1. 25-1

2. 25-2 Learning Objectives Standard Costs and Balanced Scorecard 25 Describe standard costs 1 Determine direct materials variances. 2 Determine direct labor and total manufacturing variances. 3 Prepare variance reports and balanced scorecard. 4

3. 25-3 Both standards and budgets are predetermined costs, and both contribute to management planning and control. There is a difference:  A standard is a unit amount.  A budget is a total amount Distinguishing Between Standards and Budgets LEARNING OBJECTIVE Describe standard costs. 1 LO 1

4. 25-4 Illustration 25-1 Advantages LO 1

5. 25-5 Setting standard costs requires input from all persons who have responsibility for costs and quantities. Standards should change whenever managers determine that the existing standard is not a good measure of performance. Setting Standard Costs LO 1

6. 25-6 IDEAL VERSUS NORMAL STANDARDS Companies set standards at one of two levels:  Ideal standards represent optimum levels of performance under perfect operating conditions.  Normal standards represent efficient levels of performance that are attainable under expected operating conditions. Properly set, normal standards should be rigorous but attainable. Setting Standard Costs LO 1

7. 25-7 Most companies that use standards set them at a(n):  optimum level.  ideal level.  normal level.  practical level. Setting Standard Costs Question LO 1

8. 25-8 How Do Standards Help a Business? A number of organizations, including corporations, consultants, and governmental agencies, share information regarding performance standards in an effort to create a standard set of measures for thousands of business processes. The group, referred to as the Open Standards Benchmarking Collaborative, includes IBM, Procter and Gamble, the U.S. Navy, and the World Bank. Companies that are interested in participating can go to the group’s website and enter their information. Source: Becky Partida, “Benchmark Your Manufacturing Performance,” Control Engineering (February 4, 2013). Accounting Across the Organization Navy LO 1

9. 25-9 A CASE STUDY To establish the standard cost of producing a product, it is necessary to establish standards for each manufacturing cost element—  direct materials,  direct labor, and  manufacturing overhead. The standard for each element is derived from the standard price to be paid and the standard quantity to be used. Setting Standard Costs LO 1

10. 25-10 The direct materials price standard is the cost per unit of direct materials that should be incurred. Direct Materials Setting Standard Costs Illustration 25-2 Setting direct materials price standard LO 1

11. 25-11 The direct materials quantity standard is the quantity of direct materials that should be used per unit of finished goods. Standard direct materials cost is $12.00 ($3.00 x 4.0 pounds). Direct Materials Setting Standard Costs Illustration 25-3 Setting direct materials quantity standard LO 1

12. 25-12 The direct materials price standard should include an amount for all of the following except:  receiving costs.  storing costs.  handling costs.  normal spoilage costs. Setting Standard Costs Question LO 1

13. 25-13 The direct labor price standard is the rate per hour that should be incurred for direct labor. Direct Labor Setting Standard Costs Illustration 25-4 Setting direct labor price standard LO 1

14. 25-14 The direct labor quantity standard is the time that should be required to make one unit of the product. The standard direct labor cost is $30 ($15.00 x 2.0 hours). Direct Labor Setting Standard Costs Illustration 25-5 Setting direct labor quantity standard LO 1

15. 25-15 Manufacturing Overhead For manufacturing overhead, companies use a standard predetermined overhead rate in setting the standard. Setting Standard Costs This overhead rate is determined by dividing budgeted overhead costs by an expected standard activity index, such as standard direct labor hours or standard machine hours. LO 1

16. 25-16 The company expects to produce 13,200 gallons during the year at normal capacity. It takes 2 direct labor hours for each gallon. Standard manufacturing overhead rate per gallon is $10 ($5 x 2 hours). Manufacturing Overhead Setting Standard Costs Illustration 25-6 Computing predetermined overhead rates LO 1

17. 25-17 The total standard cost per unit is the sum of the standard costs of direct materials, direct labor, and manufacturing overhead. Total Standard Cost Per Unit The total standard cost per gallon Setting Standard Costs Illustration 25-7 Standard cost per gallon of Xonic Tonic LO 1

18. 25-18 Ridette Inc. accumulated the following standard cost data concerning product Cty31. Materials per unit: 1.5 pounds at $4 per pound. Labor per unit: 0.25 hours at $13 per hour. Manufacturing overhead: Predetermined rate is 120% of direct labor cost. Compute the standard cost of one unit of product Cty31. DO IT! Standard Costs 1 LO 1

