standard costing, variance analysis and kaizen costing
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16. Standard Costing, Variance Analysis and Kaizen Costing. Learning Objective 1. Standard costs are. Using Standard-Costing Systems for Control. based on carefully predetermined amounts. used for planning labor and material requirements. the expected level of performance. - PowerPoint PPT PresentationTRANSCRIPT
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
16Standard Costing,Variance Analysis
and Kaizen Costing
16-2
Learning Objective 1
16-3
benchmarks formeasuring performance.
the expected levelof performance.
used for planning laborand material requirements.Standard
costs are
based on carefullypredetermined amounts.
Using Standard-Costing Systems for Control
16-4
STANDARD COSTa budget for the
production of one unit of product or
service
STANDARD COSTa budget for the
production of one unit of product or
service
ACTUAL COSTincurred and
recorded in the production of the product or service
ACTUAL COSTincurred and
recorded in the production of the product or service
COST VARIANCE the differencebetween the
actual cost andthe standard cost
COST VARIANCE the differencebetween the
actual cost andthe standard cost
Using Standard-Costing Systems for Control
16-5
Pro
du
ct c
ost
Standard
A standard cost varianceis the amount by which
an actual cost differs fromthe standard cost.
This variance is unfavorable because the actual cost
exceeds the standard cost.
Using Standard-Costing Systems for Control
16-6
Directmaterials
Managers focus on quantities and coststhat deviate significantly from standards
(a practice known as management by exception).
Type of Product Cost
Am
ou
nt
Directlabor
Standard
Management by Exception
16-7
Take the time to investigate only significant cost variances.Take the time to investigate only significant cost variances.
What is significant?What is significant?
Depends on the size of theorganization
Depends on the size of theorganization
Depends on the type of the organization
Depends on the type of the organization
Depends on the production
process
Depends on the production
process
Management by Exception
16-8
Prepare standard cost performance
report
Conduct next period’s
operations
Analyze variances
Identifyquestions
Receive explanations
Takecorrective
actions
Begin
Variance Analysis Cycle
16-9
Analysis ofhistorical
data
Analysis ofhistorical
data
Taskanalysis
Taskanalysis
Used in a mature production process
Used in a mature production process
Analyze the processof manufacturing
the product
Analyze the processof manufacturing
the product
What DIDthe product
cost?
What DIDthe product
cost?
What SHOULD the
product cost?
What SHOULD the
product cost?
Combinedapproach
Combinedapproach
Analyze the process for the step thathas changed, but use historical datafor the steps that have not changed
Analyze the process for the step thathas changed, but use historical datafor the steps that have not changed
Setting Standards
16-10
Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on
experience and expectations.
Participation in Setting Standards
16-11
Learning Objective 2
16-12
Perfection versus Practical Standards: A Behavioral Issue
PERFECTIONSTANDARDS
PERFECTIONSTANDARDS
PRACTICAL ORATTAINABLESTANDARDS
PRACTICAL ORATTAINABLESTANDARDS
Can only be attained under near perfect
conditions
Can only be attained under near perfect
conditions
Tight as practical,but still expected to
be attained
Tight as practical,but still expected to
be attained
•Occasional machinebreakdowns
•Normal amountsof raw material
waste
•Occasional machinebreakdowns
•Normal amountsof raw material
waste
•Peak efficiency•Lowest possible
input prices•Best-quality
material•No disruption in
production
•Peak efficiency•Lowest possible
input prices•Best-quality
material•No disruption in
production
16-13
Should we usepractical standards
or perfection standards?
Practical standardsshould be set at levels
that are currentlyattainable with reasonable andefficient effort.
Perfection versus Practical Standards: A Behavioral Issue
16-14
I agree. Perfection standards are
unattainable and therefore discouraging
to most employees.
Perfection versus Practical Standards: A Behavioral Issue
16-15
QuantityStandards
PriceStandards
Use product design specifications.
Use competitivebids for the quality
and quantity desired.
Setting Standards – Direct Materials
16-16
The standard materials cost for one unit of product is:
Standard quantity Standard price for of material one unit of material required for one
unit of product
×
Setting Standards – Direct Materials
16-17
Efficiencystandards
Ratestandards
Use time and motion studies for
each labor operation.
Use wage surveys and
labor contracts.
