Chapter

13
Standard Costs and
Operating Performance
Measures
 Standard Costs

Based on carefully
predetermined amounts.

Used for planning labor, material

Standard and overhead requirements.
Costs are
The expected level
of performance.

Benchmarks for
measuring performance.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

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

Standard
Amount

Direct
Material
Direct Manufacturing
Labor Overhead

Type of Product Cost

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 Setting Standard Costs

Accountants, engineers, personnel administrators, and

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

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 Setting Standard Costs

Should we use
practical standards
or ideal standards?

Engineer Managerial
Accountant
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
 Setting Standard Costs
Practical standards
should be set at levels
that are currently
attainable with
reasonable and
efficient effort.

Production
manager
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
 Setting Standard Costs
I agree. Ideal standards,
that are based on
perfection, are
unattainable and
discourage most
employees.

Human
Resources
Manager
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
 Setting Direct Material Standards

Price Quantity
Standards Standards

Final, delivered Use product

cost of materials, design specifications.
net of discounts.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Setting Direct Labor Standards

Rate Time
Standards Standards

Use wage Use time and

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

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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 lbs. $ 4.00 per lb. $ 12.00
Direct labor 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

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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 unfavorable

because the actual cost
exceeds the standard cost.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

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

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Variance Analysis Cycle

Take
Identify Receive corrective
questions explanations actions

Conduct next
Analyze period’s
variances operations

Prepare standard
Begin
cost performance
report

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Standard Costs

Let’s use the

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

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Material Variances Example 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.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Material Variances Zippy

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

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Material Variances Zippy

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

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
d.
d. $800
$800 favorable.
favorable.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
MPV = AQ(AP - SP)
d.
d. $800
$800 favorable.
MPV = 1,700 lbs. × ($3.90 - 4.00)
favorable.
MPV = $170 Favorable

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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 pounds.
pounds.
b.
b. 1,500
1,500 pounds.
pounds.
c.
c. 2,550
2,550 pounds.
pounds.
d.
d. 2,000
2,000 pounds.
pounds.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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 pounds.
pounds.
b.
b. 1,500
1,500 pounds.
pounds.
c.
c. 2,550
2,550 pounds.
pounds.
d. 2,000 SQ = 1,000 units × 1.5 lbs per unit
pounds.
d. 2,000 pounds.SQ = 1,500 lbs

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
d.
d. $800
$800 favorable.
favorable.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
d.
d. $800
$800 favorable.
favorable.
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs - 1,500 lbs)
MQV = $800 unfavorable

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Material Variances Summary Zippy

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 Quantity variance

$170 favorable $800 unfavorable
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
 Material Variances

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.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Material Variances Continued Zippy

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.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Material Variances Continued Zippy

Actual Quantity Actual Quantity

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

Price variance increases

Price variance because quantity
$280 favorable purchased increases.
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
 Material Variances Continued Zippy

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 is
unchanged because
actual and standard Quantity variance
quantities are unchanged. $800 unfavorable
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
 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.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

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

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Standard Costs

Now let’s calculate

standard cost
variances for
direct labor.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Labor Variances Example Zippy

Hanson Inc. has the following direct labor

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

Last week 1,550 direct labor hours were

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

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Labor Variances Zippy

What
What was was Hanson’s
Hanson’s actual
actual rate
rate (AR)
(AR)
for
for labor
labor 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.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Labor Variances Zippy

What
What was was Hanson’s
Hanson’s actual
actual rate
rate (AR)
(AR)
for
for labor
labor for
for the
the week?
week?
AR = $9,610 ÷ 1,550 hours
a. $6.20 per
a. $6.20 per hour.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.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Labor Variances Zippy

Hanson’s
Hanson’s labor
labor rate
rate variance
variance (LRV)
(LRV) for
for
the
the week
week was:
was:
a.
a. $310
$310 unfavorable.
unfavorable.
b.
b. $310
$310 favorable.
favorable.
c.
c. $300
$300 unfavorable.
unfavorable.
d.
d. $300
$300 favorable.
favorable.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Labor Variances Zippy

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

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Labor Variances Zippy

The
The standard
standard hours
hours (SH)
(SH) of
of labor
labor 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.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Labor Variances Zippy

The
The standard
standard hours
hours (SH)
(SH) of
of labor
labor 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

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Labor Variances Zippy

Hanson’s
Hanson’s labor
labor efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was:
was:
a.
a. $290
$290 unfavorable.
unfavorable.
b.
b. $290
$290 favorable.
favorable.
c.
c. $300
$300 unfavorable.
unfavorable.
d.
d. $300
$300 favorable.
favorable.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Labor Variances Zippy

Hanson’s
Hanson’s labor
labor efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was:
was:
a.
a. $290
$290 unfavorable.
unfavorable.
b.
b. $290
$290 favorable.
favorable.
c.
c. $300
$300 unfavorable.
unfavorable.
d.
d. $300
$300 favorable.
favorable.
LEV = SR(AH - SH)
LEV = $6.00(1,550 hrs - 1,500 hrs)
LEV = $300 unfavorable
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
 Labor 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 unfavorable $300 unfavorable
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
 Labor Rate Variance –
A Closer Look
Using highly paid skilled workers to
perform unskilled tasks results in an
unfavorable 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.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Labor Efficiency Variance –
A Closer Look
Poorly Poor
trained quality
workers materials

Unfavorable
Efficiency
Variance
Poor Poorly
supervision maintained
of workers equipment
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
 Responsibility for Labor 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.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Responsibility for Labor Variances

Maybe I can attribute the labor

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

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 Standard Costs

Now let’s calculate

standard cost
variances for the
last of the variable
production costs –
variable
manufacturing
overhead.
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
 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 labor hour

Last week 1,550 hours were worked to make

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

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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.
c. $3.30
$3.30 per
per hour.
hour. AR = $3.30 per hour
d.
d. $4.50
$4.50 per
per hour.
hour.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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 unfavorable.
unfavorable.
b.
b. $400
$400 favorable.
favorable.
c.
c. $335
$335 unfavorable.
unfavorable.
d.
d. $300
$300 favorable.
favorable.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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 unfavorable.
unfavorable.
b.
b. $400
$400 favorable.
favorable.
SV = AH(AR - SR)
c.
c. $335
$335 unfavorable.
unfavorable.
SV = 1,550 hrs($3.30 - $3.00)
d.
d. $300 favorable.SV = $465 unfavorable
$300 favorable.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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 unfavorable.
unfavorable.
b.
b. $435
$435 favorable.
favorable.
c.
c. $150
$150 unfavorable.
unfavorable.
d.
d. $150
$150 favorable.
favorable.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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 unfavorable.
unfavorable.
b.
b. $435
$435 favorable.
favorable. 1,000 units × 1.5 hrs per unit
c.
c. $150
$150 unfavorable.
unfavorable.
d.
d. $150
$150 favorable.
favorable.
EV = SR(AH - SH)
EV = $3.00(1,550 hrs - 1,500 hrs)
EV = $150 unfavorable
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
 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 unfavorable $150 unfavorable
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
 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 labor
labor hours,
hours, the
the labor
labor efficiency
efficiency
and
and variable
variable overhead
overhead efficiency
efficiency variances
variances
will
will move
move in
in tandem.
tandem.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

Emphasis on negative Favorable 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.

Labor quantity standards Emphasizing standards

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

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 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
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
 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?

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 The Balanced Scorecard
Learning improves
business processes.

Improved business
processes improve
customer satisfaction.

Improving customer
satisfaction improves
financial results.
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
 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.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

 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 Manufacturing cycle time
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
 End of Chapter 10

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000