COST CH6 Standard Cost

7/28/2019 COST CH6 Standard Cost

1/74


2/74


3/74


4/74

StandardA standard is a benchmark or norm for measuringperformance.

Standard are widely used in managerial accounting wherethey relate to the quantity & cost of inputs in manufacturing

goods & providing services.

Quantity standards specify how much of an input should beused to make a product or provide a service.

Cost or price standards specify how much should be paid for

each unit of input.


5/74

Standard CostA standard cost is a planned or pre-determined cost

which is calculated from managements standard of

efficient operation & the relevant necessary expenditure.


6/74

Standard Costing Standard costing is the preparation of standard costsand applying them to measure the variations from

actual costs and analyzing the causes of variations

with a view to maintain maximum efficiency in

production.

It can be used as a process of measuring and

correcting actual performance to ensure that the plans

are properly set and implemented


7/74

Purpose of Standard Costing Establishing budgets. Controlling costs, directing and motivating employees

and measuring efficiencies.

Promoting possible cost reduction.

Simplifying costing procedures and expediting costreports.

Assigning costs to materials, work in process, andfinished goods inventories.

Forming the basis for establishing bids and contractsand for setting sales prices


8/74

Procedures of standard costing system

Set the predetermined standards for sales margin and productioncosts

Collect the information about the actual performance

Compare the actual performance with the standards to arrive at

the variance

Analyze the variances and ascertaining the causes of variance

Take corrective action to avoid adverse variance

Adjust the budget in order to make the standards more realistic


9/74

Functions of standard costing system

Valuation

Assigning the standard cost to the actual output

Planning

Use the current standards to estimate future sales

volume and future costs

Controlling

Evaluating performance by determining how efficiently

the current operations are being carried out


10/74

Functions of standard costing system

Motivation

Notify the staff of the managements expectations

Setting of selling price


11/74

Ideal Standard Ideal standards are those that can be attained onlyunder the best circumstances.

These can be achieved through the best possible

combination of factors i.e. maximum output atminimum cost.

Assumption:

Extremely tight & do not provide

for waste & inefficient in any

forms.

No material is wasted.

No units are spoiled.

No idle time.

Operators work at predeterminedspeed.

The available capacity is fully

utilized


12/74

Practical Standard Practical standards are those standards that are tightbut attainable.

Assumption:

Allow for normal machine downtime

Employee rest period.

Practical standards are used in

Using signaling abnormal condition Forecasting cash flows

Planning inventory


13/74

Setting Standard Past records of purchase prices and input usage can help insetting standards.

Setting price and quantity standards requires the combinedexpertise of all persons who have responsibility over input

prices and over effective use of inputs.

The standards should be designed to encourage efficient

future operations, not a repetition of past inefficient

operations.


14/74

Setting Standard Standard must be established for a definite period of

time so that they can be effective in performance

evaluation, control & analysis of costs.

Standards are developed for-

Materials

Labor

Overhead


15/74

Connotation of Standard

Standard

Price

Quantity

Material

Price

Quantity

Labor

Rate

Hour

Overhead

Rate

Hour


16/74

Object Matrix

Object

AP

SP

AQ

AQ*AP

AQ*SP

SQ

--

SQ*SP

AQ=Actual QuantityAP=Actual PriceSQ=StandardQuantitySP=Standard Price


17/74

Factors in Setting Price Standard Purchase Price

Freight

Receiving & handling

Purchase discount


18/74

Factors in Setting Quantity Standard

Basic materials input i.e. materials

requirement as specified in the bill of

material.Allowance for waste & spoilage

Allowances for rejecting defective materials

Evaporation

Leakage


19/74

Factors in Setting Rate Standard

Basic wage rate per hour

Employment taxes

Fringe benefit

Union negotiation

Experience of the worker


20/74

Factor in Setting Time(Hour) Standard

Basic labor time

Allowance for breaks & personal needs

Allowance for cleanup & machine downtime

Allowance for reject

Allowance for set-up time

Allowance for fatigue

Waiting time of operator


21/74

Variance analysis

A variance is the difference between the

standards and the actual performance

When the actual results are better than the

expected results, there will be a favorable

variance (F).

If the actual results are worse than the expected

results, there will be an adverse variance (A).