Setting Standards – Direct Labor
16-18
The standard labor cost for one unit of product is:
Standard number Standard wage rate of labor hours for one hour for one unit of product
×
Setting Standards – Direct Labor
16-19
Jobs with repetitive tasks lend themselves to efficiency measures.
Computing non-manufacturing efficiency variances requires some assumed relationship between input and output activity. Examples Examples
Standard Cost in Service Industries
16-20
Department Input Output
Mailing Labor hours Number of pieces mailed
Personnel Labor hours Number of personnel changes processed
Food service Labor hours Number of meals served
Consulting Billable hours Customer revenues
Nursing Labor hours Number of patients and/or procedures
Check processing Computer hours Number of checks processed
Standard Cost in Service Industries
16-21
Implementing and maintaining cost standards canbe time-consuming, labor-intensive, and expensive.
Implementing and maintaining cost standards canbe time-consuming, labor-intensive, and expensive.
Costs and Benefits ofStandard-Costing Systems
IMPROVEDDECISION
MAKING, BUT:
IMPROVEDDECISION
MAKING, BUT:
Costs Benefits
16-22
Quantity variancePrice variance
The difference betweenthe actual price and the
standard price
The difference betweenthe actual quantity andthe standard quantity
Standard cost variances
Cost Variance Analysis
16-23
A General Model for Variance Analysis
Actual quantity Actual quantity Standard quantity × × × Actual price Standard price Standard price
Price / Ratevariance
Quantity / Efficiency variance
16-24
A General Model forVariance Analysis
Actual quantity Actual quantity Standard quantity × × × Actual price Standard price Standard price
Standard price is the amount that should have been paid for the resources acquired.
Price / Ratevariance
Quantity / Efficiency variance
16-25
Quantity / Efficiency variance
Price / Ratevariance
A General Model forVariance Analysis
Actual quantity Actual quantity Standard quantity × × × Actual price Standard price Standard price
Standard quantity is the quantityallowed for the actual good output.
16-26
A General Model forVariance Analysis
Actual quantity Actual quantity Standard quantity × × × Actual price Standard price Standard price
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
Price / Ratevariance
Quantity / Efficiency variance
16-27
Let’s use the concepts of the
general model to calculate standard
cost variances, starting with
direct materials.
Standard Costs
16-28
Learning Objective 3
16-29
Koala Camp Gear Company in MelbourneAustralia has the following direct material
standard to manufacture one Tree Line tent:
12 square meters per tent at$8.00 per square meter (sq m)
Last month Koala purchased 40,000 squaremeters at $8.15 per square meter and used36,400 square meters to make 3,000 tents.
Materials Variances
16-30
We should compute the price variance using the actual
quantity purchased.
Price variance$6,000 Unfavorable
40,000 sq m 40,000 sq m × × $8.15 per sq m $8.00 per sq m
$326,000 $320,000
Actual quantity Actual quantity purchased purchased × × Actual price Standard price
Materials Variances
16-31
We should compute the quantity variance
using the actual quantity used.
Quantity variance$3,200 Unfavorable
36,400 sq m 36,000 sq m × × $8.00 per sq m $8.00 per sq m
$291,200 $288,000
Actual quantity used Standard quantity × × Standard price Standard price
SQ = 3,000 tents × 12 sq m per tent SQ = 36,000 sq m
Materials Variances
16-32
MPV = AQp(AP – SP) MPV = 40,000 sq m × ($8.15 – $8.00) MPV = $6,000 Unfavorable
MQV = SP(AQu – SQ) MQV = $8.00(36,400 sq m – 36,000 sq m) MQV = $3,200 Unfavorable
We may also calculate materialsvariances using formulas:
We may also calculate materialsvariances using formulas:
Materials Variances
16-33
Okay. I’ll computethe price variance when
materials are purchased, and the usage variance assoon as material is used.
I need the variances as soonas possible so that I canbetter identify problems
and control costs.
You accountants just don’tunderstand the problems weproduction managers have.
Reporting Materials Variances
16-34
Responsibility for Materials Variances
I am not responsiblefor this unfavorable
materials usagevariance.
You bought poor qualitymaterials, so my people
had to use more of it.
Your poorly trained workers and poorly maintained equipment
caused the problems.
Also, your poor scheduling requires rush orders of
materials at higher prices, causing unfavorable price
variances.
16-35
Now let’s calculate standard cost variances for direct labor.
Standard Costs
16-36
Koala has the following direct laborstandard to manufacture one Tree Line tent:
2 standard hours per tent at$18.00 per direct labor hour
Last month 5,900 direct labor hours were worked at $19.00 per hour to make 3,000 tents.
