Standard Costing, Operational Performance Measures, and the Balanced Scorecard

1
10
Chapter Ten

• Standard Costing, Operational Performance
  Measures, and the Balanced Scorecard

2
Managing Costs
Standardperformancelevel
Actualperformancelevel
Comparison between standard and actual
performancelevel
Costvariance
3
Standard Costs
Based on carefullypredetermined amounts.
Used for planning labor and material requirements.
The expected levelof performance.
Benchmarks formeasuring performance.
4
Management by Exception
Managers focus on quantities and coststhat
exceed standards, a practice known as management
by exception.
Standard
Amount
DirectMaterial
DirectLabor
Type of Product Cost
5
Setting Standards
CostStandards
6
Participation in Setting Standards

• Accountants, engineers, personnel
  administrators, and production managers combine
  efforts to set standards based on experience and
  expectations.

7
Perfection versus Practical Standards A
Behavioral Issue
8
Perfection versus Practical Standards A
Behavioral Issue
I agree. Perfection standards areunattainable
and therefore discouraging to most employees.
9
Use of Standards by Nonmanufacturing Organizations

• Standard cost analysis may be used in any
  organization with repetitive tasks.
• A relationship between tasks and output measures
  must be established.

10
Variance Analysis Cycle


Takecorrective actions.
Identifyquestions.
Receive explanations.
Conduct next periods operations.

Analyze variances.
Prepare standard cost performance report.
Begin
11
Cost Variance Analysis
12
A General Model for Variance Analysis
Actual Quantity Actual Quantity
Standard Quantity

Actual Price Standard Price
Standard Price
Price Variance
Quantity Variance
13
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.
14
A General Model for Variance Analysis
AQ(AP - SP)
SP(AQ - SQ) AQ Actual Quantity
SP Standard Price AP Actual Price
SQ Standard Quantity
15
Standard Costs
Lets use the concepts of the general model to
calculate standard cost variances, starting
withdirect material.
16
Material Variances

• 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.

17
Material 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.

18
Material Variances

• 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.
19
Material Variances
Zippy

• Hansons material price variance (MPV)for the
  week was
• a. 170 unfavorable.
• b. 170 favorable.
• c. 800 unfavorable.
• d. 800 favorable.

20
Material Variances

• Hansons 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
21
Material Variances

• 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.

22
Material Variances

• 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
23
Material Variances

• Hansons material quantity variance (MQV) for
  the week was
• a. 170 unfavorable.
• b. 170 favorable.
• c. 800 unfavorable.
• d. 800 favorable.

24
Material Variances

• Hansons 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
25
Material Variances Summary
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
26
Material Variances
27
Material 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.

28
Material 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
29
Material Variances
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
30
Isolation of Material Variances
31
Responsibility for Material Variances
32
Standard Costs
Now lets calculate standard cost variances for
direct labor.
33
Labor Variances
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.
34
Labor Variances
What was Hansons 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.
35
Labor Variances
What was Hansons 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.
AR 15,810 1,550 hours AR 10.20 per hour
36
Labor Variances
Hansons labor rate variance (LRV)for the week
was a. 310 unfavorable. b. 310
favorable. c. 300 unfavorable. d. 300
favorable.
37
Labor Variances
Hansons labor rate variance (LRV)for the week
was a. 310 unfavorable. b. 310
favorable. c. 300 unfavorable. d. 300
favorable.
LRV AH(AR - SR) LRV 1,550 hrs(10.20 -
10.00) LRV 310 unfavorable
38
Labor Variances
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.
39
Labor Variances
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.
SH 1,000 units 1.5 hours per unit SH
1,500 hours
40
Labor Variances
Hansons labor efficiency variance (LEV)for the
week was a. 510 unfavorable. b. 510
favorable. c. 500 unfavorable. d. 500
favorable.
41
Labor Variances
Hansons labor efficiency variance (LEV)for the
week was a. 510 unfavorable. b. 510
favorable. c. 500 unfavorable. d. 500
favorable.
LEV SR(AH - SH) LEV 10.00(1,550 hrs -
1,500 hrs) LEV 500 unfavorable
42
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
43
Labor Rate Variance A Closer Look
Using highly paid skilled workers toperform
unskilled tasks results in anunfavorable rate
variance.
High skill,high rate
Low skill,low rate
Production managers who make work assignmentsare
generally responsible for rate variances.
44
Labor Efficiency Variance A Closer Look
45
Responsibility for Labor Variances
I am not responsible for the unfavorable
laborefficiency variance! You purchased
cheapmaterial, so it took moretime to process
it.
46
Responsibility for Labor Variances
Maybe I can attribute the laborand material
variances to personnel for hiring the wrong
peopleand training them poorly.
47
Significance of Cost Variances

• Size of variance
• Dollar amount
• Percentage of standard
• Recurring variances
• Trends
• Controllability
• Favorable variances
• Costs and benefits of investigation

48
A Statistical Approach
ControlCharts
49
Statistical Control Chart
Warning signals for investigation


Favorable Limit





Desired Value

Unfavorable Limit

1
2
3
4
5
6
7
8
9
Variance Measurements
50
Standard Costs and Product Costing
Standard material and labor costsare entered
into the manufacturingaccounts instead of actual
costs.
Standard cost variancesare closed directly
toCost of Goods Sold.
51
Advantages of Standard Costing
Management byException
Sensible CostComparisons
PerformanceEvaluation
EmployeeMotivation
52
Criticisms of Standard Costing
53
Operational Control Measures in Todays
Manufacturing Environment

• Raw Material and Scrap Control
• Inventory Control
• Machine Performance
• Product Quality
• Production and Delivery
• Productivity
• Innovation and Learning

54
Operational Control Measures in Todays
Manufacturing Environment

• Material Scrap Control
• Quality
• Lead time
• Cost of scrap
• Total cost

• Inventory Control
• Turnover ratio
• No. of inventory items
• Ratio of inventory value to sales revenue

55
Operational Control Measures in Todays
Manufacturing Environment

• Machine Performance
• Availability
• Downtime
• Usage
• Setup time

• Product Quality
• Warranty claims
• Customer complaints
• Defective products
• Cost of rework

56
Operational Control Measures in Todays
Manufacturing Environment

• Productivity
• Units produced per day per employee
• Ratio of output value to input value

• Innovation and Learning
• Percentage of sales from new products
• Cost savings from process improvements

57
Production and Delivery Performance Measures
Order Received
ProductionStarted
Goods Shipped
Process Time Inspection Time Move Time
Waiting Time
Wait Time
Manufacturing Cycle Time
Delivery Cycle Time
Process time is the only value-added activity.
58
Production and Delivery Performance Measures
Order Received
ProductionStarted
Goods Shipped
Process Time Inspection Time Move Time
Waiting Time
Wait Time
Manufacturing Cycle Time
Delivery Cycle Time
59
The Balanced Scorecard
Exh.10-8
Financial Perspective How do we lookto the
firms owners?
Internal OperationsPerspective In which
activities must we excel?
Customer Perspective How do our customers see us?
Innovation andLearning PerspectiveHow can we
continuallyimprove and create value?
60
End of Chapter 10
Lets set the standard alittle higher.