chapter 10 standard costing, operational performance measures, and the balanced scorecard
TRANSCRIPT
Chapter 10Chapter 10
Standard Costing, Operational
Performance Measures, and the
Balanced Scorecard
Standard Costing, Operational
Performance Measures, and the
Balanced Scorecard
Definition of TermsDefinition of Terms
10-3
Standard Costs
- are usually associated with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead.
10-4
Standard Costing
• is a control method involving the preparation of detailed cost and sales budgets
• It is then compared with the actual results for a specific account period and any significant variances between the actual and the budgeted results are investigated
10-5
Standard Costing
• Unexpected trends are corrected if they are not acceptable or they cannot be accommodated.
10-6
Cost variance (CV)
is the amount of money that was actually spent on a project or a part of a project compared to the amount of work that was actually accomplished. Cost variance is the budgeted cost of work performed minus the actual cost of work performed.
Learning Objective
1
Learning Objective
1
10-8
Managing Costs
Standardcost
Actualcost
Comparison between standard and actual
performancelevel
Costvariance
10-9
Management by Exception
DirectMaterial
Type of Product CostType of Product Cost
Am
ou
nt
Am
ou
nt
DirectLabor
Standard
Managers focus on quantities and coststhat exceed standards, a practice known as
management by exception.
Learning Objective
2
Learning Objective
2
10-11
Setting Standards
Analysis ofHistorical Data
TaskAnalysis
CostStandards
10-12
Accountants, engineers, personnel administrators, and production managers combine efforts to set standards
based on experience and expectations.
Participation in Setting Standards
10-13
Perfection versus Practical Standards: A Behavioral Issue
Should we usepractical standards
or perfection standards?
Practical standardsshould be set at levels
that are currentlyattainable with reasonable andefficient effort.
10-14
I agree. Perfection standards are
unattainable and therefore discouraging
to most employees.
Perfection versus Practical Standards: A Behavioral Issue
10-15
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.
Learning Objective
3
Learning Objective
3
10-17
Standard Cost Variances
Cost Variance Analysis
Quantity VariancePrice Variance
The difference betweenthe actual price and the
standard price
The difference betweenthe actual quantity andthe standard quantity
10-18
A General Model for Variance 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
10-19
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.
10-20
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 that should have been used.
10-21
Standard Costs
Let’s use the concepts
of the general model to
calculate standard cost
variances, starting with
direct material.
10-22
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 Variances Zippy
10-23
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 Variances Zippy
10-24
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 Variances Zippy
10-25
Hanson’s direct-material price variance (MPV)for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Material Variances Zippy
10-26
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 Variances Zippy
10-27
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 Variances Zippy
10-28
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 Variances Zippy
10-29
Hanson’s direct-material quantity variance (MQV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Material Variances Zippy
10-30
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 Variances Zippy
10-31
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 Summary
10-32
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 Variances
10-33
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 Variances Zippy
10-34
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
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
10-35
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 Variances Zippy
MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs
- 1,500 lbs) MQV = $800unfavor.
10-36
Isolation 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.
10-37
Standard Costs
Now let’s calculate standard cost variances for direct labor.
10-38
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 Variances Zippy
10-39
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 Variances Zippy
10-40
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 Variances Zippy
AR = $15,810 ÷ 1,550 hours AR = $10.20 per hour
10-41
Hanson’s labor rate variance (LRV)for the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Labor Variances Zippy
10-42
Hanson’s labor rate variance (LRV)for the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Labor Variances
LRV = AH(AR - SR) LRV = 1,550 hrs($10.20 - $10.00) LRV = $310 unfavorable
Zippy
10-43
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 Variances Zippy
10-44
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 Variances
SH = 1,000 units × 1.5 hours per unit SH = 1,500 hours
Zippy
10-45
Hanson’s labor efficiency variance (LEV)for the week was:
a. $510 unfavorable.
b. $510 favorable.
c. $500 unfavorable.
d. $500 favorable.
Labor Variances Zippy
10-46
Hanson’s labor efficiency variance (LEV)for the week was:
a. $510 unfavorable.
b. $510 favorable.
c. $500 unfavorable.
d. $500 favorable.
Labor Variances
LEV = SR(AH - SH) LEV = $10.00(1,550 hrs - 1,500 hrs) LEV = $500 unfavorable
Zippy
10-47
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
Labor 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
Learning Objective
4
Learning Objective
4
10-49
Costs and benefits of investigation
Favorable variances
Controllability
Trends
Significance of Cost Variances
What clues help me to determine the
variances that I should investigate?
Recurring variances
Size of varianceDollar/Monetary amount and
Percentage of standard
10-50
Statistical Control Chart
1 2 3 4 5 6 7 8 9
Variance Measurements
Favorable Limit
Unfavorable Limit
Desired Value • • •• •
••
••
Warning signals for investigation
10-51
Unfavorable Variance
• If actual costs are greater than standard costs
• tells management that if everything else stays constant the company's actual profit will be less than planned.
10-52
Favorable variance
• If actual costs are less than standard costs the variance is favorable
• tells management that if everything else stays constant the actual profit will likely exceed the planned profit.
Learning Objective
5
Learning Objective
5
10-54
Behavioral Impact of Standard Costing
• Variances evaluate personnel:– Variances may be used to evaluate personnel,
often with regard to salary increases, bonuses, and promotions
10-55
Behavioral Impact of Standard Costing
• Negative and positive incentives created– Such incentives can have positive and negative
effects, as a bonus plan may prompt a manager to pursue actions that are not in the best interests of the organization.
10-56
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 Costing
10-57
Controllability of Variances
• Importance of identifying who controls: It is rare that one person controls any event; however, it is often possible to identify the manager who is most able to influence a particular variance.