Labor Variances
16-37
Actual hours Actual hours Standard hours × × × Actual rate Standard rate Standard rate
Rate variance$5,900 Unfavorable
Efficiency variance$1,800 Favorable
5,900 hours 5,900 hours 6,000 hours × × ×$19.00 per hour $18.00 per hour $18.00 per hour
$112,100 $106,200 $108,000
SH = 3,000 tents × 2 hours per tent SH = 6,000 hours
Labor Variances
16-38
LRV = AH(AR - SR) LRV = 5,900 hrs($19.00 - $18.00) LRV = $5,900 Unfavorable
LEV = SR(AH - SH) LEV = $18.00(5,900 hrs - 6,000 hrs) LEV = $1,800 Favorable
We may also calculate laborvariances using formulas:
We may also calculate laborvariances using formulas:
Labor Variances
16-39
Labor Rate Variance – A Closer Look
Production managers who make work assignmentsare generally responsible for price variances.
High skill,high rate
Low skill,low rate
Using highly paid skilled workers toperform unskilled tasks results in an
unfavorable price variance.
16-40
Labor Efficiency Variance –A Closer Look
UnfavorableEfficiencyVariance
Poorlytrainedworkers
Poorquality
materials
Poorlymaintainedequipment
Poorsupervisionof workers
16-41
You used too much time because of poorly
trained workers and poor supervision.
I am not responsible for the unfavorable labor
efficiency variance!
You bought poor qualitymaterials, so my people tookmore time to process them.
Responsibility for Labor Variances
16-42
Maybe I can attribute the laborand materials variances to personnel
for hiring the wrong peopleand training them poorly.
Responsibility for Labor Variances
16-43
In some manufacturing processes, a certain amount of defective production or spoilage is normal.
In some manufacturing processes, a certain amount of defective production or spoilage is normal.
Example: 1,000 liters of chemicals are normally required in a chemical process in order to obtain 800 liters of good output.
If total good output in February is 5,000 liters, what is the standard allowed quantity of input?
Example: 1,000 liters of chemicals are normally required in a chemical process in order to obtain 800 liters of good output.
If total good output in February is 5,000 liters, what is the standard allowed quantity of input?
Good output quantityGood output quantity = 80% X Input quantity= 80% X Input quantity
Good output quantity ÷ 80%Good output quantity ÷ 80% = Input quantity allowed= Input quantity allowed
5,000 liters of good output ÷ 80%
5,000 liters of good output ÷ 80%
= 6,250 liters of input allowed
= 6,250 liters of input allowed
Allowance for Defects or Spoilage
16-44
Learning Objective 4
16-45
????
How does a manager know when to follow up on a cost variance and when to ignore it?
How does a manager know when to follow up on a cost variance and when to ignore it?
Size of varianceSize of variance
Absolute amountAbsolute amount Relative amountRelative amount
Significance of Cost Variances: When to Follow Up
16-46
Size of variance Dollar amount Percentage of standard
Recurring variances Trends Controllability Favorable variances Costs and benefits of
investigation
What clues help me to determine the
variances that I should investigate?
Significance of Cost Variances
16-47
Significance of Cost Variances: When to Follow Up
How do I know which variances to investigate?
Larger variances, in dollar amount or as a
percentage of the standard, are
investigated first.
We could use a rule of thumb such as:investigate all variances that are over $10,000
or over 10 percent of the standard cost.
We could use a rule of thumb such as:investigate all variances that are over $10,000
or over 10 percent of the standard cost.
16-48
Month VariancePercentage of standard cost
September $6,000 F 6.0%October 6,400 F 6.4%November 3,200 F 3.2%December 6,200 F 6.2%
Month VariancePercentage of standard cost
September $6,000 F 6.0%October 6,400 F 6.4%November 3,200 F 3.2%December 6,200 F 6.2%
None of the variances are greater than $10,000 or10% for any one month, but they should be investigated
because of they have continued for several months.
None of the variances are greater than $10,000 or10% for any one month, but they should be investigated
because of they have continued for several months.
Significance of Cost Variances: When to Follow Up
What about recurring variances?
