1. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 10 Standard Costing, Operational Performance Measures, and the Balanced Scorecard

2. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 1

3. 10-3 Managing Costs Standard cost Actual cost Comparison between standard and actual performance level Cost variance

4. 10-4 Management by Exception Direct Material Managers focus on quantities and costs that exceed standards, a practice known as management by exception. Type of Product Cost Amount Direct Labor Standard

5. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 2

6. 10-6 Setting Standards Analysis of Historical Data Task Analysis Cost Standards

7. 10-7 Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations. Participation in Setting Standards

8. 10-8 Perfection versus Practical Standards: A Behavioral Issue Should we use practical standards or perfection standards? Practical standards should be set at levels that are currently attainable with reasonable and efficient effort.

9. 10-9 I agree. Perfection standards are unattainable and therefore discouraging to most employees. Perfection versus Practical Standards: A Behavioral Issue

10. 10-10 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.

11. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 3

12. 10-12 A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price VarianceQuantity 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

13. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 4

14. 10-14 1.Size of variance 1.Dollar amount 2.Percentage of standard 2.Recurring variances 3.Trends 4.Controllability 5.Favorable variances 6.Costs and benefits of investigation Significance of Cost Variances What clues help me to determine the variances that I should investigate?

15. 10-15 Statistical Control Chart 123456789 Variance Measurements Favorable Limit Unfavorable Limit Desired Value Warning signals for investigation

16. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 5

17. 10-17 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. Behavioral Impact of Standard Costing

18. 10-18 Controllability of Variances Direct-Material Price Variance Direct-Labor Rate Variance Direct-Material Quantity Variance Direct-Labor Efficiency Variance

19. 10-19 Interaction among Variances I am not responsible for the unfavorable labor efficiency variance! You purchased cheap material, so it took more time to process it. You used too much time because of poorly trained workers and poor supervision.

20. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 6

21. 10-21 Standard Costs and Product Costing Standard material and labor costs are entered into Work-in-Process inventory instead of actual costs. Standard cost variances are closed directly to Cost of Goods Sold.

22. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 7

23. 10-23 Advantages of Standard Costing Management by Exception Stable Product Costs Sensible Cost Comparisons Advantages Performance Evaluation Employee Motivation

24. 10-24 End of Chapter 10 Let’s set the standard a little higher.