Standard Costs and The Balanced Scorecard · First, they point to causes of problems and directions for improvement. ... Hanson’s material price variance (MPV) for the week was:

Standard Costs and The Balanced Scorecard

Chapter

10

© 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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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 company’sstrategy.

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 learningcurves.

After studying this chapter, you should be able to:


10-4

Standard Costs

benchmarks formeasuring performance.

the expected levelof performance.

based on carefullypredetermined amounts.

used for planning labour, materialand overhead requirements.Standard

Costs are:


10-5

Standard Costs

DirectMaterial

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

management by exception.

Type of Product Cost

Am

ou

nt

DirectLabour

ManufacturingOverhead

Standard


10-6

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

experience and expectations.

Setting Standard Costs


10-7

Setting Standard Costs

Should we usepractical standardsor ideal standards?

Engineer ManagerialAccountant


10-8

Setting Standard CostsPractical standards

should be set at levelsthat are currently

attainable withreasonable andefficient effort.

Productionmanager Managerial

Accountant


10-9

Setting Standard CostsI agree. Ideal standards,

that are based onperfection, are

unattainable anddiscourage most

employees.

HumanResourcesManager

ManagerialAccountant


10-10

Setting Direct Material Standards

QuantityStandards

Use productdesign specifications.

PriceStandards

Final, deliveredcost of materials,net of discounts.


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Setting Direct Labour Standards

RateStandards

Use wage surveys and

labour contracts.

TimeStandards

Use time andmotion studies for

each labour operation.


10-12

Setting Variable OverheadStandards

RateStandards

The rate is the variable portion of the

predetermined overhead rate.

ActivityStandards

The activity is the base used to calculate

the predeterminedoverhead.


10-13

Standard Cost Card – VariableProduction Cost

A standard cost card for one unit ofproduct 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 Variable mfg. overhead 2.5 hours 3.00 per hour 7.50 Total standard unit cost 54.50$

B


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Are standards thesame as budgets?

A standard is theexpected cost for one

unit.

A budget is theexpected cost for all

units.

Standards vs. Budgets


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Standard Cost VariancesP

rod

uc

t C

os

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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Standard Cost Variances

I see that thereis an

unfavourablevariance.

But why arevariances

important to me?

First, they point to causes ofproblems and directions

for improvement.

Second, they trigger investigations in departments

having responsibility for incurring the costs.


10-17

Variance Analysis Cycle

Prepare standardcost performance

report

Conduct nextperiod’s

operations

Analyzevariances

Identifyquestions

Receiveexplanations

Takecorrective

actions

Begin


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Price Variance

The difference betweenthe actual price and the

standard price


Quantity Variance

The difference betweenthe actual quantity andthe standard quantity


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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Standard quantity is the quantity allowed forthe actual good output.


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AQ(AP - SP) SP(AQ - SQ)

AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity




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Standard Costs

Let’s use thegeneral model to

calculate standardcost variances,

starting withdirect material.


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


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



10-26

Hanson’s material price variance (MPV)for the week was:

a. $170 unfavourable.

b. $170 favourable.

c. $800 unfavourable.

d. $800 favourable.



b. $170 favourable.


d. $800 favourable.



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b. $170 favourable.


d. $800 favourable.



b. $170 favourable.


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



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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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

Hanson’s material quantity variance (MQV)for the week was:


b. $170 favourable.


d. $800 favourable.



b. $170 favourable.


d. $800 favourable.



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b. $170 favourable.


d. $800 favourable.



b. $170 favourable.


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



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


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Material Variances

Hanson purchased andused 1,700 kilograms.How are the variances

computed 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

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, and1,700 kilograms were used to make 1,000

Zippies.

Material Variances ContinuedZippy


10-35

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

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

Isolation of Material Variances

I need the price variancesooner so that I can better

identify purchasing problems.

You accountants just don’tunderstand the problems thatpurchasing managers have.

I’ll start computingthe price variancewhen material is

purchased rather thanwhen it’s used.


10-38

Responsibility for MaterialVariances

I am not responsible for this unfavourable material

quantity 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

Standard Costs

Now let’s calculatestandard costvariances fordirect labour.


10-40

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

1.5 standard hours per Zippy at $6.00 perdirect 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 Example Zippy


10-41

What was Hanson’s 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.


a. $6.20 per hour.

b. $6.00 per hour.

c. $5.80 per hour.

d. $5.60 per hour.

Labour Variances Zippy


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a. $6.20 per hour.

b. $6.00 per hour.

c. $5.80 per hour.

d. $5.60 per hour.


a. $6.20 per hour.

b. $6.00 per hour.

c. $5.80 per hour.

d. $5.60 per hour.

Labour Variances

AR = $9,610 ÷ 1,550 hours AR = $6.20 per hour

Zippy


10-43

Hanson’s labour rate variance (LRV) forthe week was:


b. $310 favourable.


d. $300 favourable.



b. $310 favourable.


d. $300 favourable.



10-44



b. $310 favourable.


d. $300 favourable.



b. $310 favourable.


d. $300 favourable.

Labour Variances

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

Zippy


10-45

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.


a. 1,550 hours.

b. 1,500 hours.

c. 1,700 hours.

d. 1,800 hours.



