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Standard Costs and The Balanced Scorecard

Chapter

10

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McGraw-Hill Ryerson Limited., 2001

10-2

LEARNING OBJECTIVES

1. Explain how direct materials standards anddirect labour standards are set.

2. Compute the direct materials price and quantityvariances and explain their significance.

3. Compute mix and yield variances for materialsand explain their significance.

4. Compute the direct labour rate and efficiencyvariances and explain their significance.

5. Compute the variable manufacturing overheadspending and efficiency variances.

After studying this chapter, you should be able to:

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10-3

LEARNING OBJECTIVES

6. Understand the advantages of and the potentialproblems with using standard costs.

7. Understand how a balanced scorecard fitstogether and how it supports a companysstrategy.

8. Compute the delivery cycle time, the throughputtime and the manufacturing cycle efficiency(MCE).

9. (Appendix 10A) Prepare journal entries to recordstandard costs and variances.

10. (Appendix 10B) Explain the value of learning

curves.

After studying this chapter, you should be able to:

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10-4

Standard Costs

benchmarks for measuring performance.

the expected levelof performance.

based on carefullypredetermined amounts.

used for planning labour, material

and overhead requirements.Standard Costs are:

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10-5

Standard Costs

DirectMaterial

Managers focus on quantities and coststhat exceed standards, a practice known as

management by exception .

Type of Product Cost

A m o u n

t

DirectLabour

ManufacturingOverhead

Standard

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10-6

Accountants, engineers, personneladministrators, and production managerscombine efforts to set standards based on

experience and expectations.

Setting Standard Costs

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10-7

Setting Standard Costs

Should we usepractical standardsor ideal standards?

Engineer ManagerialAccountant

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10-8

Setting Standard CostsPractical standardsshould be set at levels

that are currentlyattainable withreasonable andefficient effort.

Productionmanager Managerial

Accountant

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10-9

Setting Standard Costs I agree. Ideal standards,that are based on

perfection, areunattainable anddiscourage most

employees.

HumanResources

Manager ManagerialAccountant

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10-10

Setting Direct Material StandardsQuantity

Standards

Use productdesign specifications.

PriceStandards

Final, deliveredcost of materials,net of discounts.

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10-11

Setting Direct Labour StandardsRate

Standards

Use wagesurveys and

labour contracts.

TimeStandards

Use time andmotion studies for

each labour operation.

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10-12

Setting Variable OverheadStandards

RateStandards

The rate is thevariable portion of the

predetermined overhead rate.

ActivityStandards

The activity is the base used to calculate

the predeterminedoverhead.

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10-13

Standard Cost Card VariableProduction Cost A standard cost card for one unit of

product might look like this:

A A x BStandard Standard StandardQuantity Price Cost

Inputs or Hours or Rate per Unit

Direct materials 3.0 kg. 4.00$ per kg. 12.00$Direct labour 2.5 hours 14.00 per hour 35.00 Varia ble mfg. overhead 2.5 hours 3.00 per hour 7.50

Total standard unit cost 54.50$

B

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10-14

Are standards thesame as budgets?

A standard is theexpected cost for one

unit.

A budget is theexpected cost for allunits.

Standards vs. Budgets

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10-15

Standard Cost Variances

P r o d u c

t C o s t

Standard

This variance is unfavourablebecause the actual cost

exceeds the standard cost.

A standard cost variance is the amount by whichan actual cost differs from the standard cost.

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10-16


I see that there

is anunfavourablevariance.

But why arevariances

important to me?

First, they point to causes of problems and directions

for improvement.Second, they trigger

investigations in departments having responsibility

for incurring the costs.

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10-17

Variance Analysis Cycle

Prepare standardcost performance

report

Conduct nextperiods

operations

Analyzevariances

Identifyquestions

Receiveexplanations

Take

correctiveactions

Begin

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10-18


Price Variance

The difference betweenthe actual price and the

standard price


Quantity Variance

The difference betweenthe actual quantity andthe standard quantity

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10-19

A General Model for VarianceAnalysis

Actual Quantity Actual Quantity Standard Quantity Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Standard price is the amount that shouldhave been paid for the resources acquired.

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10-20




Standard quantity is the quantity allowed for the actual good output.

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10-21


AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity


Actual Quantity Actual Quantity S tandard Quantity Actual Price S tandard Price S tandard Price

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10-22

Standard Costs

Lets use thegeneral model to

calculate standardcost variances,

starting withdirect material .

