1. Chapter 10
Standard Costing, Operational Performance Measures, and the Balanced Scorecard

2. Definition of Terms

3. Standard Costs
- are usually associated with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead.

4. Standard Costing
is a control method involving the preparation of detailed cost and sales budgets
It is then compared with the actual results for a specific account period and any significant variances between the actual and the budgeted results are investigated

5. Standard Costing
Unexpected trends are corrected if they are not acceptable or they cannot be accommodated.

6. Cost variance (CV)
is the amount of money that was actually spent on a project or a part of a project compared to the amount of work that was actually accomplished. Cost variance is the budgeted cost of work performed minus the actual cost of work performed.

7. Learning Objective 1

8. Comparison between standard and actual performance level
Managing Costs
Standard cost
Actual cost
Comparison between standard and actual performance level
Cost variance

9. Management by Exception
Managers focus on quantities and costs that exceed standards, a practice known as management by exception.
Standard
Amount
Direct Material
Direct Labor
Type of Product Cost

10. Learning Objective 2

11. Analysis of Historical Data
Setting Standards
Cost Standards
Analysis of Historical Data
Task Analysis

12. Participation in Setting Standards
Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations.

13. Perfection versus Practical Standards: A Behavioral Issue
Practical standards should be set at levels that are currently attainable with
reasonable and
efficient effort.
Should we use practical standards or perfection standards?

14. Perfection versus Practical Standards: A Behavioral Issue
I agree. Perfection standards are unattainable and therefore discouraging to most employees.

15. Use of Standards by Service Organizations
Standard cost analysis may be used in any organization with repetitive tasks.
A relationship between tasks and output measures must be established.

16. Learning Objective 3

17. Cost Variance Analysis
Standard Cost Variances
Price Variance
Quantity Variance
The difference between the actual price and the standard price
The difference between the actual quantity and the standard quantity

18. A General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance
Quantity Variance
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

19. A General Model for Variance 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 Variance
Quantity Variance

20. A General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance
Quantity Variance
Standard quantity is the quantity that should have been used.

21. Standard Costs
Let’s use the concepts of the general model to calculate standard cost variances, starting with direct material.

22. 1.5 pounds per Zippy at $4.00 per pound
Material Variances
Zippy
Hanson Inc. has the following direct material standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week 1,700 pounds of material were purchased and used to make 1,000 Zippies. The material cost a total of $6,630.

23. What is the actual price per pound paid for the material?
Material Variances
Zippy
What is the actual price per pound paid for the material?
a. $4.00 per pound.
b. $4.10 per pound.
c. $3.90 per pound.
d. $6.63 per pound.

24. What is the actual price per pound paid for the material?
Material Variances
Zippy
What is the actual price per pound paid for the material?
a. $4.00 per pound.
b. $4.10 per pound.
c. $3.90 per pound.
d. $6.63 per pound.
AP = $6,630 ÷ 1,700 lbs. AP = $3.90 per lb.

25. Hanson’s direct-material price variance (MPV) for the week was:
Material Variances
Zippy
Hanson’s direct-material price variance (MPV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.

26. Hanson’s direct-material price variance (MPV) for the week was:
Material Variances
Zippy
Hanson’s direct-material price variance (MPV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
MPV = AQ(AP - SP) MPV = 1,700 lbs. × ($ ) MPV = $170 Favorable

27. Material Variances
Zippy
The standard quantity of material that should have been used to produce 1,000 Zippies is:
a. 1,700 pounds.
b. 1,500 pounds.
c. 2,550 pounds.
d. 2,000 pounds.

28. Material Variances
Zippy
The standard quantity of material that should have been used to produce 1,000 Zippies is:
a. 1,700 pounds.
b. 1,500 pounds.
c. 2,550 pounds.
d. 2,000 pounds.
SQ = 1,000 units × 1.5 lbs per unit SQ = 1,500 lbs

29. Hanson’s direct-material quantity variance (MQV) for the week was:
Material Variances
Zippy
Hanson’s direct-material quantity variance (MQV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.

