1. Standard Costs and Performance Reports
Module 23
Standard Costs and Performance Reports
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2. Explain responsibility accounting.1
Explain responsibility accounting.
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3. Responsibility Accounting
The structuring of performance reports to emphasize the factors controlled by units or managers
Most include comparisons of actual results with budgeted amounts
Customized to emphasize activities of each organizational unit or value chain element
Should exclude non-controllable costs
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4. Responsibility Accounting and Organization Structure
Organization structure is the arrangement of lines of responsibility within the organization
Alternative organization structures
Functional-based such as marketing vs. production vs. research, etc.
Product-based
Geographically-based
Service-based
Customer-based
Performance reporting begins with the lowest organizational unit and builds to the entire organization
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5. Types of Responsibility Centers
LESS responsibility
Cost Center
Revenue Center
Profit Center
Investment Center
MORE
MORE responsibility
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6. Cost Center
A responsibility center whose manager is responsible only for managing costs
No revenue responsibility
Examples in a manufacturing plant
Tooling department
Assembly activities
Examples in a retail store
Inventory control function
Maintenance department
Examples in a university
Security department
Student registering activities
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7. Revenue Center
A responsibility center whose manager is responsible for the generation of sales revenues
Sometimes assigned responsibility for controllable costs incurred in generating revenue
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8. Profit Center
A responsibility center whose manager is responsible for revenues, costs, and resulting profits
Most frequently a segment of a company such as
Product line
Marketing territory
Store
Other measures of assessment beyond profit include
Quality, service ratings,
operating efficiencies
Profits
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9. Investment Center
A responsibility center whose manager is responsible for the relationship between its profits and the total assets invested in the center
High degree of organization autonomy
Evaluated on the basis of how well controllable resources are used to earn a profit
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10. Financial and Nonfinancial Performance Measures
This chapter’s emphasis is on financial performance reports.
Financial measures however do not indicate the root cause of financial deviations.
Managers and employees are often better served by performance reports focusing on data directly related to their job such as units processed or customers served per hour.
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11. 2
Differentiate between static and flexible budgets for performance reporting Prepare a flexible budget.
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12. Static and Flexible Budgets
Static Budget
Flexible Budget
Based on original operating budget
Constant, regardless of actual activity
Set for a series of possible production and sales volumes, or
Adjusted to a particular level of production
Used to determine what costs should be for a particular activity level
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13. Static Budget Example
Langley Hats has scheduled 800 sunhats for production during July. Costs of production are:
Direct materials yards per $3 per yard
Direct labor hours per $12 per hour
Variable overhead – 0.15 labor $16.50 per hour
Fixed overhead - $2,100 per month
The static manufacturing cost budget based on 800 units:
Manufacturing costs:
Variable costs
Direct materials (800 × 1.2 yards × $3 per yard)
$2,880
Direct labor (800 × 0.15 hours × $12 per hour)
1,440
Variable overhead (120 hours × $16.50)
1,980
Fixed overhead
2,100
Total manufacturing costs
$8,400
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14. Flexible Budget Example
While scheduled production was 800 hats, Langley Hats actually produced 850 sunhats during July with direct materials costing $3,087; direct labor, $1,547; variable overhead, $2,185; and fixed overhead costing $2,090.
Langley Hats
Production Department Performance Report
For Month of July
Actual
Flexible Budget
Variance
Units
850
Variable costs
Direct materials
$3,087
$3,060
$27 U
Direct labor
1,547
1,530
$17
Variable overhead
2,185
2,104
$81
Fixed overhead cost
2,090
2,100
$10 F
Totals
$8,909
$8,794
$115
1.2 x $3 x 850 = $3,060
0.15 x $12 x 850 = $1,530
0.15 x $16.50 x 850
= $2,104
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15. Standard Costs A Standard cost …..
Indicates what it should cost to provide an activity or produce one batch or unit of product under planned and efficient operating conditions
Should be based on realistic expectations
Developed from
Engineering analysis
Historical data adjusted for expected changes
Past inefficiencies excluded
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16. Tight Standards
Set by some companies to motivate employees toward higher levels of production
Often causes planning and behavioral problems
More likely to occur in an imposed budget
Less likely to occur in a participation budget
Loose standards may occur
Easily attainable
May fail to motivate employees
Can make the company uncompetitive
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17. 3
Determine the components of standard cost variance analysis. Formulate and interpret direct materials cost variances.