16-49
Month VariancePercentage of standard cost
September $ 250 U 0.25%October 840 U 0.84%November 4,000 U 4.0%December 9,300 U 9.3%
Month VariancePercentage of standard cost
September $ 250 U 0.25%October 840 U 0.84%November 4,000 U 4.0%December 9,300 U 9.3%
Significance of Cost Variances: When to Follow Up
What about trends?
None of the variances are greater than $10,000 or10% for any one month, but they should be
investigated because of the unfavorable trend.
None of the variances are greater than $10,000 or10% for any one month, but they should be
investigated because of the unfavorable trend.
16-50
ControllabilityA manager is more likely to investigate a variance
that is controllable by someone in the
organization than one that is not.
ControllabilityA manager is more likely to investigate a variance
that is controllable by someone in the
organization than one that is not.
Favorable variancesIt is as important to investigate
significant favorable variances as well as significant unfavorable
variances.
Favorable variancesIt is as important to investigate
significant favorable variances as well as significant unfavorable
variances.
Cost and benefits of investigation
The decision whether to investigate a variance is a cost -
benefit decision
Cost and benefits of investigation
The decision whether to investigate a variance is a cost -
benefit decision
Significance of Cost Variances: When to Follow Up
16-51
Display variations in a process and help to
analyze the variationsover time.
Distinguish between random variationsand variations that
should be investigated.
Provide a warning signal when variationsare beyond a specified level.
Controlcharts
Statistical Analysis
16-52
1 2 3 4 5 6 7 8 9
Variance measurements
Favorable limit
Unfavorable limit
Desired value • • •• •
••
••
Warning signals for investigation
Statistical Analysis
16-53
Learning Objective 5
16-54
Behavioral Effects of Standard Costing
Standard costs, budgets and variances are used to evaluate the performance of individuals and departments
Standard costs, budgets and variances are used to evaluate the performance of individuals and departments
They can profoundly influence behavior when they are used to determine salary increases, bonuses and promotions
They can profoundly influence behavior when they are used to determine salary increases, bonuses and promotions
16-55
Direct-materials price variance
Direct-materials quantity variance
Direct-labor rate variance
Direct-labor efficiency variance
Purchasing manager
Production supervisor
Production supervisor
Production supervisor
Get the best prices available for purchased goods andservices through skillful purchasing practices
Skillful supervision and motivation of production employees, coupled withthe careful use and handling of materials, contribute to minimal waste
Generally results from using a different mix of employeesthan that anticipated when the standard were set
Motivating employees toward production goals andeffective work schedules improves efficiency
Which Managers Influence Cost Variances?
16-56
Researchand
develop-ment
Design Supply Produc-
tion Marketing
Distri- bution
Customer service
HumanresourcesHuman
resources
PhysicalresourcesPhysical
resources
Variances in one part of the value chain can bedue to root causes in another part of the chain.Variances in one part of the value chain can bedue to root causes in another part of the chain.
Interaction among variances often occurs, making it difficult to determine the responsibility for a particular variance.
Interaction among variances often occurs, making it difficult to determine the responsibility for a particular variance.
Interaction among Variances
Value chainValue chain
perspectiveperspective
Exh.16-5
16-57
Learning Objective 6
16-58
Work-in-process inventory
Direct-materials costDirect-labor cost
Manufacturing overhead
Finished-goods inventory
Cost of goods sold Income summary
Product cost transferredwhen product is finished
Product cost transferred when product is sold
Expense closed into
Income summary at endof accounting period
Exh.16-6
Using Standard Costs for Product Costing
16-59
Standard Cost Journal Entries
Inventories are recorded at standard cost. Variances are recorded as follows:
Favorable variances are credits, representing savings in production costs.
Unfavorable variances are debits, representing excess production costs.
Standard cost variances are usually closed to cost of goods sold. Favorable variances decrease cost of goods sold. Unfavorable variances increase cost of goods sold.
Inventories are recorded at standard cost. Variances are recorded as follows:
Favorable variances are credits, representing savings in production costs.
Unfavorable variances are debits, representing excess production costs.
Standard cost variances are usually closed to cost of goods sold. Favorable variances decrease cost of goods sold. Unfavorable variances increase cost of goods sold.
16-60
Impact of Information Technology on Standard Costing
Materials purchasesand uses are recorded
at standard,using bar codes.
Labor time and rate are recorded at standard,
using bar codesand employee IDs.
CAD designers can accessthe data base for instantdesign cost estimates.