30. Hanson’s direct-material quantity variance (MQV) for the week was:
Material Variances
Zippy
Hanson’s direct-material quantity variance (MQV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable

31. Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
1,700 lbs ,700 lbs ,500 lbs × × × $3.90 per lb $4.00 per lb $4.00 per lb.
$6, $ 6, $6,000
Price variance $170 favorable
Quantity variance $800 unfavorable

32. Material Variances
Zippy
Hanson purchased and used 1,700 pounds. How are the variances computed if the amount purchased differs from the amount used?
The price variance is computed on the entire quantity purchased.
The quantity variance is computed only on the quantity used.

33. 1.5 pounds per Zippy at $4.00 per pound
Material Variances
Zippy
Hanson Inc. has the following material standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700 pounds were used to make 1,000 Zippies.

34. Price variance $280 favorable
Material Variances
Zippy
Actual Quantity Actual Quantity Purchased Purchased × × Actual Price Standard Price
MPV = AQ(AP - SP) MPV = 2,800 lbs × ($ ) MPV = $ Favorable
2,800 lbs ,800 lbs × × $3.90 per lb $4.00 per lb.
$10, $11,200
Price variance $280 favorable
Price variance increases because quantity purchased increases.

35. Quantity variance $800 unfavorable
Material Variances
Zippy
Actual Quantity Used Standard Quantity × × Standard Price Standard Price
MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs ,500 lbs) MQV = $800unfavor.
1,700 lbs ,500 lbs × × $4.00 per lb $4.00 per lb.
$6, $6,000
Quantity variance is unchanged because actual and standard quantities are unchanged.
Quantity variance $800 unfavorable

36. Isolation of Material Variances
I need the variances as soon as possible so that I can better identify problems and control costs.
You accountants just don’t understand the problems we production managers have.
Okay. I’ll start computing the price variance when material is purchased and the quantity variance as soon as material is used.

37. Now let’s calculate standard cost variances for direct labor.
Standard Costs
Now let’s calculate standard cost variances for direct labor.

38. 1.5 standard hours per Zippy at $10.00 per direct labor hour
Labor Variances
Zippy
Hanson Inc. has the following direct labor standard to manufacture one Zippy:
1.5 standard hours per Zippy at $10.00 per direct labor hour
Last week 1,550 direct labor hours were worked at a total labor cost of $15,810 to make 1,000 Zippies.

39. What was Hanson’s actual rate (AR) for labor for the week?
Labor Variances
Zippy
What was Hanson’s actual rate (AR) for labor for the week?
a. $10.20 per hour.
b. $10.10 per hour.
c. $9.90 per hour.
d. $9.80 per hour.

40. What was Hanson’s actual rate (AR) for labor for the week?
Labor Variances
Zippy
What was Hanson’s actual rate (AR) for labor for the week?
a. $10.20 per hour.
b. $10.10 per hour.
c. $9.90 per hour.
d. $9.80 per hour.
AR = $15,810 ÷ 1,550 hours AR = $10.20 per hour

41. Hanson’s labor rate variance (LRV) for the week was:
Labor Variances
Zippy
Hanson’s labor rate variance (LRV) for the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.

42. Hanson’s labor rate variance (LRV) for the week was:
Labor Variances
Zippy
Hanson’s labor rate variance (LRV) for the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
LRV = AH(AR - SR) LRV = 1,550 hrs($ $10.00) LRV = $310 unfavorable

43. Labor Variances
Zippy
The standard hours (SH) of labor that should have been worked to produce 1,000 Zippies is:
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.