22/74

Profit variance

Selling andadministrativeCost variance

Total productionCost variance

Sales Variance

Sales variance basedon turnover Sales Variancebased on Margin

Materialscostvariance

LaborCostvariance

VariableOverheadvariance

FixedOverheadvariance

Overhead variance


23/74

Three types of cost variance

Material cost variance

Labor cost variance

Overheads variance

Variable overheads variance

Fixed overheads variance


24/74

Materials cost variance(AQ*AP SQ*SP)

Material Price varianceAQ*AP AQ*SP Material Usage VarianceAQ*SP SQ*SP

Mix Variance Yield Variance

Actual Units

Produced*SQ P/U


25/74

Labor Cost VarianceAH*AR SH*SR

Rate VarianceAH*AR AH*SR

Mix Variance Yield Variance

Idle Time VarianceSR*Hours Lost

Efficiency VarianceAH*SR SH*SR

Actual UnitsProduced*SH

P/U


26/74

Overhead CostVariance

Variable OverheadVariance

Fixed OverheadVariance


27/74

Variable Overhead variance

(AH*AR

SH*SR)

VOExpenditure/Spending/

Budget Variance

AH*AR

AH*SR

VO EfficiencyVariance

AH*SR SH*SR

Actual Units

Produced*SVMO P/U


28/74

Fixed Overhead varianceAOC SH*SFOR

Fixed O/H Expenditure VarianceAFOH - SFOH

Fixed O/H Volume variance(AP

SP)*SFOHR PU

EfficiencyvarianceCalendervariance CapacityVariance


29/74

Sales Value Variance(AQS*ASP SQS*SSP)

Sales Price VarianceASP* AQS SSP*AQS

Sales Volume VarianceAQS *SSP SQS*SSP

Sales Mix Variance Sales Quantity Variance


30/74

Total sales margin variance(Actual Profit Budgeted Profit)

Sales Margin PriceVariance

(AMPU

SSMPU)*AQ

Sales Margin VolumeVariance

(AQ

SQ)*SSMPU

Sales Margin QuantityVariance

Sales Margin MixVariance

(SSPPU

SCPU)(ASPPU

SCPU)

P bl


31/74

Problem

Direct Materials

Direct Labor

VariableManufacturingO/H

Total Standard Cost

Standard

Quantity OrHour

Standard

Price or Rte

Standard

Cost

ZB Company produce a single product. Variablemanufacturing overhead is applied to products on thebasis of direct-labor-hours. The standard costs for one unitof product are as under:

2.5 Hours Tk. 3 Tk. 7.5

Tk. 54.50

2.5 Hours Tk. 14 Tk.35

3 Pound Tk. 4 Tk.12


32/74

Direct Materials

Direct Labor

VariableManufacturing

O/H

Actual QuantityOr Hour

ActualPrice or

Rate

ActualCost

During June, 2011, 2000 units were produced. The costs associatedwithJunes operations were as under

5400 Hours Tk. 2.85 Tk.15390

5400 Hours Tk. 13.75 Tk.74250

6500 Pound Tk. 3.80 Tk.24700


33/74

2. Compute & Comment on the Labor variance.3. Compute & Comment on Manufacturing Overhead

Variance.

Requirements:1. Compute & Comment on the material variance ifI. All of the material purchased was used during June.II. 5000 units of materials is used during the period of

to produce 1600 units of products

Requirement: 01 (i)


34/74

Material Price Variance = (AP SP)*AQ= (Tk.3.80 Tk.4)*6500 pounds

= Tk.1300 F

Requirement: 01 (i)

Data Derived:Standard Quantity (SQ) = SQ Per Unit * Units Produced

= 3 Pounds * 2000 Units= 6000 Pounds

Material Quantity Variance = (AQ SQ)*SP

= (6500 6000)* Tk.4= Tk.2000 USince actual quantity is more than standard quantity toproduce 2000 units of product, material quantity variance

is unfavorable.

Requirement: 01 (ii)


35/74

In this situation material price variance is not computed.This is because it is calculated when materials are

purchased by purchase manager. Here only quantityvariance will be calculated.

Requirement: 01 (ii)

Here AQ = 5000 units

SQ = 3 pounds * 1600 units = 4800 poundsMaterial Quantity Variance = (AQ SQ)*SP

= (5000 4800)* Tk.4= Tk.800 U

Since actual quantity is more than standard quantity toproduce 1600 units of product, material quantity varianceis unfavorable.

Requirement: 02


36/74

Labor Rate Variance = (AR SR)*AH= (Tk13.75 Tk.14)*5400 hours

= Tk.1350 F

Requirement: 02

Data Derived:Standard Hour (SH) = SH Per Unit * Units Produced

= 2.5 hrs * 2000 Units= 5000 Hours

Labor Efficiency Variance = (AH SH)*SR

= (5400

5000)* Tk.14= Tk.5600 USince actual hours is more than standard hours to produce2000 units of product, so material quantity variance is

unfavorable.