Standard costdata base
16-61
Learning Objective 7
16-62
Standard Costing: Its Traditional Advantages
Managementby exception
Performanceevaluation
Employeemotivation
Sensible costcomparisons
Advantages
More stableproduct costs
Less expensive thanactual- or normal-costing systems
16-63
Learning Objective 8
16-64
Criticisms of Standard Costing in Today’s Manufacturing Environment
There is too much focus on the cost and efficiency of direct labor.
Automation reduces labor costs and the significance of labor variances.
Automated manufacturing processes tend to be more consistent in meeting production specifications.
Variance reports are often provided too late to be useful to managers.
There is too much focus on the cost and efficiency of direct labor.
Automation reduces labor costs and the significance of labor variances.
Automated manufacturing processes tend to be more consistent in meeting production specifications.
Variance reports are often provided too late to be useful to managers.
Variances are often too aggregated. They are not tied to specific product lines, production batches, or to the flexible management system.
Standard costing may not be applicable in flexible manufacturing operationswith short life-cycle products.
There is too much focus on cost minimization rather than increasing product quality or customer service.
Variances are often too aggregated. They are not tied to specific product lines, production batches, or to the flexible management system.
Standard costing may not be applicable in flexible manufacturing operationswith short life-cycle products.
There is too much focus on cost minimization rather than increasing product quality or customer service.
16-65
Adaptation of Standard-Costing Systems
Applications of standard costing have adapted tochanges in the manufacturing environment and the
resulting criticisms leveled at standard costing.
Applications of standard costing have adapted tochanges in the manufacturing environment and the
resulting criticisms leveled at standard costing.
Automation means more overhead,
less labor.
Automation means more overhead,
less labor.
Reduced importance of
labor standards.
Reduced importance of
labor standards.
More emphasis on material and
overhead costs.
More emphasis on material and
overhead costs.
Less use of laboras a cost driver.
Less use of laboras a cost driver.
16-66
Adaptation of Standard-Costing Systems
Applications of standard costing have adapted tochanges in the manufacturing environment and the
resulting criticisms leveled at standard costing.
Applications of standard costing have adapted tochanges in the manufacturing environment and the
resulting criticisms leveled at standard costing.
Reduces labor efficiency variance
Reduces labor efficiency variance
Reduces material quantity variance
Reduces material quantity variance
AutomationAutomation
Reduces variation in qualityand increases quality
Reduces variation in qualityand increases quality
16-67
Adaptation of Standard-Costing Systems
Applications of standard costing have adapted tochanges in the manufacturing environment and the
resulting criticisms leveled at standard costing.
Applications of standard costing have adapted tochanges in the manufacturing environment and the
resulting criticisms leveled at standard costing.
Shorter product life
cycles
Shorter product life
cycles
Elimination of non-value-added costs
Elimination of non-value-added costs
More frequent revisions of
standard costs
More frequent revisions of
standard costs
More frequent benchmarking
More frequent benchmarking
Real-time information systems provide more timely
variance reports
Real-time information systems provide more timely
variance reports
Non-financial measures such a delivery times are
more important
Non-financial measures such a delivery times are
more important
16-68
Learning Objective 9
16-69
Comparing Standard Costing and Kaizen Costing
Standard costing – the use of carefully predetermined product costs for budgeting and performance evaluation. Standard costs are typically used in established
production processes.
Kaizen costing – the emphasis is on continuous reduction of production costs. Rather than standards or targets, the goal is current
costs that are less than previous costs.
Standard costing – the use of carefully predetermined product costs for budgeting and performance evaluation. Standard costs are typically used in established
production processes.
Kaizen costing – the emphasis is on continuous reduction of production costs. Rather than standards or targets, the goal is current
costs that are less than previous costs.
16-70
Co
st p
er p
rod
uct
un
it
12/31/x0 12/31/x1Time
Cost basefor next
year
Actual costreductionachieved
Current yearcost base
Kaizen goal:cost reduction
rate
Actual costperformance
of the current year
Exh.16-7
Kaizen Costing
Kaizen goal:cost reduction
amount
16-71
Learning Objective 10
16-72
Production Mix and Yield Variances Nearly all production processes require
multiple materials and labor inputs. A summary quantity variance for materials
and labor would hide the individual effects of these inputs.
The quantity variances can be analyzed into two further variances: Mix (the difference between actual and
standard input proportions) Yield (the difference between actual and
standard input used) The analysis assumes, of course, that the
inputs can be substituted for each other.
16-73
End of Chapter 16