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18. Standard Cost Variance Analysis
Provides a system for examining the flexible budget variance
Difference between actual costs and flexible budget cost of producing a given quantity of product or service
Actual Costs
Determined from financial transactions
Flexible Budget Costs
Determined by multiplying standard quantities allowed for the output times standard price or rate
Identifies the general cause of the flexible budget variances for variable cost components by breaking them into separate price and quantity variances
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19. Standard Cost Variance Analysis
Materials price variance
Materials quantity variance
Direct Materials
Labor rate variance
Labor efficiency variance
Direct Labor
Variable overhead spending variance
Variable overhead efficiency variance
Variable Overhead
Fixed overhead is excluded because it does not vary with production in the relevant range of activity.
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20. Direct Materials Standard Components
Standard Price
Indicates how much should be paid for each input unit of direct materials
Input is the measurement of raw materials, such as pounds, yards, grams, etc.
Standard Quantity
Indicates the amount of direct materials allowed to produce one unit of product
Output is quantity of finished goods produced
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21. Direct Materials Price Variance
Difference between actual and standard cost of actual materials inputs.
Favorable
Unfavorable
Actual < Standard
Actual > Standard
Implies the company obtained a better price for each input unit of materials than allowed in the budget
Implies the company paid a higher price for each input unit of materials than allowed in the budget
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22. Direct Materials Quantity Variance
Difference between standard quantity of actual material inputs and flexible budged quantity for materials.
Favorable
Unfavorable
Actual < Standard
Actual > Standard
Implies the company used fewer input units of materials than allowed in the budget
Implies the company used more input units of materials than allowed in the budget
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23. Standard Cost Variance Analysis —Direct Materials—
While scheduled production was 800 hats, Langley Hats actually produced 850 sunhats during July using 980 yards costing $3.15 per yard. The standard for materials is 1.2 yards at $3 per yard.
SQ = 1.2 x 850 = 1,020 yards
Input component: Direct materials Output: 850
Actual Cost
 Standard Cost of Actual Inputs
Flexible Budget Cost
Actual quantity (AQ)
980
Standard quantity allowed (SQ)
1,020
Actual price (AP)
$3.15
Standard price (SP)
$3.00
$3,087
$2,940
$3,060
Materials price variance $147 U
Materials quantity variance $120 F
Total flexible budget materials variance $27 U
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24. Direct Material Variance
The employee responsible for purchasing materials paid $0.15 more per yard than allowed by the standards.
Materials price variance = AQ(AP – SP)
= 980 ($ $3.00) = $147 U
The actual quantity of materials used was 40 yards (1,020 – 980) less than the yardage allowed by the standards for the 850 units produced.
Materials quantity variance = SP(AQ – SQ)
= $3.00 (980 – 1,020) = $120 F
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25. Causes of Material Price Variances
Favorable Materials Price Variance
Volume purchase discounts
Effective bargaining
Purchasing substandard-quality materials
Purchasing from a distressed seller
Unfavorable Materials Price Variance
Failure to buy in sufficient quantities to receive normal discounts
Failure to order in a timely fashion creating more costly shipping
Purchasing higher-quality materials than specified
Uncontrollable market price changes
Failure to bargain effectively
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26. Causes of Material Quantity Variances
Favorable Materials Quantity Variance
Less materials waste than allowed by the standards
Better than expected machine efficiency
Direct materials of higher quality than required by the standards
More efficient use of direct materials
Unfavorable Materials Quantity Variance
Incurring more waste than allowed in the standards
Poorly maintained machinery requiring larger amounts of raw materials
Raw materials of lower quality than required by the standards
Poorly trained employees
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27. Formulate and interpret direct labor cost variances.4
Formulate and interpret direct labor cost variances.
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28. Standard Cost Variance Analysis —Direct Labor—
While scheduled production was 800 hats, Langley Hats actually produced 850 sunhats during July using 130 labor hours costing $11.90/hour. The standard for labor is 0.15 hours at $12/hour.
SH = 0.15 x 850 = hours
Input component: Direct labor Output: 850
Actual Cost
 Standard Cost of Actual Inputs
Flexible Budget Cost
Actual hours (AH)
130
Standard hours allowed (SH)
127.5
Actual rate (AR)
$11.90
Standard rate (SR)
$12.00
$1,547
$1,560
$1,530
Labor rate variance $13 F
Labor efficiency variance $30 U
Total flexible budget labor variance $17 U
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29. Direct Labor Variance
Paid $0.10 less per hour than allowed by the standards.