44. Labor Variances
Zippy
The standard hours (SH) of labor that should have been worked to produce 1,000 Zippies is:
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.
SH = 1,000 units × 1.5 hours per unit SH = 1,500 hours

45. Hanson’s labor efficiency variance (LEV) for the week was:
Labor Variances
Zippy
Hanson’s labor efficiency variance (LEV) for the week was:
a. $510 unfavorable.
b. $510 favorable.
c. $500 unfavorable.
d. $500 favorable.

46. Hanson’s labor efficiency variance (LEV) for the week was:
Labor Variances
Zippy
Hanson’s labor efficiency variance (LEV) for the week was:
a. $510 unfavorable.
b. $510 favorable.
c. $500 unfavorable.
d. $500 favorable.
LEV = SR(AH - SH) LEV = $10.00(1,550 hrs - 1,500 hrs) LEV = $500 unfavorable

47. Labor Variances Summary
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
1,550 hours ,550 hours ,500 hours × × × $10.20 per hour $10.00 per hour $10.00 per hour
$15, $15, $15,000
Rate variance $310 unfavorable
Efficiency variance $500 unfavorable

48. Learning Objective 4

49. Significance of Cost Variances
Size of variance
Dollar/Monetary amount and
Percentage of standard
What clues help me to determine the variances that I should investigate?
Recurring variances
Trends
Controllability
Favorable variances
Costs and benefits of investigation

50. Statistical Control Chart
Warning signals for investigation • •
Favorable Limit • • • •
Desired Value • •
Unfavorable Limit • 1 2 3 4 5 6 7 8 9
Variance Measurements

51. Unfavorable Variance If actual costs are greater than standard costs
tells management that if everything else stays constant the company's actual profit will be less than planned.

52. Favorable variance
If actual costs are less than standard costs the variance is favorable
tells management that if everything else stays constant the actual profit will likely exceed the planned profit.

53. Learning Objective 5

54. Behavioral Impact of Standard Costing
Variances evaluate personnel:
Variances may be used to evaluate personnel, often with regard to salary increases, bonuses, and promotions

55. Behavioral Impact of Standard Costing
Negative and positive incentives created
Such incentives can have positive and negative effects, as a bonus plan may prompt a manager to pursue actions that are not in the best interests of the organization.

56. Behavioral Impact of Standard Costing
If I buy cheaper materials, my direct-materials expenses will be lower than what is budgeted. Then I’ll get my bonus. But we may lose customers because of lower quality.

57. Controllability of Variances
Importance of identifying who controls: It is rare that one person controls any event; however, it is often possible to identify the manager who is most able to influence a particular variance.

58. Controllability of Variances
Production supervisor and/or production engineers
Purchasing manager
Direct-Material Price Variance
Direct-Material Quantity Variance
Direct-Labor Rate Variance
Direct-Labor Efficiency Variance
Production supervisor
Production supervisor

59. Controllability of Variances
Variance often affect more than one input: Variances often interact, making investigation and controllability difficult.
For example, a labor efficiency variance may be caused by problems not only with labor but by problems with machinery and material as well.
In addition, managers sometimes trade-off variances, purposely incurring an unfavorable variance that is more than offset by favorable variances.

60. Interaction among Variances
You used too much time because of poorly trained workers and poor supervision.
I am not responsible for the unfavorable labor efficiency variance!
You purchased cheap material, so it took more time to process it.

61. Learning Objective 6

62. Standard Costs Variances Cost flows
In a standard-cost system, costs flow thought the same accounts in the general ledger
however, they flow through at standard cost.
In other words, Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold are carried at standard cost.

63. Standard Costs and Variances Differences recorded in variance accounts
The differences between standard costs and the actual costs incurred are recorded in variance accounts instead of actual costs.
Unfavorable variances are recorded as debits
favorable variances are recorded as credits.

64. Standard Costs and Variances
Variances are normally closed at the end of the accounting period to Cost of Goods Sold.

65. Learning Objective 7

66. Advantages of Standard Costing
Sensible method
Management by Exception
Performance Evaluation
Employee Motivation
Advantages
Stable Product Costs

67. Sensible method
It provides a sensible method to compare budgeted costs to actual costs at the actual level of output.

