chap010 7e edited
TRANSCRIPT
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Chapter 10Chapter 10
Standard Costing, Operational
Performance Measures, and the
Balanced Scorecard
Standard Costing, Operational
Performance Measures, and the
Balanced Scorecard
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
1
Learning Objective
1
Managing CostsManaging Costs
Standardcost
Actualcost
Comparison between standard and actual
performancelevel
Costvariance
Management by ExceptionManagement by Exception
DirectMaterial
Managers focus on quantities and coststhat exceed standards, a practice known as
management by exception.
Type of Product Cost
Am
ou
nt
DirectLabor
Standard
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
2
Learning Objective
2
Setting StandardsSetting Standards
Analysis ofHistorical Data
TaskAnalysis
CostStandards
Accountants, engineers, personnel administrators, and production managers combine efforts to set standards
based on experience and expectations.
Participation in Setting StandardsParticipation in Setting Standards
Perfection versus Practical Perfection versus Practical Standards: A Behavioral IssueStandards: A Behavioral Issue
Should we usepractical standards
or perfection standards?
Practical standardsshould be set at levels
that are currentlyattainable with reasonable andefficient effort.
I agree. Perfection standards are
unattainable and therefore discouraging
to most employees.
Perfection versus Practical Perfection versus Practical Standards: A Behavioral IssueStandards: A Behavioral Issue
Use of Standards by Use of Standards by Service OrganizationsService Organizations
• Standard cost analysis may be used in any organization with repetitive tasks.
• A relationship between tasks and output measures must be established.
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
3
Learning Objective
3
Standard Cost Variances
Cost Variance AnalysisCost Variance Analysis
Quantity VariancePrice Variance
The difference betweenthe actual price and the
standard price
The difference betweenthe actual quantity andthe standard quantity
A General Model for Variance A General Model for Variance Analysis Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance Quantity Variance
Materials price variance Materials quantity variance Labor rate variance Labor efficiency variance Variable overhead Variable overhead spending variance efficiency variance
AQ(AP - SP) SP(AQ - SQ)
AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity
A General Model for Variance A General Model for Variance Analysis 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.
A General Model for Variance A General Model for Variance Analysis Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance Quantity Variance
Standard quantity is the quantity that should have been used.
Standard CostsStandard Costs
Let’s use the concepts
of the general model to
calculate standard cost
variances, starting with
direct material.
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.
Material VariancesMaterial Variances Zippy
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.
Material VariancesMaterial Variances Zippy
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.
AP = $6,630 ÷ 1,700 lbs.AP = $3.90 per lb.
Material VariancesMaterial Variances Zippy
Hanson’s direct-material price variance (MPV)for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Material VariancesMaterial Variances Zippy
Hanson’s direct-material price variance (MPV)for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable. MPV = AQ(AP - SP) MPV = 1,700 lbs. × ($3.90 - 4.00) MPV = $170 Favorable
Material VariancesMaterial Variances Zippy
The standard quantity of material thatshould 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.
Material VariancesMaterial Variances Zippy
The standard quantity of material thatshould 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.
SQ = 1,000 units × 1.5 lbs per unit SQ = 1,500 lbs
Material VariancesMaterial Variances Zippy
Hanson’s direct-material quantity variance (MQV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Material VariancesMaterial Variances Zippy
Hanson’s direct-material quantity variance (MQV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable
Material VariancesMaterial Variances 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$170 favorable
Quantity variance$800 unfavorable
Material Variances SummaryMaterial Variances Summary
The price variance is computed on the entire
quantity purchased.
The quantity variance is computed only on the
quantity used.
Hanson purchased and used 1,700 pounds.
How are the variances computed if the amount purchased differs from
the amount used?
ZippyMaterial VariancesMaterial Variances
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.
Material VariancesMaterial Variances Zippy
Material VariancesMaterial Variances
Actual Quantity Actual Quantity Purchased Purchased × × Actual Price Standard Price
2,800 lbs. 2,800 lbs. × × $3.90 per lb. $4.00 per lb.
$10,920 $11,200
Price variance$280 favorable
Price variance increases because quantity
purchased increases.
Zippy
MPV = AQ(AP - SP)MPV = 2,800 lbs. × ($3.90 - 4.00)MPV = $280 Favorable
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$800 unfavorable
Quantity variance is unchanged because actual and standard
quantities are unchanged.
Material VariancesMaterial Variances Zippy
MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs
- 1,500 lbs) MQV = $800unfavor.
Isolation of Material VariancesIsolation of Material Variances
I need the variances as soonas possible so that I canbetter identify problems
and control costs.
You accountants just don’tunderstand the problems
we production managers have.
Okay. I’ll start computingthe price variance when
material is purchased andthe quantity variance assoon as material is used.
Standard CostsStandard Costs
Now let’s calculate standard cost variances for direct labor.
Hanson Inc. has the following direct labor standard to manufacture one Zippy:
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.
Labor VariancesLabor Variances Zippy
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.
Labor VariancesLabor Variances Zippy
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.
Labor VariancesLabor Variances Zippy
AR = $15,810 ÷ 1,550 hours AR = $10.20 per hour
Hanson’s labor rate variance (LRV)for the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Labor VariancesLabor Variances Zippy
Hanson’s labor rate variance (LRV)for the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Labor VariancesLabor Variances
LRV = AH(AR - SR) LRV = 1,550 hrs($10.20 - $10.00) LRV = $310 unfavorable
Zippy
The standard hours (SH) of labor thatshould 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.
Labor VariancesLabor Variances Zippy
The standard hours (SH) of labor thatshould 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.