Labor rate variance = AH(AR – SR)
= 130 ($ $12.00) = $13 F
Used more labor hours than allowed by the standards for the 850 units produced.
Labor efficiency variance = SR(AH – SH)
= $12.00 (130 – 127.5) = $30 U
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30. Causes of Labor Rate Variances
Favorable Labor Rate Variance
Less skilled employees with lower pay rate used than specified in the standard
Reduction in wage rate since standards developed
Unfavorable Labor Rate Variance
More highly skilled or experienced employees used than specified in the standard
Increase in wage rate since standards developed
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31. Causes of Labor Efficiency Variances
Favorable Labor Efficiency Variance
Use of highly skilled workers
Better machinery
Raw materials of higher quality than the standards provide
High employee morale
Improved job satisfaction
Improved working conditions
Unfavorable Labor Efficiency Variance
Poorly trained workers
Poorly maintained machinery
Down-time resulting from the use of low-quality materials
Low employee morale
Poor working conditions
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32. Formulate and interpret overhead cost variances.5
Formulate and interpret overhead cost variances.
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33. Standards for Variable Overhead
Standards more difficult to set
Manufacturing overhead represents groups of different costs
There is no natural physical measure
Common approach
Use a substitute measure of quantity for all items in a group
Typical measures
Machine hours
Units of finished product
Direct labor hours
Direct labor dollars
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34. Standard Cost Variance Analysis —Variable Overhead Variances—
While scheduled production was 800 hats, Langley Hats actually produced 850 sunhats during July using 130 labor hours. Actual variable overhead cost was $2,185. The standard for variable overhead is $16.50 per direct labor hour.
SH = 0.15 x 850 = hours
Input component: Variable overhead Flexible Budget Cost
Actual Cost
Standard Cost of Actual Inputs
Flexible Budget Cost
Actual labor hours (AH)
130
Labor hours allowed (SH)
127.5
Standard rate (SR)
$16.50
$2,185
$2,145
*$2,104
Variable overhead spending variance $40 U
Variable overhead efficiency variance $41 U
Total flexible budget variable overhead variance $81 U
*rounded
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35. Variable Overhead Variances
Variable overhead spending variance
= Actual costs – (SR x AH)
= $2,185 – ($16.50 x 130) = $40 U
The actual variable overhead costs were $40 higher that what the cost would have been using actual hours at the standard rate of $16.50 per labor hour.
The actual labor hours used should have increased variable overhead by $41 at the standard rate of $ per labor hour.
Variable overhead efficiency variance
= SR(AH - SH)
= $16.50 (130 – ) = $41 U
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36. Variable Overhead Variances
Because they include many heterogeneous costs, it is difficult to interpret variable overhead variances
Variable overhead spending variances
Include all types of actual expenditures that cause actual expenditures to differ from the amount expected for the actual inputs of the measurement base
Regardless of its title, the variable overhead efficiency variance provides no information on the efficiency of using individual variable overhead items
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37. Fixed Overhead Variances
Because the fixed overhead budget variance is the same for all output levels within the relevant range, the budget variance is not usefully broken into price and quantity factors
Possible causes of variances
Higher budgeted supervisor salaries paid
Longer than normal working shifts could cause maintenance costs to exceed budget
Fixed overhead budget variance = Actual fixed overhead – Budgeted fixed overhead = $2,090 - $2,000 = $10 F
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38. 6
Calculate revenue variances and prepare a performance report for a revenue center.
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39. Performance Reports for Revenue Centers
Includes a comparison of actual and budgeted revenues
Static budget used to evaluate revenue centers
If revenue projections are not met, budgeted profit will not be met
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40. Revenue Center Variances
Three variances for revenue centers: =
Actual
volume ×
price
Budgeted volume
Budgeted price –
Revenue Variance
Sales Price Variance
Actual
sales volume
Actual selling price
Budgeted selling price – = ×
Broken into two variances
Sales Volume Variance
Budgeted selling price
Actual sales volume
Budgeted sales volume – = ×
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41. Revenue Center Variance Example
While scheduled sales totaled 800 hats at $15 each, Langley Hats actually sold 850 sunhats for an average of $14.80 each.
Revenue variance
= (850 x $14.80) – (800 x $15) = $580 F
Sales price variance
= ($ $15) x 850 = $170 U
Sales volume variance
= (850 – 800) x $15 = $750 F
Totals are the same.