68. Management by exception
Managers can practice management by exception.
(MBE) "policy by which management devotes its time to investigating only those situations in which actual results differ significantly from planned results. The idea is that management should spend its valuable time concentrating on the more important items (such as shaping the company's future strategic course). Attention is given only to material deviations requiring investigation."

69. Benchmark for performance
It provides a benchmark for performance evaluation and employee rewards.

70. Stable product cost
Standard costs provide a stable product cost. Actual costs may fluctuate erratically, whereas standard costs are changed only periodically.

71. Less expensive
Standard systems are usually less expensive to operate than actual or normalized systems

72. Learning Objective 8

73. Criticisms of Standard Costing
Too aggregate, and untimely
Not specific
Disadvantages
Too much focus on direct-labor
Stable production required
Shorter life cycles
Narrow definition
Focus on cost minimization

74. Too aggregated and untimely
Variances are too aggregated and arrive too late to be useful. Variances should focus on activities, specific product lines, production batches, and/or FMS cells.

75. Focuses on less important production factors
Variances focus too much on the cost and efficiency of labor, which is becoming relatively unimportant factor of production.

76. Less stability of manufacturing environment
Standard costs rely on a stable production environment, and flexible manufacturing systems have reduced the stability, with frequent switching among a variety of products on the same manufacturing line.

77. Too focused on costs rather than quality
Standards focus too much on cost minimization and not enough on product quality, customer service, and other contemporary issues.

78. Learning Objective 9

79. Operational Control Measures in Today’s Manufacturing Environment

80. Operational Performance Measures in Today’s Manufacturing Environment
Raw Material & Scrap Control
Quality
Lead time
Cost of scrap
Total cost
Inventory Control
Average value
Average holding time
Ratio of inventory value to sales revenue

81. Operational Performance Measures in Today’s Manufacturing Environment
Machine Performance
Availability
Downtime
Maintenance records
Setup time
Product Quality
Warranty claims
Customer complaints
Defective products
Cost of rework

82. Operational Performance Measures in Today’s Manufacturing Environment
Production
Manufacturing cycle time
Velocity
Manufacturing cycle efficiency
Delivery
% of on-time deliveries
% of orders filled
Delivery cycle time

83. Operational Performance Measures in Today’s Manufacturing Environment
Productivity
Aggregate productivity
Partial productivity
Innovation and Learning
Percentage of sales from new products
Cost savings from process improvements

84. Learning Objective 10

85. The Balanced Scorecard
Financial
Vision and Strategy
Customer
Internal Operations
Learning and Growth

86. Balanced scorecard
a strategic planning and management system to align business activities to the:
vision and strategy of the organization
improve internal and external communications
monitor organization performance against strategic goals.

87. Balanced Score card It is used extensively in: business and industry
Government
and nonprofit organizations worldwide

88. The four perspectives Financial Customer Internal Business Processes
Learning and Growth

89. Financial Perspective
encourages the identification of a few relevant high-level financial measures. In particular, designers were encouraged to choose measures that helped inform the answer to the question "How do we look to shareholders?"

90. Customer
encourages the identification of measures that answer the question "How do customers see us?"

91. Internal Business Processes
encourages the identification of measures that answer the question "What must we excel at?"

92. Learning and Growth
encourages the identification of measures that answer the question "Can we continue to improve and create value?".

93. Learning Objective 11

94. Use of Standard Costs for Product Costing
Raw Material Inventory
Actual quantity at
standard cost
Account Payable
Actual quantity at
actual cost
Direct Material Price Variance
Favorable Variance
Unfavorable Variance

95. Use of Standard Costs for Product Costing

96. Use of Standard Costs for Product Costing

97. Use of Standard Costs for Product Costing

98. End of Chapter 10 Thank you very much
Jessie Montealegre
Barry Pualengco
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