Requirement: 03


37/74

Variable O/H Variance = (AR SR)*AH= (Tk.2.85 Tk.3)*5400 hours

= Tk.810 F

Requirement: 03

Data Derived:Standard Hour (SH) = SH Per Unit * Units Produced

= 2.5 hrs * 2000 Units= 5000 Hours

Variable O/H Efficiency Variance = (AH SH)*SR= (5400 5000)* Tk.3= Tk.1200 U

Since actual hours is more than standard hours to produce2000 units of product, so material quantity variance is

unfavorable.


38/74

Reasons for variances

Material price variance

Price changes in market conditions

Change in the efficiency of purchasing dept. to obtain

good terms from suppliers

Purchase of different grades or wrong types of materials

Non-availability of quantity discount

Freight cost changes & changes in purchasing &

storekeeping costs.


39/74

Materials usage variance

More effective use of materials/ wastage arising from

the efficient production process

Purchase of different grade or wrong types of materials

Wastage by the staff

Change in production methods

Poor material handling



40/74

Labor rate variance Non-controllable market changes in the basic wage

rate

Use of higher/lower grade of workers

Unexpected overtime allowance paid

Labor strike leading to utilization of unskilled help

Change in labor rate within industry



41/74

Labor efficiency

variance Purchase of different grade

or wrong types ofmaterials

Breakdown of machinery

High/low labour turnover

Changes in production

method

Introduction of newmachinery


Poor working condition

Assignment wrong type of

worker to work

Adequacy of supervision

Changes in workingcondition

Change in motivation

methods

Poor supervision

Insufficient training of

workers


42/74

Variable overheads expenditure variance

It may be caused by the non-controllable change in

the price level of indirect wages or utility rates sincethe predetermined rate is set

It is meaningless to interpret this kind of variance on

its own. One should look various components of the

fixed overheads



43/74

Variable overheads efficiency variance

Both the variable overheads and direct

labor cost vary with the direct labor hours

worked



44/74

Fixed overheads expenditure

It is meaningless to interpret this kind of

variance on its own.

It may be caused by the change in the price

levels of rent, rates and other fixed

expenses



45/74

Fixed overhead volume variance

When the level of activity is higher than

the budgeted level, there is a favourable

variance



46/74

Sales margin price variance

Change in the pricing strategies of the company

Response to the change of pricing policies of itscompetitors

Higher profit margin with growing demand for

the product Lower profit margin for simulating sales



47/74

Sales margin volume variance

Change in prices and demand

Change in the market share of its competitors



48/74

Responsibility for cost Variance

MPV Purchasing Agent/Manager

MQV Plant Superintendent, Departmental Supervisor,

Production Manager, Machine Operator

LRV HRD, Departmental Supervisor, Plant Superintendent

LEV Plant Superintendent, Departmental Supervisor,

Production Manager, Machine Operator

OSV

OVV


49/74

Balanced Score Card


50/74

The Balanced Scorecard (BSC) was published in 1992 by

Robert Kaplan and David Norton.

A Balanced scorecard consists of an integrated set of

performance measures that are derived from the

companys strategy & that support the companys strategy

throughout the organization.

The Balanced Scorecard evaluates the firm's efforts for

future improvement using process, customer, and learning

and growth metrics.

Balanced Score Card


51/74

The term "scorecard" signifies quantified performance

measures and "balanced" signifies that the system is

balanced between:

short-term objectives and long-term objectives

financial measures and non-financial measures

lagging indicators and leading indicators

internal performance and external performance

perspectives

Balanced Score Card


52/74

The Balanced Scorecard is a management system that

maps an organization's strategic objectives into

performance metrics in four perspectives:

financial performance,

internal processes,

customers, and

learning and growth.


53/74

Balanced Score Card Framework

Financial Performance

ObjectivesMeasures

Targets

Initiative

Learning & Growth

Objectives

Measures

Targets

Initiative

CustomersObjectives

Measures

Targets

Initiative

Internal ProcessObjectives

Measures

Targets

Initiative

Strategy

Balanced Score Card


54/74

The financial perspective addresses the question of

how shareholders view the firm and

which financial goals are desired from the

shareholder's perspective.

The specific goals depend on the company's stage in the

business life cycle.

Balanced Score Card


55/74

The customer perspective addresses the question of

how the firm is viewed by its customers and

how well the firm is serving its targeted customers

in order to meet the financial objectives.

Generally, customers view the firm in terms of time,

quality, performance, and cost.

Balanced Score Card


56/74

Internal business process objectives address the

question of

which processes are most critical for satisfying

customers and shareholders. These are the processes in which the firm must

concentrate its efforts to excel.

Balanced Score Card


57/74

Learning and growth metrics address the question of

how the firm must learn, improve, and innovate in

order to meet its objectives.

Much of this perspective is employee-centered.