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10-23

Hanson Inc. has the following direct materialstandard to manufacture one Zippy:

1.5 kilograms per Zippy at $4.00 per kilogram

Last week 1,700 kilograms of material werepurchased and used to make 1,000 Zippies.

The material cost a total of $6,630.

Material Variances Example Zippy

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10-24

What is the actual price per kilogrampaid for the material?a. $4.00 per kilogram.b. $4.10 per kilogram.c. $3.90 per kilogram.

d. $6.63 per kilogram.



Material Variances Zippy

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10-25




d. $6.63 per kilogram. AP = $6,630 1,700 kg.AP = $3.90 per kg.


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10-26

Hansons material price variance (MPV)for the week was:a. $170 unfavourable.b. $170 favourable.c. $800 unfavourable.

d. $800 favourable.


d. $800 favourable.


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10-27


d. $800 favourable.

Hansons material price variance (MPV)for the week was:a. $170 unfavourable .b. $170 favourable.c. $800 unfavourable.

d. $800 favourable. MPV = AQ(AP - SP) MPV = 1,700 kg. ($3.90 - 4.00) MPV = $170 Favourable


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10-28

The standard quantity of material thatshould have been used to produce1,000 Zippies is:

a. 1,700 kilograms.b. 1,500 kilograms.

c. 2,550 kilograms.d. 2,000 kilograms.


a. 1,700 kilograms.b. 1,500 kilograms.c. 2,550 kilograms.d. 2,000 kilograms.


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10-29


a. 1,700 kilograms.b. 1,500 kilograms.

c. 2,550 kilograms.d. 2,000 kilograms.


a. 1,700 kilograms.b. 1,500 kilograms.c. 2,550 kilograms.d. 2,000 kilograms.SQ = 1,000 units 1.5 kg per unit

SQ = 1,500 kg


10 30

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10-30

Hansons material quantity variance (MQV)for the week was:a. $170 unfavourable.

b. $170 favourable.c. $800 unfavourable.

d. $800 favourable.


b. $170 favourable.c. $800 unfavourable.d. $800 favourable.


10 31

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10-31


b. $170 favourable.c. $800 unfavourable.

d. $800 favourable.


b. $170 favourable.c. $800 unfavourable.d. $800 favourable.

MQV = SP(AQ - SQ) MQV = $4.00(1,700 kg - 1,500 kg) MQV = $800 unfavourable


10 32

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10-32

1,700 kg. 1,700 kg. 1,500 kg.

$3.90 per kg. $4.00 per kg. $4.00 per kg.

= $6,630 = $ 6,800 = $6,000

Price variance$170 favourable

Quantity variance$800 unfavourable


Material Variances Summary Zippy

10-33

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10 33

Material Variances

Hanson purchased andused 1,700 kilograms.

How are the variancescomputed if the amountpurchased differs from

the amount used?

The price variance iscomputed on the entire

quantity purchased .

The quantity variance iscomputed only on the

quantity used .

10-34

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0 3

Hanson Inc. has the following materialstandard to manufacture one Zippy:

1.5 kilograms per Zippy at $4.00 per kilogram

Last week 2,800 kilograms of material werepurchased at a total cost of $10,920, and

1,700 kilograms were used to make 1,000Zippies.

Material Variances ContinuedZippy

10-35

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Actual Quantity Actual Quantity Purchased Purchased Actual Price Standard Price

2,800 kg. 2,800 kg.

$3.90 per kg. $4.00 per kg.

= $10,920 = $11,200

Price variance$280 favourable

Price variance increasesbecause quantity

purchased increases.


10-36

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Actual Quantity Used Standard Quantity Standard Price Standard Price

1,700 kg. 1,500 kg.

$4.00 per kg. $4.00 per kg.

= $6,800 = $6,000

Quantity variance$800 unfavourable

Quantity variance isunchanged becauseactual and standard

quantities are unchanged.


10-37

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Isolation of Material Variances

I need the price variancesooner so that I can better

identify purchasing problems.You accountants just dont

understand the problems thatpurchasing managers have.

Ill start computingthe price variance

when material ispurchased rather thanwhen its used.

10-38

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Responsibility for Material

Variances

I am not responsible for this unfavourable materialquantity variance.

You purchased cheapmaterial, so my peoplehad to use more of it.

You used too much materialbecause of poorly trained

workers and poorlymaintained equipment.

Also, your poor schedulingsometimes requires me to

rush order material at ahigher price, causing

unfavourable price variances.

