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Chapter 10

Standard Costing, Operational Performance Measures, and the Balanced Scorecard

McGraw-Hill/Irwin

Copyright © 2009 by The McGraw-Hill Companies, Inc. All

Learning Objective 1

McGraw-Hill/Irwin

Copyright © 2009 by The McGraw-Hill Companies, Inc. All

Managing Costs
Standard cost Comparison between standard and actual performance level Actual cost

Cost variance
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Management by Exception Managers focus on quantities and costs that exceed standards. a practice known as management by exception. Amount Standard Direct Material Direct Labor Type of Product Cost 10-4 .

All . Inc.Learning Objective 2 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies.

Setting Standards Cost Standards Analysis of Historical Data Task Analysis 10-6 .

Participation in Setting Standards Accountants. personnel administrators. engineers. and production managers combine efforts to set standards based on experience and expectations. 10-7 .

Should we use practical standards or perfection standards? 10-8 .Perfection versus Practical Standards: A Behavioral Issue Practical standards should be set at levels that are currently attainable with reasonable and efficient effort.

Perfection standards are unattainable and therefore discouraging to most employees.Perfection versus Practical Standards: A Behavioral Issue I agree. 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 .

Inc. All .Learning Objective 3 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies.

Cost Variance Analysis Standard Cost Variances Price Variance Quantity Variance The difference between the actual price and the standard price The difference between the actual quantity and the standard quantity 10-12 .

SQ) Labor efficiency variance SP = Standard Price Variable overhead SQ = Standard Quantity efficiency variance 10-13 .variance Labor rate variance AQ =Variable overhead Actual Quantity AP = spendingPrice Actual variance Quantity Variance Materials quantity variance SP(AQ .A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price Price Variance Materials price SP) AQ(AP .

A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price Price Variance Quantity Variance Standard price is the amount that should have been paid for the resources acquired. 10-14 .

10-15 .A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price Price Variance Quantity Variance Standard quantity is the quantity that should have been used.

10-16 .Standard Costs Let’s use the concepts of the general model to calculate standard cost variances. starting with direct material.

Material Variances Zippy Hanson Inc.630.700 pounds of material were purchased and used to make 1. The material cost a total of $6. 10-17 .00 per pound Last week 1.5 pounds per Zippy at $4.000 Zippies. has the following direct material standard to manufacture one Zippy: 1.

d.90 per pound. $4.00 per pound. b. $3. 10-18 . $4. c. $6.Material Variances Zippy What is the actual price per pound paid for the material? a.63 per pound.10 per pound.

$6. $3. $4.00 per pound. c.Material Variances Zippy What is the actual price per pound paid for the material? a.700 lbs. AP = $3. AP = $6. 10-19 .90 per pound.63 per pound.90 per lb.10 per pound. d. b.630 ÷ 1. $4.

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

$170 unfavorable.700 lbs.SP) $800 favorable. $800 unfavorable. MPV = 1.00) MPV = $170 Favorable 10-21 .90 . c. d. b. MPV = AQ(AP .Material Variances Zippy Hanson’s direct-material price variance (MPV) for the week was: a. × ($3.4. $170 favorable.

c. 1. b.550 pounds. d. 10-22 . 2. 2.000 Zippies is: a.700 pounds.000 pounds.Material Variances Zippy The standard quantity of material that should have been used to produce 1.500 pounds. 1.

Material Variances Zippy The standard quantity of material that should have been used to produce 1. 2.5 lbs per unit Zippies is: SQ a. 1. SQ = 1.000 = 1. d. c.500 pounds.000 units × 1.000 pounds. 2.700 pounds.500 lbs 10-23 . 1.550 pounds. b.

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

$170 unfavorable. $800 favorable.Material Variances Zippy MQV = SP(AQ . $800 unfavorable. 10-25 .SQ) MQV = $4.700 lbs . = $800 unfavorable Hanson’s direct-material quantity variance (MQV) for the week was: b.1. $170 favorable.500 lbs) MQV a. c. d.00(1.

