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

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

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

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

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

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

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.

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

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.

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

10-12 Standard Cost Variances Cost Variance Analysis Quantity Variance Price Variance The difference between the actual price and the standard price The difference between the actual quantity and the standard quantity

10-13 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

10-14 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.

10-15 A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price VarianceQuantity Variance Standard quantity is the quantity that should have been used.

10-16 Standard Costs Let’s use the concepts of the general model to calculate standard cost variances, starting with direct material.

10-17 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 Zippy

10-18 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. Material Variances Zippy

10-19 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. Material Variances Zippy

10-20 Hanson’s direct-material price variance (MPV) for the week was: a.$170 unfavorable. b.$170 favorable. c.$800 unfavorable. d.$800 favorable. Material Variances Zippy

10-21 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 Material Variances Zippy

10-22 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. Material Variances Zippy

10-23 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 Material Variances Zippy

10-24 Hanson’s direct-material quantity variance (MQV) for the week was: a.$170 unfavorable. b.$170 favorable. c.$800 unfavorable. d.$800 favorable. Material Variances Zippy

10-25 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 Material Variances Zippy

10-26 Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 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 Material Variances Summary

10-27 The price variance is computed on the entire quantity purchased. The quantity variance is computed only on the quantity used. Hanson purchased and used 1,700 pounds. How are the variances computed if the amount purchased differs from the amount used? Zippy Material Variances

10-28 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 Zippy

10-29 Material Variances 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 $280 favorable Price variance increases because quantity purchased increases. Zippy MPV = AQ(AP - SP) MPV = 2,800 lbs. × ($ ) MPV = $280 Favorable

10-30 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 Zippy MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800unfavor.

10-31 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.

10-32 Standard Costs Now let’s calculate standard cost variances for direct labor.

10-33 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. Labor Variances Zippy

10-34 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. Labor Variances Zippy

10-35 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. Labor Variances Zippy AR = $15,810 ÷ 1,550 hours AR = $10.20 per hour

10-36 Hanson’s labor rate variance (LRV) for the week was: a.$310 unfavorable. b.$310 favorable. c.$300 unfavorable. d.$300 favorable. Labor Variances Zippy

10-37 Hanson’s labor rate variance (LRV) for the week was: a.$310 unfavorable. b.$310 favorable. c.$300 unfavorable. d.$300 favorable. Labor Variances LRV = AH(AR - SR) LRV = 1,550 hrs($ $10.00) LRV = $310 unfavorable Zippy

10-38 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. Labor Variances Zippy

10-39 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. Labor Variances SH = 1,000 units × 1.5 hours per unit SH = 1,500 hours Zippy

10-40 Hanson’s labor efficiency variance (LEV) for the week was: a.$510 unfavorable. b.$510 favorable. c.$500 unfavorable. d.$500 favorable. Labor Variances Zippy

10-41 Hanson’s labor efficiency variance (LEV) for the week was: a.$510 unfavorable. b.$510 favorable. c.$500 unfavorable. d.$500 favorable. Labor Variances LEV = SR(AH - SH) LEV = $10.00(1,550 hrs - 1,500 hrs) LEV = $500 unfavorable Zippy

10-42 Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate Labor Variances Summary Rate variance $310 unfavorable Efficiency variance $500 unfavorable 1,550 hours 1,550 hours 1,500 hours × × × $10.20 per hour $10.00 per hour $10.00 per hour $15,810 $15,500 $15,000

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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?

10-45 Statistical Control Chart Variance Measurements Favorable Limit Unfavorable Limit Desired Value Warning signals for investigation

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10-47 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

10-48 Controllability of Variances Direct-Material Price Variance Direct-Labor Rate Variance Direct-Material Quantity Variance Direct-Labor Efficiency Variance

10-49 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.

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

10-51 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.

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

10-53 Advantages of Standard Costing Management by Exception Stable Product Costs Sensible Cost Comparisons Advantages Performance Evaluation Employee Motivation

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 8

10-55 Criticisms of Standard Costing Not specific Focus on cost minimization Too aggregate, too late Disadvantages Too much focus on direct-labor Narrow definition Stable production required Shorter life cycles

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 9

10-57 Operational Control Measures in Today’s Manufacturing Environment

10-58 Operational Performance Measures in Today’s Manufacturing Environment Raw Material & Scrap Control l Quality l Lead time l Cost of scrap l Total cost Inventory Control l Average value l Average holding time l Ratio of inventory value to sales revenue

10-59 Machine Performance l Availability l Downtime l Maintenance records l Setup time Product Quality l Warranty claims l Customer complaints l Defective products l Cost of rework Operational Performance Measures in Today’s Manufacturing Environment

10-60 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

10-61 Productivity l Aggregate productivity l Partial productivity Innovation and Learning l Percentage of sales from new products l Cost savings from process improvements Operational Performance Measures in Today’s Manufacturing Environment

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10-63 The Balanced Scorecard Financial Learning and Growth Internal Operations Customer Vision and Strategy

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10-65 Use of Standard Costs for Product Costing

10-66 Use of Standard Costs for Product Costing

10-67 Use of Standard Costs for Product Costing

10-68 Use of Standard Costs for Product Costing

10-69 End of Chapter 10 Let’s set the standard a little higher.