favorable.
d. $300 favorable.
10-36
Hanson’s labor rate variance (LRV)

for the week was:
b. $310 favorable.
LRV = AH(AR - SR)
LRV = 1,550 hrs($10.20 - $10.00)
d. $300 favorable. LRV = $310 unfavorable
10-37
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.
10-38
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.
SH = 1,000 units × 1.5 hours per unit
d. SH = 1,500 hours
1,800 hours.
10-39
Hanson’s labor efficiency variance (LEV)

for the week was:
b. $510 favorable.
d. $500 favorable.
10-40
Hanson’s labor efficiency variance (LEV)

for the week was:
LEV = SR(AH - SH)
LEV = $10.00(1,550 hrs - 1,500 hrs)
LEV = $500 unfavorable
b. $510 favorable.
d. $500 favorable.
10-41
Labor Variances Summary
Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
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
Rate variance Efficiency variance

$310 unfavorable $500 unfavorable
10-42
Learning
Objective
4
10-43
Significance of Cost Variances
1. Size of variance
1. Dollar amount
2. Percentage of standard
2. Recurring variances
3. Trends
4. Controllability
What clues help me 5. Favorable variances
to determine the 6. Costs and benefits of
variances that I should
investigate?
investigation
10-44
Statistical Control Chart
Warning signals for investigation
Favorable Limit
• •
• • •
Desired Value
• •
Unfavorable Limit •
•
1 2 3 4 5 6 7 8 9
Variance Measurements
10-45
Learning
Objective
5
10-46
Behavioral Impact of Standard
Costing
If I buy cheaper materials, my direct-
materials expenses will be lower than
what is budgeted. Then I’ll get my bonus.
But we may lose customers because of
lower quality.
10-47
Controllability of Variances
Direct-Material Direct-Material
Direct-Labor Direct-Labor
Rate Variance Efficiency Variance
10-48
Interaction among Variances
I am not responsible for

the unfavorable labor 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.
10-49
Learning
Objective
6
10-50
Standard Costs and Product
Costing
Standard
Standard material
material and
and labor
labor costs
costs
are
are entered
entered into
into Work-in-Process
Work-in-Process
inventory
inventory instead
instead of
of actual
actual costs.
costs.
Standard
Standard cost
cost variances
variances
are
are closed
closed directly
directly to
to
Cost
Cost of
of Goods
Goods Sold.
Sold.
10-51
Learning
Objective
7
10-52
Advantages of Standard Costing
Sensible Cost Management by
Comparisons Exception
Performance Employee
Evaluation Motivation
Advantages
Stable Product
Costs
10-53
Learning
Objective
8
10-54
Criticisms of Standard Costing
Too aggregate, Not specific
too late
Too much focus Disadvantages Stable production

on direct-labor required
Shorter life Narrow

cycles definition
Focus on cost
minimization
10-55
Learning
Objective
9
10-56
Operational Control Measures in
Today’s Manufacturing Environment
10-57
Operational Performance Measures in
Raw Material & Inventory Control
Scrap Control  Average value
Quality  Average holding time
Lead time  Ratio of inventory
Cost of scrap value to sales
Total cost revenue
10-58
Machine Performance Product Quality
 Availability  Warranty claims
 Downtime  Customer complaints
 Maintenance records  Defective products
 Setup time
 Cost of rework
10-59
Production Delivery
• Manufacturing cycle • % of on-time deliveries
time • % of orders filled
• Velocity • Delivery cycle time
• Manufacturing cycle
efficiency
10-60
Productivity Innovation and
Learning
 Aggregate
productivity  Percentage of sales
 Partial productivity from new products
 Cost savings from
process
improvements
10-61
Learning
Objective
10
10-62
The Balanced Scorecard
Financial
Vision
and Internal
Customer Operations
Strategy
Learning and Growth
10-63
Learning
Objective
11
10-64
Use of Standard Costs
for Product Costing
Raw-material Inventory Account Payable
Actual quantity at Actual quantity at

standard cost actual cost
Direct-Material Price Variance
Unfavorable Favorable
variance variance
10-65
for Product Costing
Work-in-Process Inventory Raw-material Inventory
Standard quantity Actual quantity at

at standard price standard cost
Direct-Material Quantity Variance
variance variance
10-66
for Product Costing
Work-in-Process Inventory Wages Payable
Standard quantity Actual quantity at

at standard price actual cost
Direct-Labor Rate Variance Direct-Labor Efficiency Variance
Unfavorable Favorable Unfavorable Favorable

variance variance variance variance
10-67
for Product Costing
Cost of Goods Sold
variance variance
10-68
End of Chapter 10
Let’s set the
standard a
little higher.
10-69

ACC585ARes Chap 10

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ACC585ARes Chap 10

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Chapter 10

Type of Product Cost

Standard Cost Variances

Price Variance Quantity Variance

The difference between The difference between

Price Variance Quantity Variance

Price Variance Quantity Variance

Standard price is the amount that should

Price Variance Quantity Variance

Standard quantity is the quantity that should

Let’s use the concepts

Hanson Inc. has the following direct material

What is the actual price per pound

a. $4.00 per pound.

What is the actual price per pound

a. $4.00 per pound.

Hanson’s direct-material price variance (MPV)

Hanson’s direct-material price variance (MPV)

The standard quantity of material that

The standard quantity of material that

Hanson’s direct-material quantity variance

Hanson’s direct-material quantity variance

Actual Quantity Actual Quantity Standard Quantity

Price variance Quantity variance

Hanson purchased and The price variance is

Hanson Inc. has the following material

Last week 2,800 pounds of material were

Actual Quantity Actual Quantity

Price variance increases

Now let’s calculate

Hanson Inc. has the following direct labor

Last week 1,550 direct labor hours were

What was Hanson’s actual rate (AR)

a. $10.20 per hour.

What was Hanson’s actual rate (AR)

a. $10.20 per hour.

Hanson’s labor rate variance (LRV)

Hanson’s labor rate variance (LRV)

The standard hours (SH) of labor that

The standard hours (SH) of labor that

Hanson’s labor efficiency variance (LEV)

Hanson’s labor efficiency variance (LEV)

Actual Hours Actual Hours Standard Hours

Rate variance Efficiency variance

I am not responsible for

Too much focus Disadvantages Stable production

Shorter life Narrow

Learning and Growth

Actual quantity at Actual quantity at

Direct-Material Price Variance

Standard quantity Actual quantity at

Direct-Material Quantity Variance

Standard quantity Actual quantity at

Direct-Labor Rate Variance Direct-Labor Efficiency Variance

Unfavorable Favorable Unfavorable Favorable

Cost of Goods Sold

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