$580 F
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42. Inclusion of Controllable Costs
Must consider controllable costs when evaluating the overall performance of revenue centers
Omission could create
Uneconomic selling practices such as
Excessive advertising and entertaining
Spending too much time on small accounts
Controllable costs include
Order getting costs
Order filling costs
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43. Controllable Costs Order Getting Costs Order Filling Costs
Costs incurred to obtain customers’ orders
Examples
Advertising
Salespersons’ salaries, commissions
Travel and entertainment
Telephone
Costs incurred to place finished goods in the hands of purchasers
Examples
Storing
Packaging
Transportation
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44. Revenue Centers as Profit Centers
Combination of revenue and cost variances
Appropriate only for a profit center
Standard variable cost of goods sold
Must be assigned to the sales department before treating as a profit center
Role of sales department as a profit center
Acquires units from the production department
Sells them outside the company
Standard cost is assigned to sales department so that inefficiencies of production do not get passed on
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45. Net Sales Volume Variances
Indicates the impact for a change in sales volume on the contribution margin given the budgeted selling price and the standard variable cost.
Sales Volume Variance
Budgeted contribution margin
Actual volume
Budgeted volume – = ×
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46. Net Sales Volume Variance Example
Langley Hats budgeted 800 sunhats at $15 each, with actual sales resulting in sales of 850 sunhats for an average of $14.80 each. The standard variable manufacturing costs of each hat totaled $7.88, and the standard variable selling expenses totaled $0.65.
Budgeted contribution margin per hat
= $15 – ($ $0.65) = $6.47
Net sales volume variance
= (850 – 800) x $6.47 = $ F
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47. Formulate and interpret fixed overhead cost variances.
Learning Objective 7
Appendix 23A
Formulate and interpret fixed overhead cost variances.
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48. Fixed Overhead Budget Variance
Because the fixed overhead budget variance is the same for all output levels within the relevant range, the budget variance is not usefully broken into price and quantity factors
Possible causes of variances
Higher budgeted supervisor salaries paid
Longer than normal working shifts could cause maintenance costs to exceed budget
Fixed overhead budget variance
Fixed overhead volume variance
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49. Fixed Overhead Budget Variance=
Budgeted total fixed overhead
Budgeted activity level
Standard fixed overhead rate
Always the same as total fixed overhead flexible budget variance because the budgeted fixed overhead is the same for all levels of activity
Caused by a combination of price and quantity factors
Standard fixed overhead rate is used
Quicker product costing
Budgeted fixed costs divided by budgeted standard level of activity
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50. Fixed Overhead Volume Variance
Indicates the difference between the activity allowed for the actual output and the budget level used as the denominator in computing the standard fixed overhead rate
Sometimes called the capacity variance
Not used to control costs
Indicates neither good nor bad performance.
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51. Standard Fixed Overhead Rate Example
While scheduled production was 800 hats, Langley Hats actually produced 850 sunhats during July using 130 labor hours. Actual fixed overhead cost was $2,090. Total budgeted fixed overhead is $2,100 for the month, and budgeted machine hours are 160. The standard machine hours is 0.20 hours per hat.
Standard fixed overhead rate
= $2,100 / 160 machine hours = $13.13 per machine hour
Budgeted cost assigned
= 0.20 hours x 850 hats x $13.13 per hour = $2,232
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52. Standard Cost Variance Analysis —Fixed Overhead—
While scheduled production was 800 hats, Langley Hats actually produced 850 sunhats during July. Actual fixed overhead cost was $2,090. The total budgeted fixed overhead is $2,100 for the month.
SH = 0.20 x 850 = 170 standard hours allowed
Input component: Fixed overhead Output: 850 units
Actual Cost
Budgeted Cost
Budgeted Cost Assigned
Budgeted hours (BH)
160
Standard hours allowed (SH)
170
Standard rate (SR)
$13.13
$2,090
$2,100
$2,232
Fixed overhead budget variance $10 F
Fixed overhead volume variance $132 F
Total fixed manufacturing overhead variance $142 U
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53. Reconcile budgeted and actual income.
Learning Objective 8
Appendix 23B
Reconcile budgeted and actual income.
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54. Reconciling Budgeted and Actual Income
Contribution format used
All costs and revenues are assigned to responsibility centers
Financial performance of each center is summarized
Budgeted net income
+/- Sales department variances
+/- Production department variances
+/- Administrative department variances
= Actual net income
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