19. 25-19 Variances are the differences between total actual costs and total standard costs. Actual costs < Standard costs = Favorable variance. Actual costs > Standard costs = Unfavorable variance. Variance must be analyzed to determine the underlying factors. Analyzing variances begins by determining the cost elements that comprise the variance. Analyzing and Reporting Variances LEARNING OBJECTIVE Determine direct materials variances. 2 LO 2

20. 25-20 A variance is favorable if actual costs are:  less than budgeted costs.  less than standard costs.  greater than budgeted costs.  greater than standard costs Question Analyzing and Reporting Variances LO 2

21. 25-21 Illustration: Assume that in producing 1,000 gallons of Xonic Tonic in the month of June, Xonic incurred the costs to the right. The total standard cost of Xonic Tonic is $52,000 (1,000 gallons x $52). Illustration 25-8 Actual production costs Illustration 25-9 Computation of total variance Analyzing and Reporting Variances LO 2

22. 25-22 Direct Materials Variances In completing the order for 1,000 gallons of Xonic Tonic, Xonic used 4,200 pounds of direct materials. These were purchased at a cost of $3.10 per unit. Standard price is $3. Illustration 25-12 Formula for total materials variance $13,020 (4,200 x $3.10) $12,000 (4,000 x $3.00) $1,020 U Total Materials Variance (TMV) Actual Quantity x Actual Price (AQ) x (AP) Standard Quantity x Standard Price (SQ) x (SP) - = - = Analyzing and Reporting Variances LO 2

23. 25-23 Next, the company analyzes the total variance to determine the amount attributable to price (costs) and to quantity (use). The materials price variance is computed from the following formula. Direct Materials Variances $13,020 (4,200 x $3.10) $12,600 (4,200 x $3.00) $420 U Materials Price Variance (MPV) Actual Quantity x Actual Price (AQ) x (AP) Actual Quantity x Standard Price (AQ) x (SP) - = - = Analyzing and Reporting Variances Illustration 25-14 Formula for materials price variance LO 2

24. 25-24 The materials quantity variance is determined from the following formula. Direct Materials Variances Illustration 25-15 Formula for materials quantity variance $12,600 (4,200 x $3.00) $12,000 (4,000 x $3.00) $600 U Materials Quantity Variance (MQV) Actual Quantity x Standard Price (AQ) x (SP) Standard Quantity x Standard Price (SQ) x (SP) - = - = Illustration 25-16 Summary of materials variances Analyzing and Reporting Variances LO 2

25. 25-25 Price Variance $13,020 – $12,600 = $420 U Quantity Variance $12,600 – $12,000 = $600 U Total Variance $13,020 – $12,000 = $1,020 U 123 12 - 23 - 13 - Actual Quantity × Actual Price (AQ) × (AP) 4,200 x $3.10 = $13,020 Standard Quantity × Standard Price (SQ) × (SP) 4,000 x $3.00 = $12,000 Actual Quantity × Standard Price (AQ) × (SP) 4,200 x $3.00 = $12,600 Illustration 25-17 Matrix for direct materials variances Analyzing and Reporting Variances LO 2

26. 25-26 Materials price variance – factors that affect the price paid for raw materials include the ► availability of quantity and cash discounts ► quality of the materials requested ► delivery method used. To the extent that these factors are considered in setting the price standard, the purchasing department is responsible. CAUSES OF MATERIALS VARIANCES Analyzing and Reporting Variances LO 2

27. 25-27 Materials quantity variance – if the variance is due to inexperienced workers, faulty machinery, or carelessness, the production department is responsible. Analyzing and Reporting Variances CAUSES OF MATERIALS VARIANCES LO 2

28. 25-28 The standard cost of Wonder Walkers includes two units of direct materials at $8.00 per unit. During July, the company buys 22,000 units of direct materials at $7.50 and uses those materials to produce 10,000 units. Compute the total, price, and quantity variances for materials. DO IT! Direct Materials Variances 2 LO 2

29. 25-29 In completing the Xonic Tonic order, Xonic incurred 2,100 direct labor hours at an average hourly rate of $14.80. The standard hours allowed for the units produced were 2,000 hours (1,000 gallons x 2 hours). The standard labor rate was $15 per hour. The total labor variance is computed as follows. Direct Labor Variances Illustration 25-18 Formula for total labor variance $31,080 (2,100 x $14.80) $30,000 (2,000 x $15.00) $1,080 U Total Labor Variance (TLV) Actual Hours x Actual Rate (AH) x (AR) Standard Hours x Standard Rate (SH) x (SR) - = - = LEARNING OBJECTIVE Determine direct labor and manufacturing overhead variances. 3 LO 3