Balanced Score Card


58/74

Within each of the Balanced Scorecard financial,customer, internal process, and learning perspectives, thefirm must define the following:

Strategic objectives - what the strategy is to achieve in

that perspective.

Measures - how progress for that particular objective

will be measured.

Targets - the target value sought for each measure.

Initiatives - what will be done to facilitate the reaching

of the target.

The Process of Building A Balanced Score Card


59/74

g


60/74


61/74

Step-one: Assessment

Assessment of the organizations Mission & Vision,

challenges (pains), enablers & values.

Preparing a change management plan for the

organization & conducing a focused communication

workshop to identify messages, media outlets, timing, &

messengers.

The Process of Building A Balanced Scorecard


62/74

Step Two: Strategy

In Step Two, elements of the organizations strategy,

including Strategic Results, Strategic Themes, and

Perspectives, are developed by workshop participants to

focus attention on customer needs and the organizations

value proposition.



63/74

Step Three: Objectives In Step Three, the strategic elements developed in Steps

One and Two are decomposed into Strategic Objectives,

which are the basic building blocks of strategy and define

the organization's strategic intent.

Objectives are first initiated and categorized on the

Strategic Theme level, categorized by Perspective, linked

in cause-effect linkages (Strategy Maps) for each StrategicTheme, and then later merged together to produce one set

of Strategic Objectives for the entire organization.



64/74

Step Four: Strategy Map

In Step Four, the cause and effect linkages between the

enterprise-wide Strategic Objectives are formalized in an

enterprise-wide Strategy Map.

The previously constructed theme Strategy Maps are

merged into an overall enterprise-wide Strategy Map that

shows how the organization creates value for its customers

and stakeholders.



65/74

Step Five: Performance Measures

In Step Five, Performance Measures are developed for

each of the enterprise-wide Strategic Objectives.

Leading and lagging measures are identified, expected

targets and thresholds are established, and baseline and

benchmarking data is developed.



66/74

Step Six: Initiatives

In Step Six, Strategic Initiatives are developed that support

the Strategic Objectives.

To build accountability throughout the organization,

ownership of Performance Measures and Strategic

Initiatives is assigned to the appropriate staff and

documented in data definition tables.



67/74

Step Seven: Automation In Step Seven, the implementation process begins by

applying performance measurement software to get the

right performance information to the right people at the

right time. Automation adds structure and discipline to implementing

the Balanced Scorecard system, helps transform disparate

corporate data into information and knowledge, and helps

communicate performance information.

In short, automation helps people make better decisions

because it offers quick access to actual performance data.



68/74

Step Eight: Cascade In Step Eight, the enterprise-level scorecard is cascaded

down into business and support unit scorecards, meaning

the organizational level scorecard (the first Tier) is

translated into business unit or support unit scorecards (thesecond Tier) and then later to team and individual

scorecards (the third Tier). Cascading translates high-level

strategy into lower-level objectives, measures, and

operational details. Cascading is the key to organization

alignment around strategy. Team and individual scorecards

link day-to-day work with department goals and corporate

vision.



69/74

Cascading is the key to organization alignment around

strategy. Performance measures are developed for all

objectives at all organization levels.

As the scorecard management system is cascaded downthrough the organization, objectives become more

operational and tactical, as do the performance measures.

Accountability follows the objectives and measures, as

ownership is defined at each level.

An emphasis on results and the strategies needed to produce

results is communicated throughout the organization.



70/74

Step Nine: Evaluation

In Step Nine, an Evaluation of the completed scorecard is

done. During this evaluation, the organization tries to

answer questions such as, Are our strategies working?,

Are we measuring the right things?, Has our

environment changed? and Are we budgeting our money

strategically?.



71/74

Benefits of the Balanced Scorecard system

Translation of strategy into measurable parameters.

Communication of the strategy to everybody in the firm.

Alignment of individual goals with the firm's strategicobjectives - the BSC recognizes that the selected

measures influence the behavior of employees.

Feedback of implementation results to the strategic

planning process.


72/74

Pitfall of the Balanced Scorecard system

Lack of a well-defined strategy: The Balanced

Scorecard relies on a well-defined strategy and an

understanding of the linkages between strategicobjectives and the metrics. Without this foundation,

the implementation of the Balanced Scorecard is

unlikely to be successful.


73/74


Using only lagging measures: Many managers believe

that they will reap the benefits of the Balanced

Scorecard by using a wide range of non-financial

measures. However, care should be taken to identify

not only lagging measures that describe past

performance, but also leading measures that can be

used to plan for future performance.


74/74

Use of generic metrics: It usually is not sufficient simply

to adopt the metrics used by other successful firms. Each

firm should put forth the effort to identify the measures

that are appropriate for its own strategy and competitive

position.


Documents

COST CH6 Standard Cost