500 lbs. × $4.Material Variances Summary Actual Quantity × Actual Price 1.000 Quantity variance $800 unfavorable 10-26 . $ 6.700 lbs.00 per lb. $6.630 Price variance $170 favorable Actual Quantity × Standard Price 1. × $3.90 per lb.700 lbs.00 per $6. × $4. lb.800 Standard Quantity × Standard Price 1.

10-27 .700 pounds. How are the variances computed if the amount purchased differs from the amount used? The price variance is computed on the entire quantity purchased.Material Variances Zippy Hanson purchased and used 1. The quantity variance is computed only on the quantity used.

Material Variances Zippy Hanson Inc. has the following material standard to manufacture one Zippy: 1.920.700 pounds were used to make 1.00 per pound Last week 2. and 1.000 Zippies.800 pounds of material were purchased at a total cost of $10.5 pounds per Zippy at $4. 10-28 .

($3.90 per lb. × $3.800 lbs.00) × $4.4.00 per lb.920 Zippy Actual Quantity Purchased × MPV = AQ(AP .SP) Standard Price MPV = 2. MPV = $280 Favorable $11.Material Variances Actual Quantity Purchased × Actual Price 2.200 Price variance increases because quantity purchased increases.90 . 10-29 Price variance $280 favorable .800 lbs.800 lbs. $10. × 2.

$6.00(1. × $4.00 per lb.800 1.Material Variances MQV = SP(AQ .SQ) MQV = $4.000 Quantity variance is unchanged because actual and standard quantities are unchanged.500 lbs. Quantity variance $800 unfavorable 10-30 . × $4.1.700 lbs . Zippy Actual Quantity Used Standard Quantity × × Standard Price Standard Price 1.00 per lb.500 lbs) MQV = $800unfavor. $6.700 lbs.

10-31 . You accountants just don’t understand the problems we production managers have. Okay.Isolation of Material Variances I need the variances as soon as possible so that I can better identify problems and control costs. I’ll start computing the price variance when material is purchased and the quantity variance as soon as material is used.

10-32 .Standard Costs Now let’s calculate standard cost variances for direct labor.

has the following direct labor standard to manufacture one Zippy: 1.810 to make 1.000 Zippies.00 per direct labor hour Last week 1.550 direct labor hours were worked at a total labor cost of $15.5 standard hours per Zippy at $10.Labor Variances Zippy Hanson Inc. 10-33 .

10 per hour. $10. $10. b. $9.80 per hour. 10-34 .20 per hour. d.Labor Variances Zippy What was Hanson’s actual rate (AR) for labor for the week? a. $9. c.90 per hour.

80 per hour. $10.10 per hour.810 ÷ 1.Labor Variances Zippy What was Hanson’s actual rate (AR) for labor for the week? a. AR = $15. b.90 per hour.20 per hour $9.20 per hour. c. d. $10. AR = $10.550 hours $9. 10-35 .

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

$10.20 . LRV = 1. $310 unfavorable.00) $300 favorable.SR) $300 unfavorable. d.550 hrs($10. LRV = AH(AR . $310 favorable. b.Labor Variances Zippy Hanson’s labor rate variance (LRV) for the week was: a. = $310 unfavorable LRV 10-37 . c.

10-38 .500 hours. c. d. 1.550 hours.700 hours.800 hours.000 Zippies is: a. b. 1.Labor Variances Zippy The standard hours (SH) of labor that should have been worked to produce 1. 1. 1.

550 hours.800 hours.000 units × 1.000 Zippies is: a.500 hours. = 1. d.500 hours 10-39 . = 1. b. 1. 1. 1.700 hours.5 hours per unit SH SH 1. c.Labor Variances Zippy The standard hours (SH) of labor that should have been worked to produce 1.