30. 25-30 Next, the company analyzes the total variance to determine the amount attributable to price (costs) and to quantity (use). The labor price variance is computed from the following formula. Direct Labor Variances $31,080 (2,100 x $14.80) $31,500 (2,100 x $15.00) $420 F Labor Price Variance (LPV) Actual Hours x Actual Rate (AH) x (AR) Actual Hours x Standard Rate (AH) x (SR) - = - = Analyzing and Reporting Variances Illustration 25-20 Formula for labor price variance LO 3

31. 25-31 The labor quantity variance is determined from the following formula. Direct Labor Variances $31,500 (2,100 x $15.00) $30,000 (2,000 x $15.00) $1,500 U Labor Quantity Variance (LQV) Actual Hours x Standard Rate (AH) x (SR) Standard Hours x Standard Rate (SH) x (SR) - = - = Illustration 25-22 Summary of labor variances Analyzing and Reporting Variances Illustration 25-21 Formula for labor quantity variance LO 3

32. 25-32 Price Variance $31,080 – $31,500 = $420 F Quantity Variance $31,500 – $30,000 = $1,500 U Total Variance $31,080 – $30,000 = $1,080 U 123 12 - 23 - 13 - Actual Hours × Actual Rate (AH) × (AR) 2,100 x $14.80 = $31,080 Standard Hours × Standard Rate (SH) × (SR) 2,000 x $15.00 = $30,000 Actual Hours × Standard Rate (AH) × (SR) 2,100 x $15.00 = $31,500 Illustration 25-23 Matrix for direct labor variances Analyzing and Reporting Variances LO 3

33. 25-33 Labor price variance – usually results from two factors: 1.paying workers different wages than expected, and 2.misallocation of workers. When workers are not unionized, the manager who authorized the wage increase is responsible for the higher wages. CAUSES OF LABOR VARIANCES Analyzing and Reporting Variances Production department generally is responsible for labor price variances resulting from misallocation of the workforce. LO 3

34. 25-34 Labor quantity variances ► Relates to the efficiency of workers. ► The cause of a quantity variance generally can be traced to the production department. Analyzing and Reporting Variances CAUSES OF LABOR VARIANCES LO 3

35. 25-35 Total overhead variance is the difference between actual overhead costs and overhead costs applied to work done. The computation of the actual overhead is comprised of a variable and a fixed component. Illustration 25-24 Actual overhead costs The predetermined overhead rate for Xonic Tonic is $5. Manufacturing Overhead Variances Analyzing and Reporting Variances LO 3

36. 25-36 The formula for the total overhead variance and the calculation for Xonic, Inc. for the month of June. Standard hours allowed are the hours that should have been worked for the units produced. Analyzing and Reporting Variances Illustration 25-25 Formula for total overhead variance LO 3

37. 25-37 The overhead variance is generally analyzed through a price variance and a quantity variance. Overhead controllable variance (price variance) shows whether overhead costs are effectively controlled. Overhead volume variance (quantity variance) relates to whether fixed costs were under- or over-applied during the year. Analyzing and Reporting Variances LO 3

38. 25-38  Over- or underspending on overhead items such as indirect labor, electricity, etc.  Poor maintenance on machines.  Flow of materials through the production process is impeded because of a lack of skilled labor to perform the necessary production tasks, due to a lack of planning.  Lack of sales orders CAUSES OF MANUFACTURING OVERHEAD VARIANCES Analyzing and Reporting Variances LO 3

39. 25-39 What’s Brewing at Starbucks? It’s easy for a company to say it’s committed to corporate social responsibility. But Starbucks actually spells out measurable goals. Recently, the company published its annual Global Responsibility Report in which it describes its goals, achievements, and even its shortcomings related to corporate social responsibility. For example, Starbucks achieved its goal of getting more than 50% of its electricity from renewable sources. It also has numerous goals related to purchasing coffee from sources that are certified as responsibly grown and ethically traded; providing funds for loans to coffee farmers; and fostering partnerships with Conservation International to provide training to farmers on ecologically friendly growing. The report also candidly explains that the company did not meet its goal to cut energy consumption by 25%. It also fell far short of its goal of getting customers to reuse their cups. In those instances where it didn’t achieve its goals, Starbucks set new goals and described steps it would take to achieve them. You can view the company’s Global Responsibility Report at www.starbucks.com. Source: “Starbucks Launches 10th Global Responsibility Report,” Business Wire (April 18, 2011). People, Planet, and Profit Insight Starbucks LO 3