10-39

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Standard Costs

Now lets calculatestandard costvariances for direct labour .

10-40

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Hanson Inc. has the following direct labour standard to manufacture one Zippy:

1.5 standard hours per Zippy at $6.00 per direct labour hour

Last week 1,550 direct labour hours wereworked at a total labour cost of $9,610 to

make 1,000 Zippies.

Labour Variances ExampleZippy

10-41

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What was Hansons actual rate (AR)for labour for the week?

a. $6.20 per hour.b. $6.00 per hour.c. $5.80 per hour.

d. $5.60 per hour.

What was Hansons actual rate (AR)for labour for the week?a. $6.20 per hour.b. $6.00 per hour.c. $5.80 per hour.

d. $5.60 per hour.

Labour VariancesZippy

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10-43

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Hansons labour rate variance (LRV) for the week was:

a. $310 unfavourable.b. $310 favourable.c. $300 unfavourable.

d. $300 favourable.

Hansons labour rate variance (LRV) for the week was:a. $310 unfavourable.b. $310 favourable.c. $300 unfavourable.

d. $300 favourable.


10-44

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Hansons labour rate variance (LRV) for the week was:

a. $310 unfavourable.b. $310 favourable.c. $300 unfavourable.

d. $300 favourable.

Hansons labour rate variance (LRV) for the week was:a. $310 unfavourable.b. $310 favourable.c. $300 unfavourable.

d. $300 favourable.

Labour Variances

LRV = AH(AR - SR) LRV = 1,550 hrs($6.20 - $6.00) LRV = $310 unfavourable

Zippy

10-45

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The standard hours (SH) of labour thatshould have been worked to produce1,000 Zippies is:a. 1,550 hours.b. 1,500 hours.

c. 1,700 hours.d. 1,800 hours.

The standard hours (SH) of labour thatshould have been worked to produce1,000 Zippies is:

a. 1,550 hours.b. 1,500 hours.c. 1,700 hours.d. 1,800 hours.


10-46

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The standard hours (SH) of labour thatshould have been worked to produce1,000 Zippies is:a. 1,550 hours.b. 1,500 hours.

c. 1,700 hours.d. 1,800 hours.

The standard hours (SH) of labour thatshould have been worked to produce1,000 Zippies is:

a. 1,550 hours.b. 1,500 hours.c. 1,700 hours.d. 1,800 hours.

Labour Variances

SH = 1,000 units 1.5 hours per unit SH = 1,500 hours

Zippy

10-47

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Hansons labour efficiency variance (LEV)for the week was:a. $290 unfavourable.b. $290 favourable.c. $300 unfavourable.

d. $300 favourable.


d. $300 favourable.


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d. $300 favourable.


d. $300 favourable.

Labour Variances

LEV = SR(AH - SH) LEV = $6.00(1,550 hrs - 1,500 hrs) LEV = $300 unfavourable

Zippy

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Actual Hours Actual Hours Standard Hours Actual Rate Standard Rate Standard Rate

Labour Variances Summary

Rate variance$310 unfavourable

Efficiency variance$300 unfavourable

1,550 hours 1,550 hours 1,500 hours

$6.20 per hour $6.00 per hour $6.00 per hour

= $9,610 = $9,300 = $9,000

Zippy

10-50

Labour Rate Variance

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Labour Rate Variance

A Closer Look

High skill,high rate

Low skill,low rate

Using highly paid skilled workers to

perform unskilled tasks results in anunfavourable rate variance.

Production managers who make work assignmentsare generally responsible for rate variances.

Production managers who make work assignmentsare generally responsible for rate variances.

10-51

Labour Efficiency Variance

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Labour Efficiency Variance

A Closer Look

UnfavourableEfficiencyVariance

Poorly

trainedworkers

Poor

qualitymaterials

Poorlymaintainedequipment

Poor supervisionof workers

10-52

Responsibility for Labour

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Variances

I am not responsible for the unfavourable labour efficiency variance!

You purchased cheapmaterial, so it took moretime to process it.

You used too muchtime because of poorly

trained workers andpoor supervision.

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Variances

Maybe I can attribute the labour and material variances to personnel

for hiring the wrong peopleand training them poorly.

10-54

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Standard Costs

Now lets calculate

standard costvariances for thelast of the variableproduction costs

variablemanufacturing

overhead .