10-58
Controllability of Variances
Direct-Material Price Variance
Direct-Labor Rate Variance
Direct-Material Quantity Variance
Direct-Labor Efficiency Variance
Purchasing managerProduction supervisor and/or production engineers
Production supervisor Production supervisor
10-59
Controllability of Variances• Variance often affect more than one
input: Variances often interact, making investigation and controllability difficult.
– For example, a labor efficiency variance may be caused by problems not only with labor but by problems with machinery and material as well.
– In addition, managers sometimes trade-off variances, purposely incurring an unfavorable variance that is more than offset by favorable variances.
10-60
Interaction 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.
Learning Objective
6
Learning Objective
6
10-62
Standard Costs Variances Cost flows
• In a standard-cost system, costs flow thought the same accounts in the general ledger
• however, they flow through at standard cost.
• In other words, Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold are carried at standard cost.
10-63
Standard Costs and Variances Differences recorded in variance
accounts• The differences between standard costs and
the actual costs incurred are recorded in variance accounts instead of actual costs.
• Unfavorable variances are recorded as debits
• favorable variances are recorded as credits.
10-64
Standard Costs and Variances
• Variances are normally closed at the end of the accounting period to Cost of Goods Sold.
Learning Objective
7
Learning Objective
7
10-66
Advantages of Standard Costing
Management byException
Stable Product Costs
Sensible method
Advantages
PerformanceEvaluation
EmployeeMotivation
10-67
Sensible method
• It provides a sensible method to compare budgeted costs to actual costs at the actual level of output.
10-68
Management by exception• Managers can practice management by exception.
• (MBE) "policy by which management devotes its time to investigating only those situations in which actual results differ significantly from planned results. The idea is that management should spend its valuable time concentrating on the more important items (such as shaping the company's future strategic course). Attention is given only to material deviations requiring investigation."
10-69
Benchmark for performance
• It provides a benchmark for performance evaluation and employee rewards.
10-70
Stable product cost
• Standard costs provide a stable product cost. Actual costs may fluctuate erratically, whereas standard costs are changed only periodically.
10-71
Less expensive
• Standard systems are usually less expensive to operate than actual or normalized systems
Learning Objective
8
Learning Objective
8
10-73
Criticisms of Standard Costing
Not specific
Focus on cost minimization
Too aggregate, and untimely
DisadvantagesToo much focus on direct-labor
Narrow definition
Stable production required
Shorter life cycles
10-74
Too aggregated and untimely
• Variances are too aggregated and arrive too late to be useful. Variances should focus on activities, specific product lines, production batches, and/or FMS cells.
10-75
Focuses on less important production factors
• Variances focus too much on the cost and efficiency of labor, which is becoming relatively unimportant factor of production.
10-76
Less stability of manufacturing environment
• Standard costs rely on a stable production environment, and flexible manufacturing systems have reduced the stability, with frequent switching among a variety of products on the same manufacturing line.
10-77
Too focused on costs rather than quality
• Standards focus too much on cost minimization and not enough on product quality, customer service, and other contemporary issues.
Learning Objective
9
Learning Objective
9
10-79
Operational Control Measures in Today’s Manufacturing Environment
10-80
Operational Performance Measures in Today’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
10-81
Machine Performance Availability Downtime Maintenance records Setup time
Product Quality Warranty claims Customer complaints Defective products Cost of rework
Operational Performance Measures in Today’s Manufacturing Environment
10-82
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
10-83
Productivity Aggregate
productivity Partial productivity
Innovation and Learning
Percentage of sales from new products
Cost savings from process improvements
Operational Performance Measures in Today’s Manufacturing Environment
Learning Objective
10
Learning Objective
10
10-85
The Balanced ScorecardFinancial
Learning and Growth
Internal OperationsCustomer
Vision and
Strategy
10-86
Balanced scorecard
• a strategic planning and management system to align business activities to the:– vision and strategy of the organization– improve internal and external communications – monitor organization performance against
strategic goals.
10-87
Balanced Score card
• It is used extensively in:– business and industry– Government– and nonprofit organizations worldwide
10-88
The four perspectives
• Financial
• Customer
• Internal Business Processes
• Learning and Growth
10-89
Financial Perspective
• encourages the identification of a few relevant high-level financial measures. In particular, designers were encouraged to choose measures that helped inform the answer to the question "How do we look to shareholders?"
10-90
Customer
• encourages the identification of measures that answer the question "How do customers see us?"
10-91
Internal Business Processes
• encourages the identification of measures that answer the question "What must we excel at?"
10-92
Learning and Growth
• encourages the identification of measures that answer the question "Can we continue to improve and create value?".
Learning Objective
11
Learning Objective
11
10-94
Use of Standard Costsfor Product Costing
Raw Material Inventory
Actual quantity atstandard cost
Account Payable
Actual quantity atactual cost
Direct Material Price Variance
Favorable VarianceUnfavorable Variance
10-95
Unfavorable Favorablevariance variance
Direct-Material Quantity Variance
Standard quantityat standard price
Work-in-Process Inventory
Use of Standard Costsfor Product Costing
Actual quantity atstandard cost
Raw-material Inventory
10-96
Unfavorable Favorablevariance variance
Direct-Labor Rate Variance
Actual quantity atactual cost
Wages Payable
Standard quantityat standard price
Work-in-Process Inventory
Use of Standard Costsfor Product Costing
Unfavorable Favorablevariance variance
Direct-Labor Efficiency Variance
10-97
Use of Standard Costsfor Product Costing
Unfavorable Favorablevariance variance
Cost of Goods Sold
10-98
End of Chapter 10Thank you very much
• To download the updated presentationplease go to: barryf1.wordpress.com
Jessie Montealegre Barry Pualengco