40. 25-40 The standard cost of Product YY includes 3 hours of direct labor at $12.00 per hour. The predetermined overhead rate is $20.00 per direct labor hour. During July, the company incurred 3,500 hours of direct labor at an average rate of $12.40 per hour and $71,300 of manufacturing overhead costs. It produced 1,200 units. (a) Compute the total, price, and quantity variances for labor. (b) Compute the total overhead variance. DO IT! Labor and Manufacturing Overhead Variances 3 LO 3

41. 25-41 Reporting Variances  All variances should be reported to appropriate levels of management as soon as possible.  The form, content, and frequency of variance reports vary considerably among companies.  Facilitate the principle of “management by exception.”  Top management normally looks for significant variances. LEARNING OBJECTIVE Prepare variance reports and balanced scorecards. 4 LO 4

42. 25-42 Materials price variance report for Xonic, Inc., with the materials for the Xonic Tonic order listed first. Illustration 25-26 Reporting Variances Analyzing and Reporting Variances XONIC Variance Report—Purchasing Department For the Week Ended June 8, 2017 LO 4

43. 25-43 Statement Presentation of Variances In income statements prepared for management under a standard cost accounting system, cost of goods sold is stated at standard cost and the variances are disclosed separately. Illustration 25-27 Analyzing and Reporting Variances XONIC Income Statement For the Month Ended June 30, 2017 LO 4

44. 25-44 Which of the following is incorrect about variance reports?  They facilitate “management by exception.”  They should only be sent to the top level of management.  They should be prepared as soon as possible.  They may vary in form, content, and frequency among companies. Question Analyzing and Reporting Variances LO 4

45. 25-45 The balanced scorecard incorporates financial and nonfinancial measures in an integrated system that links performance measurement and a company’s strategic goals. The balanced scorecard evaluates company performance from a series of “perspectives.” The four most commonly employed perspectives are as follows. Balanced Scorecard Illustration 25-30 Linked process across balanced scorecard perspectives LO 4

46. 25-46 Illustration 25-28 Nonfinancial measures used in various industries LO 4

47. 25-47 Illustration 25-29 Examples of objectives within the four perspectives of balanced scorecard LO 4

48. 25-48 Which of the following would not be an objective used in the customer perspective of the balanced scorecard approach?  Percentage of customers who would recommend product to a friend.  Customer retention.  Brand recognition.  Earning per share. Question Balanced Scorecard LO 4

49. 25-49 In summary, the balanced scorecard does the following:  Employs both financial and nonfinancial measures.  Creates linkages so that high-level corporate goals can be communicated all the way down to the shop floor.  Provides measurable objectives for such nonfinancial measures such as product quality, rather than vague statements such as “We would like to improve quality.”  Integrates all of the company’s goals into a single performance measurement system, so that an inappropriate amount of weight will not be placed on any single goal. Balanced Scorecard LO 4

50. 25-50 It May Be Time to Fly United Again Many of the benefits of a balanced scorecard approach are evident in the improved operations at United Airlines. At the time it fi led for bankruptcy, United had a reputation for some of the worst service in the airline business. But when Glenn Tilton took over as United’s chief executive officer, he recognized that things had to change. He implemented an incentive program that allows all of United’s 63,000 employees to earn a bonus of 2.5% or more of their wages if the company “exceeds its goals for on-time flight departures and for customer intent to fly United again.” After instituting this program, the company’s on-time departures were among the best, its customer complaints were reduced considerably, and the number of customers who said that they would fly United again was at its highest level ever. Sources: Susan Carey, “Friendlier Skies: In Bankruptcy, United Airlines Forges a Path to Better Service,” Wall Street Journal (June 15, 2004); and Emre Serpen, “More to Maintain,” Airline Business (November 2012), pp. 38–40. Service Company Insight United Airlines LO 4

51. 25-51 Polar Vortex Corporation experienced the following variances: materials price $250 F, materials quantity $1,100 F, labor price $700 U, labor quantity $300 F, and overhead $800 F. Sales revenue was $102,700, and cost of goods sold (at standard) was $61,900. Determine the actual gross profit. DO IT! Reporting Variances 4 Sales revenue $102,700 Cost of goods sold (at standard) 61,900 Standard gross profit 40,800 Variances Materials price $ 250 F Materials quantity 1,100 F Labor price 700 U Labor quantity 300 F Overhead 800 F Total variance favorable 1,750 Gross profit (actual) $ 42,550 LO 4