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

Labor Variances Zippy Hanson’s labor efficiency variance (LEV) for the week was: LEV = SR(AH . $510 unfavorable. 10-41 . c. d. $500 unfavorable.= $500 unfavorable LEV b.500 hrs) a.550 hrs .00(1. $500 favorable.SH) LEV = $10.1. $510 favorable.

500 hours × $10.00 per hour $15.00 per hour $15.550 hours × $10.20 per hour $15.000 Rate variance $310 unfavorable Efficiency variance $500 unfavorable 10-42 .500 Standard Hours × Standard Rate 1.550 hours × $10.Labor Variances Summary Actual Hours × Actual Rate 1.810 Actual Hours × Standard Rate 1.

All .Learning Objective 4 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies. Inc.

Significance of Cost Variances 1. 6. Dollar amount 2. Size of variance 1. 3. Recurring variances Trends Controllability Favorable variances Costs and benefits of investigation 10-44 . 5. 4. Percentage of standard What clues help me to determine the variances that I should investigate? 2.

Statistical Control Chart Warning signals for investigation Favorable Limit Desired Value • • 2 • • • • • 7 Unfavorable Limit • 8 • 9 1 3 4 5 6 Variance Measurements 10-45 .

Learning Objective 5 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies. Inc. All .

10-47 .Behavioral Impact of Standard Costing If I buy cheaper materials. Then I’ll get my bonus. But we may lose customers because of lower quality. my directmaterials expenses will be lower than what is budgeted.

Controllability of Variances
Direct-Material Price Variance Direct-Material Quantity Variance

Direct-Labor Rate Variance

Direct-Labor Efficiency Variance
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Interaction among Variances
I am not responsible for the unfavorable labor efficiency variance! You purchased cheap material, so it took more time to process it. You used too much time because of poorly trained workers and poor supervision.

10-49

Learning Objective 6

McGraw-Hill/Irwin

Copyright © 2009 by The McGraw-Hill Companies, Inc. All

Standard cost variances Standard cost variances are closed directly to are closed directly to Cost of Goods Sold.Standard Costs and Product Costing Standard material and labor costs Standard material and labor costs are entered into Work-in-Process are entered into Work-in-Process inventory instead of actual costs. 10-51 . inventory instead of actual costs. Cost of Goods Sold.

All .Learning Objective 7 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies. Inc.

Advantages of Standard Costing Sensible Cost Comparisons Management by Exception Performance Evaluation Advantages Stable Product Costs Employee Motivation 10-53 .

Inc. All .Learning Objective 8 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies.

too late Too much focus on direct-labor Shorter life cycles Focus on cost minimization 10-55 Not specific Disadvantages Stable production required Narrow definition .Criticisms of Standard Costing Too aggregate.

All . Inc.Learning Objective 9 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies.

Operational Performance Measures in Today’s Manufacturing Environment Raw Material & Scrap Control qQuality qLead time qCost of scrap qTotal cost q q q Inventory Control Average value Average holding time Ratio of inventory value to sales revenue 10-57 .

Operational Performance Measures in Today’s Manufacturing Environment Machine Performance q Availability q Downtime q Maintenance records q Setup time Product Quality q q q q Warranty claims Customer complaints Defective products Cost of rework 10-58 .

Operational Performance Measures in Today’s Manufacturing Environment Production • Manufacturing cycle time • Velocity • Manufacturing cycle efficiency Delivery • % of on-time deliveries • % of orders filled • Delivery cycle time 10-59 .

Operational Performance Measures in Today’s Manufacturing Environment q q Productivity Aggregate productivity Partial productivity Innovation and Learning q Percentage of sales from new products Cost savings from process improvements q 10-60 .

Inc. All .Learning Objective 10 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies.

The Balanced Scorecard Financial Customer Vision and Strategy Internal Operations Learning and Growth 10-62 .

End of Chapter 10 Let’s set the standard a little higher. 10-63 .