10-55

Variable Manufacturing

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Hanson Inc. has the following variablemanufacturing overhead standard to

manufacture one Zippy:

1.5 standard hours per Zippy at $3.00 per direct labour hour

Last week 1,550 hours were worked to make1,000 Zippies, and $5,115 was spent for

variable manufacturing overhead.


Overhead Variances ExampleZippy

10-56


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What was Hansons actual rate (AR) for variable manufacturing overhead ratefor the week?

a. $3.00 per hour.b. $3.19 per hour.c. $3.30 per hour.d. $4.50 per hour.




Overhead VariancesZippy

10-57


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Overhead Variances

AR = $5,115 1,550 hours

AR = $3.30 per hour

Zippy

10-58


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Hansons spending variance (SV) for variable manufacturing overhead for the week was:

a. $465 unfavourable.b. $400 favourable.c. $335 unfavourable.d. $300 favourable.





10-59


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V g

Overhead Variances

SV = AH(AR - SR) SV = 1,550 hrs($3.30 - $3.00) SV = $465 unfavourable

Zippy

10-60


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Hansons efficiency variance (EV) for variable manufacturing overhead for theweek was:




g


10-61


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g

Overhead Variances

EV = SR(AH - SH) EV = $3.00(1,550 hrs - 1,500 hrs) EV = $150 unfavourable

1,000 units 1.5 hrs per unit

Zippy

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10-63

Variable Manufacturing Overhead

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g

Variances A Closer Look

If variable overhead is applied on the basisof direct labour hours, the labour efficiencyand variable overhead efficiency variances

will move in tandem.

If variable overhead is applied on the basisof direct labour hours, the labour efficiencyand variable overhead efficiency variances

will move in tandem.

10-64

Variance Analysis and

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Larger variances, indollar amount or asa percentage of the

standard, areinvestigated first.

Management by Exception

How do I know whichvariances toinvestigate?

10-65

Advantages of Standard Costs

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Advantages of Standard Costs

Management by

exception

Improved cost control and performance

evaluation

Better Informationfor planning anddecision making

Possible reductions

in production costs

Advantages

10-66

Emphasis on negative Favourable variances

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PotentialProblems

Emphasis on negativemay impact morale.

Emphasizing standardsmay exclude other

important objectives.

Favourable variancesmay be misinterpreted.

Continuous improvementmay be more

important thanmeeting standards.

Standard costreports may

not be timely.

Labour quantity standardsand efficiency variancesmay not be appropriate.

10-67

The Balanced Scorecard

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Management translates its strategy intoperformance measures that employees

understand and accept.

Management translates its strategy intoperformance measures that employees

understand and accept.

Performancemeasures

Financial Customers

Learningand growth

Internalbusiness

processes

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How do we lookto the owners?

How can we

continually learn,grow, and improve?

In which internal

business processes must we excel?

How do we lookto customers?

10-69


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Learning improvesbusiness processes.

Improved business

processes improvecustomer satisfaction.

Improving customer satisfaction improves

financial results.

10-70

Delivery Performance Measures

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Process time is the only value-added time.


Wait TimeProcess Time + Inspection Time

+ Move Time + Queue Time

Order Received

ProductionStarted

GoodsShipped

Delivery Cycle Time

Throughput Time

10-71


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ManufacturingCycle

Efficiency

Value-added timeThroughput time

=

Wait Time

Throughput Time

Process Time + Inspection Time+ Move Time + Queue Time

Order Received

ProductionStarted

GoodsShipped

Delivery Cycle Time

Appendix

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General Ledger Entries toRecord Variances

10A

10-73

Journal Entries - Material Variances

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Price varianceDr Raw Materials

Dr Materials Price Variance (U)Cr Materials Price Variance (F)Cr Accounts Payable

Quantity varianceDr Work in ProcessDr Materials Quantity Variance (U)

Cr Materials Quantity Variance (F)Cr Raw Materials

10-74

Journal Entries - Labour Variances

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Rate varianceDr Work in Process

Dr Labour Rate Variance (U)Cr Labour Rate Variance (F)Cr Wages Payable

Efficiency varianceDr Work in Process

Dr Labour Efficiency Variance (U)Cr Labour Efficiency Variance (F)Cr Wages Payable

Appendix

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The Learning Curve

10B

10-76

The Learning Curve

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g

! Productivity in hours per unit will

decrease as an employee produces moreunits.! Used to set and revise standard labour

hours in a repetitive task environment.! Used for labour intensive manufacturing.

10-77

End of Chapter 10

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