52. 25-52 A standard cost accounting system is a double-entry system of accounting. Companies may use a standard cost system with either  job order or  process costing. The system is based on two important assumptions: 1.Variances from standards are recognized at the earliest opportunity. 2.The Work in Process account is maintained exclusively on the basis of standard costs. LEARNING OBJECTIVE 5 APPENDIX 25A: Identify the features of a standard cost accounting system. LO 5

53. 25-53 Illustration: 1. Purchase raw materials on account for $13,020 when the standard cost is $12,600. Raw Materials Inventory12,600 Materials Price Variance420 Accounts Payable13,020 2. Incur direct labor costs of $31,080 when the standard labor cost is $31,500. Factory Labor31,500 Labor Price Variance420 Factory Wages Payable31,080 Standard Cost Accounting System LO 5

54. 25-54 3. Incur actual manufacturing overhead costs of $10,900. Manufacturing Overhead10,900 Accounts Payable/Cash/Acc. Depreciation10,900 4. Issue raw materials for production at a cost of $12,600 when the standard cost is $12,000. Work in Process Inventory12,000 Materials Quantity Variance600 Raw Materials Inventory12,600 Standard Cost Accounting System LO 5

55. 25-55 5. Assign factory labor to production at a cost of $31,500 when standard cost is $30,000. Work in Process Inventory30,000 Labor Quantity Variance 1,500 Factory Labor31,500 6. Applying manufacturing overhead to production $10,000. Work in Process Inventory10,000 Manufacturing Overhead10,000 Standard Cost Accounting System LO 5

56. 25-56 7. Transfer completed work to finished goods $52,000. Finished Goods Inventory52,000 Work in Process Inventory 52,000 8. Sell 1,000 gallons of Xonic Tonic for $70,000. Accounts Receivable70,000 Cost of Goods Sold52,000 Sales70,000 Finished Goods Inventory52,000 Standard Cost Accounting System LO 5

57. 25-57 9. Recognize unfavorable total overhead variance: Overhead Variance900 Manufacturing Overhead 900 Standard Cost Accounting System LO 5

58. 25-58 Ledger Accounts Illustration 25A-1 Cost accounts with variances LO 5

59. 25-59 The overhead variance is generally analyzed through a price variance and a quantity variance.  Overhead controllable variance (price variance) shows whether overhead costs are effectively controlled.  Overhead volume variance (quantity variance) relates to whether fixed costs were under- or over-applied during the year. LEARNING OBJECTIVE 6 APPENDIX 25B: Compute overhead controllable and volume variances. LO 6

60. 25-60 The overhead controllable variance shows whether overhead costs are effectively controlled. To compute this variance, the company compares actual overhead costs incurred with budgeted costs for the standard hours allowed. The budgeted costs are determined from a flexible manufacturing overhead budget. Overhead Controllable Variance LO 6

61. 25-61 For Xonic the budget formula for manufacturing overhead is variable manufacturing overhead cost of $3 per hour of labor plus fixed manufacturing overhead costs of $4,400. Illustration 25B-1 Overhead Controllable Variance LO 6

62. 25-62 Illustration 25B-2 shows the formula for the overhead controllable variance and the calculation for Xonic, Inc. Overhead Controllable Variance Illustration 25B-2 Formula for overhead controllable variance LO 6

63. 25-63 Difference between normal capacity hours and standard hours allowed times the fixed overhead rate. Illustration 25B-3 Overhead Volume Variance LO 6

64. 25-64 Illustration: Xonic Inc. budgeted fixed overhead cost for the year of $52,800. At normal capacity, 26,400 standard direct labor hours are required. Xonic produced 1,000 units of Xonic Tonic in June. The standard hours allowed for the 1,000 gallons produced in June is 2,000 (1,000 gallons x 2 hours). For Xonic, standard direct labor hours for June at normal capacity is 2,200 (26,400 annual hours ÷ 12 months). The computation of the overhead volume variance in this case is as follows. Illustration 25B-4 Overhead Volume Variance LO 6

65. 25-65 In computing the overhead variances, it is important to remember the following.  Standard hours allowed are used in each of the variances.  Budgeted costs for the controllable variance are derived from the flexible budget.  The controllable variance generally pertains to variable costs.  The volume variance pertains solely to fixed costs. Overhead Volume Variance LO 6

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