principles of managerial accounting chapter 10. standard costs set to encourage efficient operations...
TRANSCRIPT
Principles of Managerial Accounting
Chapter 10
Standard Costs Set to encourage efficient operations
– management by exception. Quantity Standards
A benchmark to measure performance Direct Materials – units of raw materials Direct Labor – time to convert
Cost Standards Identifies how much each unit of input
should cost. (eg. unit of raw material standard cost compared to actual cost)
Setting Standard Costs Ideal standards – allow for no machine
breakdowns or work interruptions, and require that workers operate at peak efficiency 100% of the time.
Practical standards – Tight, but attainable. Allow for normal machine downtime and employee rest periods.
Setting direct material standards Standard price per unit for direct
materials Reflect delivered cost of the materials, net
of discounts Standard quantity of direct materials
per unit of output. The amount of material going into each unit
of finished product, many companies include an allowance for unavoidable waste.
Setting Direct Labor Standards Standard rate per hour of direct
labor Includes hourly wages plus fringe
benefits and other labor-related costs. Standard direct labor-hours per unit
of output. Time allowed to complete a unit of
product, includes allowance for coffee breaks, clean-up time and machine downtime.
Setting variable manufacturing overhead standards Usually expressed in terms of
direct labor-hours or machine-hours.
Standards vs budgets Standards are generally expressed
in a unit amount. Budgets generally reflect to total
costs.
Variance Analysis A variance is the difference between
standard prices or quantities and the actual prices or quantities. Price variance – the difference between
the actual quantity of inputs at the actual price and the actual quantity of inputs at the standard price.
Price (rate) variance = AQ (AP-SP) Or (AQ x AP) – (AQ x SP)
AQ = Actual quantity of inputs purchased (or used)
AP = Actual price per unity of inputs purchased
SP = Standard Price per unity of input
SQ = Standard input allowed for the actual output
Variance analysis (cont) Quantity variance
The difference between the actual quantity of inputs used at the standard price and the standard quantity of inputs allowed for the actual output at the standard price.
Quantity (efficiency) variance = (AQ x SP) – (SQ x SP) or SP (AQ-SQ)
Responsibility for variances Materials price variance
Generally the responsibility of the purchasing manager.
Variance should be recognized immediately rather than wait until the materials are placed in production.
Materials variance Generally the responsibility of the
production manager, unless the inferior materials are purchased by the purchasing manager.
Responsibilities (cont) Labor rate variances:
Production manager would be responsible for the mix of workers (lower vs higher paid employees) or overtime
Labor efficiency variance: Causes – poorly trained workers, poorly
motivated workers, poor quality materials which require more labor time or processing, faulty equipment , poor supervision
Most often it is changes in demand for the product.
Variable overhead variances Spending variances when
expressed in direct labor hours: Actual overhead cost – (Actual input
hours x Variable overhead rate) Efficiency variance when expressed
in terms of direct labor hours: (Actual hours – Standard hours
allowed) x Variable overhead rate
Potential problems with using standard costs Usually prepared on a monthly basis
rendering the information useless in many situations.
Management may use an unfavorable variance as a “club” and morale may suffer.
JIT strategy may be ignored to meet established standards.
Meeting standards may over-ride other objectives eg. Improving quality, on-time delivery, customer satisfaction.
Characteristics of a balanced scorecard Scorecard should provide motivation and
feedback for improving. Should emphasize continuous improvement
rather than just meeting standards. Some of the performance measures may be
non-financial which are usually better understood by employees.
Scorecards should contain only those performance measure the individual (or department) can actually influence.
Internal business process performance measures Delivery cycle time – total elapsed time
between when an order is placed and the product is shipped to the customer.
Throughput (manufacturing cycle) time – total elapsed time between when an order is initiated into production and when it is shipped to the customer.
Manufacturing cycle efficiency – the ratio of value-added time (process time) to total throughput time.
Assignment: Ex 3 Pr 10, 11, 12