Labor VariancesLabor Variances
SH = 1,000 units × 1.5 hours per unit SH = 1,500 hours
Zippy
Hanson’s labor efficiency variance (LEV)for the week was:
a. $510 unfavorable.
b. $510 favorable.
c. $500 unfavorable.
d. $500 favorable.
Labor VariancesLabor Variances Zippy
Hanson’s labor efficiency variance (LEV)for the week was:
a. $510 unfavorable.
b. $510 favorable.
c. $500 unfavorable.
d. $500 favorable.
Labor VariancesLabor Variances
LEV = SR(AH - SH) LEV = $10.00(1,550 hrs - 1,500 hrs) LEV = $500 unfavorable
Zippy
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
Labor Variances SummaryLabor Variances Summary
Rate variance$310 unfavorable
Efficiency variance$500 unfavorable
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
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
4
Learning Objective
4
• Size of variance– Dollar amount– Percentage of standard
• Recurring variances• Trends• Controllability• Favorable variances• Costs and benefits of
investigation
Significance of Cost VariancesSignificance of Cost Variances
What clues help me to determine the
variances that I should investigate?
Statistical Control ChartStatistical Control Chart
1 2 3 4 5 6 7 8 9
Variance Measurements
Favorable Limit
Unfavorable Limit
Desired Value • • •• •
••
••
Warning signals for investigation
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
5
Learning Objective
5
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.
Behavioral Impact of Standard Behavioral Impact of Standard CostingCosting
Controllability of VariancesControllability of Variances
Direct-Material Price Variance
Direct-Labor Rate Variance
Direct-Material Quantity Variance
Direct-Labor Efficiency Variance
Interaction among VariancesInteraction among Variances
I am not responsible for the unfavorable labor
efficiency variance!
You purchased cheapmaterial, so it took more
time to process it.
You used too much time because of poorly
trained workers and poor supervision.
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
6
Learning Objective
6
Standard Costs and Product Standard Costs and Product CostingCosting
Standard material and labor costsare entered into Work-in-Process inventory instead of actual costs.
Standard material and labor costsare entered into Work-in-Process inventory instead of actual costs.
Standard cost variancesare closed directly toCost of Goods Sold.
Standard cost variancesare closed directly toCost of Goods Sold.
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
7
Learning Objective
7
Advantages of Standard CostingAdvantages of Standard Costing
Management byException
Stable Product Costs
Less Expensive
Sensible CostComparisons
Advantages
PerformanceEvaluation
EmployeeMotivation
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
8
Learning Objective
8
Criticisms of Standard CostingCriticisms of Standard Costing
Not specific
Focus on cost minimization
Consistency due to automation
Too aggregate, too late
DisadvantagesToo much focus on direct-labor
Narrow definition
Stable production required
Shorter life cycles
Adapting Standard-Costing SystemsAdapting Standard-Costing Systems
Reduced focus on labor
Focus on material and overhead
Identify Cost Drivers
Shifting cost structures
Elimination of non-value added costs
Shorter product life cycles
Impact of TQM and JIT
Real-Time Information Systems
Nonfinancial Measures
Benchmarking
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
9
Learning Objective
9
Operational Control Measures in Operational Control Measures in Today’s Manufacturing EnvironmentToday’s Manufacturing Environment
Operational Performance Measures in Operational Performance Measures in Today’s Manufacturing EnvironmentToday’s Manufacturing Environment
Raw Material & Scrap Control
Quality Lead timeCost of scrapTotal cost
Inventory Control Average value Average holding time Ratio of inventory
value to sales revenue
Machine Performance Availability Downtime Maintenance records Setup time
Product Quality Warranty claims Customer complaints Defective products Cost of rework
Operational Performance Measures in Operational Performance Measures in Today’s Manufacturing EnvironmentToday’s Manufacturing Environment
Operational Performance Measures in Operational Performance Measures in Today’s Manufacturing EnvironmentToday’s Manufacturing Environment
Production• Manufacturing cycle
time• Velocity• Manufacturing cycle
efficiency
Delivery• % of on-time deliveries• % of orders filled• Delivery cycle time
Productivity Aggregate
productivity Partial productivity
Innovation and Learning
Percentage of sales from new products
Cost savings from process improvements
Operational Performance Measures in Operational Performance Measures in Today’s Manufacturing EnvironmentToday’s Manufacturing Environment
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
10
Learning Objective
10
The Balanced ScorecardThe Balanced ScorecardFinancial
Learning and Growth
Internal OperationsCustomer
Vision and
Strategy
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
11
Learning Objective
11
Use of Standard CostsUse of Standard Costsfor Product Costingfor Product Costing
Actual quantity atstandard cost
Raw-material Inventory
Unfavorable Favorablevariance variance
Direct-Material Price Variance
Actual quantity atactual cost
Account Payable
Unfavorable Favorablevariance variance
Direct-Material Quantity Variance
Standard quantityat standard price
Work-in-Process Inventory
Use of Standard CostsUse of Standard Costsfor Product Costingfor Product Costing
Actual quantity atstandard cost
Raw-material Inventory
Unfavorable Favorablevariance variance
Direct-Labor Rate Variance
Actual quantity atactual cost
Wages Payable
Standard quantityat standard price
Work-in-Process Inventory
Use of Standard CostsUse of Standard Costsfor Product Costingfor Product Costing
Unfavorable Favorablevariance variance
Direct-Labor Efficiency Variance
Use of Standard CostsUse of Standard Costsfor Product Costingfor Product Costing
Unfavorable Favorablevariance variance
Cost of Goods Sold
End of Chapter 10End of Chapter 10
Let’s set the standard alittle higher.