1. Standard Costs 11/16/04 Chapter 10

2. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Costs Standard Costs are Predetermined. Used for planning labor, material and overhead requirements. Benchmarks for measuring performance. Used to simplify the accounting system.

3. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Costs Direct Material Managers focus on quantities and costs that differ from standards by a significant amount, a practice known as management by exception. Type of Product Cost Amount Direct Labor Manufacturing Overhead Standard

4. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations. Setting Standard Costs

5. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Setting Standard Costs Should we use practical standards or ideal standards? Engineer Managerial Accountant

6. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Setting Standard Costs Practical standards should be set at levels that are currently attainable with reasonable and efficient effort. Production manager

7. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Setting Standard Costs I agree. Ideal standards, based on perfection, are unattainable and discourage most employees. Human Resources Manager

8. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Note The argument that ideal standards are discouraging has been persuasive for many years. So “normal” defects and waste were built into the standards. In recent years, TQM and other initiatives have sought to eliminate all defects and waste. Ideal standards, that allow for no waste, have become more popular. The emphasis is on improvement over time, not attaining the ideal standards right now. The argument that ideal standards are discouraging has been persuasive for many years. So “normal” defects and waste were built into the standards. In recent years, TQM and other initiatives have sought to eliminate all defects and waste. Ideal standards, that allow for no waste, have become more popular. The emphasis is on improvement over time, not attaining the ideal standards right now.

9. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Setting Direct Material Standards (example p. 428) Price Standards Final, delivered cost of materials, net of discounts. Quantity Standards Material required per spec. plus allowance for waste, etc.

10. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Setting Direct Labor Standards (example p. 429) Rate Standards Use wage surveys and labor contracts, include fringes. Time Standards Time required to complete a unit of product, using time and motion studies

11. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Setting Variable Overhead Standards (example p. 430) Rate Standards The rate is the variable portion of the predetermined overhead rate. Activity Standards The activity is the base used to apply overhead to units of product

12. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Cost Card – Variable Production Cost A standard cost card for one unit of product might look like this:

13. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Cost Variances Cost Standard This variance is unfavorable because the actual cost exceeds the standard cost. A standard cost variance is the amount by which an actual cost differs from the standard cost.

14. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Cost Variances Mr.D: “I see that there is an unfavorable variance. But why are variances 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.

15. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Cost Variances Price Variance The difference between the actual price and the standard price Quantity Variance The difference between the actual quantity and the standard quantity

16. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price VarianceQuantity Variance Standard price is the amount that should have been paid for the resources acquired.

17. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Price VarianceQuantity Variance Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price A General Model for Variance Analysis Standard quantity is the quantity allowed for the actual good produced.

18. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin A General Model for Variance Analysis AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity Price VarianceQuantity Variance Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

19. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Favorable/Unfavorable Variances If AQ(AP-SP) = positive = unfavorable (actual is greater than standard) If AQ(AP-SP) = negative = favorable (actual is less than standard) If SP(AQ-SQ) = positive = unfavorable If SP(AQ-SQ) = negative = favorable

20. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Costs Let’s use the general model to calculate standard cost variances for direct material.

21. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Glacier Peak Outfitters has the following direct material standard for the fiberfill in its mountain parka. 0.1 kg. of fiberfill per parka at $5.00 per kg. Last month 210 kgs of fiberfill were purchased and used to make 2,000 parkas. The material cost a total of $1,029. Material Variances Example (VG)

22. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg. = $1,029 = $1,050 = $1,000 Price variance $21 favorable Quantity variance $50 unfavorable Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price $1,029  210 kgs = $4.90 per kg Material Variances Summary

23. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg. = $1,029 = $1,050 = $1,000 Price variance $21 favorable Quantity variance $50 unfavorable Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 0.1 kg per parka  2,000 parkas = 200 kgs Material Variances Summary

24. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Note: Using the formulas Materials price variance MPV = AQ (AP - SP) = 210 kgs ($4.90/kg - $5.00/kg) = 210 kgs (-$0.10/kg) = $21 F Materials quantity variance MQV = SP (AQ - SQ) = $5.00/kg (210 kgs-(0.1 kg/parka  2,000 parkas)) = $5.00/kg (210 kgs - 200 kgs) = $5.00/kg (10 kgs) = $50 U

25. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Quick Check Suppose only 190 kgs of fiberfill were used to make 2,000 parkas. What is the materials quantity variance? Remember that the standards call for 0.1 kg of fiberfill per parka at a cost of $5 per kg of fiberfill. a. $50 F b. $50 U c. $100 F d. $100 U Suppose only 190 kgs of fiberfill were used to make 2,000 parkas. What is the materials quantity variance? Remember that the standards call for 0.1 kg of fiberfill per parka at a cost of $5 per kg of fiberfill. a. $50 F b. $50 U c. $100 F d. $100 U

26. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Suppose only 190 kgs of fiberfill were used to make 2,000 parkas. What is the materials quantity variance? Remember that the standards call for 0.1 kg of fiberfill per parka at a cost of $5 per kg of fiberfill. a. $50 F b. $50 U c. $100 F d. $100 U Suppose only 190 kgs of fiberfill were used to make 2,000 parkas. What is the materials quantity variance? Remember that the standards call for 0.1 kg of fiberfill per parka at a cost of $5 per kg of fiberfill. a. $50 F b. $50 U c. $100 F d. $100 U Quick Check MQV = SP (AQ - SQ) = $5.00/kg (190 kgs-(0.1 kg/parka  2,000 parkas)) = $5.00/kg (190 kgs - 200 kgs) = $5.00/kg (-10 kgs) = $50 F

27. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Costs Let’s use the general model to calculate all standard cost variances, starting with direct material.

28. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 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. Material Variances Example Zippy

29. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 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. 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. Quick Check Zippy

30. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 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. 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. Quick Check Zippy

31. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s material price variance (MPV) for the week was: a.$170 unfavorable. b.$170 favorable. c.$800 unfavorable. d.$800 favorable. Hanson’s material price variance (MPV) for the week was: a.$170 unfavorable. b.$170 favorable. c.$800 unfavorable. d.$800 favorable. Quick Check Zippy

32. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s material price variance (MPV) for the week was: a.$170 unfavorable. b.$170 favorable. c.$800 unfavorable. d.$800 favorable. Hanson’s 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. × ($3.90 - 4.00) MPV = $170 Favorable Quick Check Zippy

33. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 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. 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. Quick Check Zippy

34. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 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. 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 Quick Check Zippy

35. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Quick Check Hanson’s material quantity variance (MQV) for the week was: a.$170 unfavorable. b.$170 favorable. c.$800 unfavorable. d.$800 favorable. Hanson’s material quantity variance (MQV) for the week was: a.$170 unfavorable. b.$170 favorable. c.$800 unfavorable. d.$800 favorable. Zippy

36. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s material quantity variance (MQV) for the week was: a.$170 unfavorable. b.$170 favorable. c.$800 unfavorable. d.$800 favorable. Hanson’s 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 Quick Check Zippy

37. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 1,700 lbs. 1,700 lbs. 1,500 lbs. × × × $3.90 per lb. $4.00 per lb. $4.00 per lb. = $6,630 = $ 6,800 = $6,000 Price variance $170 favorable Quantity variance $800 unfavorable Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Material Variances Summary Zippy

38. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Material Variances 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.

39. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 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. Material Variances Continued Zippy

40. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Actual Quantity Actual Quantity Purchased Purchased × × Actual Price Standard Price 2,800 lbs. 2,800 lbs. × × $3.90 per lb. $4.00 per lb. = $10,920 = $11,200 Price variance $280 favorable Price variance increases because quantity purchased increases. Zippy Material Variances Continued

41. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Actual Quantity Used Standard Quantity × × Standard Price Standard Price 1,700 lbs. 1,500 lbs. × × $4.00 per lb. $4.00 per lb. = $6,800 = $6,000 Quantity variance $800 unfavorable Quantity variance is unchanged because actual and standard quantities are unchanged. Material Variances Continued Zippy

42. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Responsibility for Material Variances I am not responsible for this unfavorable material quantity variance. You purchased cheap material, so my people had to use more of it. You used too much material because of poorly trained workers and poorly maintained equipment. Also, your poor scheduling sometimes requires me to rush order material at a higher price, causing unfavorable price variances. Production Manager Purchasing Manager

43. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Material Price Variance Causes Odd lot sizes Price discounts Rush orders Lower quality materials Special pricing Transportation method Second source

44. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Material Quantity Variance Causes Faulty/poorly maintained machinery Poor quality material Inefficient or poorly trained workers New workers Poor supervision

45. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Costs – Direct Labor Now let’s calculate standard cost variances for direct labor.

46. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson Inc. has the following direct labor standard to manufacture one Zippy: 1.5 standard hours per Zippy at $12.00 per direct labor hour Last week 1,550 direct labor hours were worked at a total labor cost of $18,910 to make 1,000 Zippies. Labor Variances Example Zippy

47. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin What was Hanson’s actual rate (AR) for labor for the week? a. $12.20 per hour. b. $12.00 per hour. c. $11.80 per hour. d. $11.60 per hour. What was Hanson’s actual rate (AR) for labor for the week? a. $12.20 per hour. b. $12.00 per hour. c. $11.80 per hour. d. $11.60 per hour. Quick Check Zippy

48. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin What was Hanson’s actual rate (AR) for labor for the week? a. $12.20 per hour. b. $12.00 per hour. c. $11.80 per hour. d. $11.60 per hour. What was Hanson’s actual rate (AR) for labor for the week? a. $12.20 per hour. b. $12.00 per hour. c. $11.80 per hour. d. $11.60 per hour. Quick Check AR = $18,910 ÷ 1,550 hours AR = $12.20 per hour Zippy

49. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable. Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable. Quick Check Zippy

50. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable. Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable. Quick Check LRV = AH(AR - SR) LRV = 1,550 hrs($12.20 - $12.00) LRV = $310 unfavorable Zippy

51. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 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. 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. Quick Check Zippy

52. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 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. 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. Quick Check SH = 1,000 units × 1.5 hours per unit SH = 1,500 hours Zippy

53. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. Hanson’s labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. Quick Check Zippy

54. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. Hanson’s labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. Quick Check LEV = SR(AH - SH) LEV = $12.00(1,550 hrs - 1,500 hrs) LEV = $600 unfavorable Zippy

55. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate Labor Variances Summary Rate variance $310 unfavorable Efficiency variance $600 unfavorable 1,550 hours 1,550 hours 1,500 hours × × × $12.20 per hour $12.00 per hour $12.00 per hour = $18,910 = $18,600 = $18,000 Zippy

56. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Labor Rate Variance – A Closer Look Production managers who make work assignments are generally responsible for rate variances. Overtime Premium Wage increase Using highly paid skilled workers to perform unskilled tasks results in an unfavorable rate variance. Turnover of Employees

57. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Labor Efficiency Variance – A Closer Look Unfavorable Efficiency Variance Poor supervision of workers Poorly maintained equipment Poorly trained workers Poor quality materials Insufficient demand for product

58. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Responsibility for Labor Variances Production Manager Poorly trained/motivated workers Poorly maintained equipment Poor supervision of workers Inaccurate standards Purchasing Manager Poor quality of materials

59. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Standard Costs – Variable Manufacturing Overhead Now let’s calculate standard cost variances for the last of the variable production costs – variable manufacturing overhead.

60. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Variable Manufacturing Overhead Example Hanson Inc. has the following variable manufacturing overhead standard: 1.5 standard hours per Zippy at a POHR of $3.00 per direct labor hour Last week, 1,550 direct labor hours were worked to make 1,000 Zippies, and a total cost of $5,115 was incurred for variable manufacturing overhead. Actual rate = $5,115 / 1,550 = $3.30.

61. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was: a.$465 unfavorable. b.$400 favorable. c.$335 unfavorable. d.$300 favorable. Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was: a.$465 unfavorable. b.$400 favorable. c.$335 unfavorable. d.$300 favorable. Quick Check Zippy

62. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was: a.$465 unfavorable. b.$400 favorable. c.$335 unfavorable. d.$300 favorable. Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was: a.$465 unfavorable. b.$400 favorable. c.$335 unfavorable. d.$300 favorable. Quick Check SV = AH(AR - SR) SV = 1,550 hrs($3.30 - $3.00) SV = $465 unfavorable Zippy

63. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was: a.$435 unfavorable. b.$435 favorable. c.$150 unfavorable. d.$150 favorable. Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was: a.$435 unfavorable. b.$435 favorable. c.$150 unfavorable. d.$150 favorable. Quick Check Zippy

64. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was: a.$435 unfavorable. b.$435 favorable. c.$150 unfavorable. d.$150 favorable. Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was: a.$435 unfavorable. b.$435 favorable. c.$150 unfavorable. d.$150 favorable. Quick Check EV = SR(AH - SH) EV = $3.00(1,550 hrs - 1,500 hrs) EV = $150 unfavorable 1,000 units × 1.5 hrs per unit Zippy

65. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Spending variance $465 unfavorable Efficiency variance $150 unfavorable 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 Variable Manufacturing Overhead Variances Zippy

66. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Variable Manufacturing Overhead Variances – Causes Timing of overhead spending Changes in costs of overhead items Difference between actual and standard allocation base activity Spent more that what was budgeted

67. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Variance Analysis and Management by Exception How do I know which variances to investigate? Larger variances, in dollar amount or as a percentage of the standard, are investigated first.

68. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Advantages of Standard Costs Management by exception Improved cost control and performance evaluation Better Information for planning and decision making Possible reductions in production costs Advantages Simplify Bookkeeping

69. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Potential Problems Emphasis on negative may impact morale. Emphasizing standards may exclude other important objectives. Favorable variances may be misinterpreted. Continuous improvement may be more important than meeting standards. Standard cost reports may not be timely. Incentives to build Inventories, to absorb excess overhead Disadvantages of Standard Costs

70. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Delivery Performance Measures Delivery time cycle – time from when an order is received from a customer to when it is shipped Manufacturing cycle time (throughput time) – time required to turn raw materials into completed products Objective is to reduce/eliminate non-value added activities such as waiting, inspection, move, rework, test and queue time

71. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process time is the only value-added time. Delivery Performance Measures Wait Time Process Time + Inspection Time + Move Time + Queue Time Delivery Cycle Time Order Received Production Started Goods Shipped Throughput Time

72. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Delivery Performance Measures Manufacturing Cycle Efficiency Value-added time Manufacturing cycle time = Wait Time Process Time + Inspection Time + Move Time + Queue Time Delivery Cycle Time Order Received Production Started Goods Shipped Throughput Time

73. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Quick Check A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the throughput time? a. 10.4 days b. 0.2 days c. 4.1 days d. 13.4 days A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the throughput time? a. 10.4 days b. 0.2 days c. 4.1 days d. 13.4 days

74. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the throughput time? a. 10.4 days b. 0.2 days c. 4.1 days d. 13.4 days A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the throughput time? a. 10.4 days b. 0.2 days c. 4.1 days d. 13.4 days Quick Check Throughput time = Process + Inspection + Move + Queue = 0.2 days + 0.4 days + 0.5 days + 9.3 days = 10.4 days

75. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Quick Check A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the MCE? a. 50.0% b. 1.9% c. 52.0% d. 5.1% A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the MCE? a. 50.0% b. 1.9% c. 52.0% d. 5.1%

76. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the MCE? a. 50.0% b. 1.9% c. 52.0% d. 5.1% A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the MCE? a. 50.0% b. 1.9% c. 52.0% d. 5.1% Quick Check MCE= Value-added time ÷ Throughput time = Process time ÷ Throughput time = 0.2 days ÷ 10.4 days = 1.9%

77. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin End of Chapter 10