10-46


a. 1,550 hours.

b. 1,500 hours.

c. 1,700 hours.

d. 1,800 hours.


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

Hanson’s labour efficiency variance (LEV)for the week was:


b. $290 favourable.


d. $300 favourable.



b. $290 favourable.


d. $300 favourable.



10-48



b. $290 favourable.


d. $300 favourable.



b. $290 favourable.


d. $300 favourable.

Labour Variances

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

Zippy


10-49

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 –A Closer Look

High skill,high rate

Low skill,low rate

Using highly paid skilled workers toperform unskilled tasks results in an

unfavourable 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 –A Closer Look

UnfavourableEfficiencyVariance

Poorlytrainedworkers

Poorquality

materials

Poorlymaintainedequipment

Poorsupervisionof workers


10-52

Responsibility for LabourVariances

I am not responsible for the unfavourable labour

efficiency variance!

You purchased cheapmaterial, so it took more

time to process it.

You used too muchtime because of poorly

trained workers andpoor supervision.


10-53

Responsibility for LabourVariances

Maybe I can attribute the labourand material variances to personnel

for hiring the wrong peopleand training them poorly.


10-54

Standard Costs

Now let’s calculatestandard cost

variances for thelast of the variableproduction costs –

variablemanufacturing

overhead.


10-55

Hanson Inc. has the following variablemanufacturing overhead standard to

manufacture one Zippy:

1.5 standard hours per Zippy at $3.00 perdirect labour hour

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

variable manufacturing overhead.

Variable ManufacturingOverhead Variances Example Zippy


10-56

What was Hanson’s actual rate (AR) forvariable 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.


a. $3.00 per hour.

b. $3.19 per hour.

c. $3.30 per hour.

d. $4.50 per hour.

Variable ManufacturingOverhead Variances Zippy


10-57


a. $3.00 per hour.

b. $3.19 per hour.

c. $3.30 per hour.

d. $4.50 per hour.


a. $3.00 per hour.

b. $3.19 per hour.

c. $3.30 per hour.

d. $4.50 per hour.

Variable ManufacturingOverhead Variances

AR = $5,115 ÷ 1,550 hours AR = $3.30 per hour

Zippy


10-58

Hanson’s spending variance (SV) forvariable manufacturing overhead forthe week was:


b. $400 favourable.


d. $300 favourable.



b. $400 favourable.


d. $300 favourable.



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b. $400 favourable.


d. $300 favourable.



b. $400 favourable.


d. $300 favourable.


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

Zippy


10-60

Hanson’s efficiency variance (EV) forvariable manufacturing overhead for theweek was:


b. $435 favourable.


d. $150 favourable.



b. $435 favourable.


d. $150 favourable.



10-61



b. $435 favourable.


d. $150 favourable.



b. $435 favourable.


d. $150 favourable.


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


10-62

Spending variance$465 unfavourable

Efficiency variance$150 unfavourable

1,550 hours 1,550 hours 1,500 hours × × × $3.30 per hour $3.00 per hour $3.00 per hour

= $5,115 = $4,650 = $4,500

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



10-63

Variable Manufacturing OverheadVariances – 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

Larger variances, indollar amount or asa percentage of the

standard, areinvestigated first.

Variance Analysis andManagement by Exception

How do I know whichvariances toinvestigate?


10-65

Advantages of Standard Costs

Management byexception

Improved cost control and performance

evaluation

Better Informationfor planning anddecision making

Possible reductionsin production costs

Advantages


10-66

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

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


10-68


How do we lookto the owners?

How can wecontinually learn,

grow, and improve?

In which internalbusiness processes

must we excel?

How do we lookto customers?


10-69


Learning improvesbusiness processes.

Improved businessprocesses improve

customer satisfaction.

Improving customersatisfaction improves

financial results.


10-70

Process time is the only value-added time.

Delivery Performance Measures

Wait TimeProcess Time + Inspection Time

+ Move Time + Queue Time

OrderReceived

ProductionStarted

GoodsShipped

Delivery Cycle Time

Throughput Time


10-71

Delivery Performance Measures

ManufacturingCycle

Efficiency

Value-added time

Throughput time=

Wait Time

Throughput Time

Process Time + Inspection Time+ Move Time + Queue Time

OrderReceived

ProductionStarted

GoodsShipped

Delivery Cycle Time

General Ledger Entries toRecord Variances

Appendix

10A


10-73

Journal Entries - Material Variances✒ Price variance

Dr Raw Materials

Dr Materials Price Variance (U)

Cr Materials Price Variance (F)

Cr Accounts Payable

✒ Quantity varianceDr Work in Process

Dr Materials Quantity Variance (U)

Cr Materials Quantity Variance (F)

Cr Raw Materials


10-74

Journal Entries - Labour Variances

✒ 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

The Learning Curve

Appendix

10B


10-76

The Learning Curve

!Productivity in hours per unit willdecrease as an employee produces moreunits.

!Used to set and revise standard labourhours in a repetitive task environment.

!Used for labour intensive manufacturing.


10-77

End of Chapter 10

Documents

Standard Costs and The Balanced Scorecard · First, they point to causes of problems and directions for improvement. ... Hanson’s material price variance (MPV) for the week was: