1. Standard Costs and the Balanced Scorecard
Chapter 10
Standard Costs and the Balanced Scorecard

2. Standard Costs Predetermined.
Used for planning labor, material and overhead requirements.
Standard Costs are
Benchmarks for measuring performance.
Used to simplify the
accounting system.

3. Manufacturing Overhead
Standard Costs
Managers focus on quantities and costs that exceed standards, a practice known as management by exception.
Standard
Amount
Direct Material
Direct Labor
Manufacturing Overhead
Type of Product Cost

4. Setting Standard Costs
Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations.

5. Setting Standard Costs
Should we use practical standards or ideal standards?
Engineer
Managerial Accountant

6. Setting Standard Costs
Practical standards should be set at levels that are currently attainable with reasonable and efficient effort.
Production manager

7. Setting Standard Costs
I agree. Ideal standards, based on perfection, are unattainable and discourage most employees.
Human Resources Manager

8. 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.

9. Setting Direct Material Standards
Price Standards
Final, delivered cost of materials, net of discounts.
Quantity Standards
Use product design specifications.

10. Setting Direct Labor Standards
Rate Standards
Use wage surveys and labor contracts.
Time Standards
Use time and motion studies for each labor operation.

11. Setting Variable Overhead Standards
Rate Standards
The rate is the variable portion of the predetermined overhead rate.
Activity Standards
The activity is the base used to calculate the predetermined overhead.

12. Standard Cost Card – Variable Production Cost
A standard cost card for one unit of product might look like this:

13. Standards vs. Budgets A standard is a per unit cost.
Standards are often used when preparing budgets.
Are standards the same as budgets?
A budget is set for total costs.

14. Standard Cost Variances
A standard cost variance is the amount by which an actual cost differs from the standard cost.
This variance is unfavorable because the actual cost exceeds the standard cost.
Standard
Cost

15. Standard Cost Variances
First, they point to causes of problems and directions for improvement.
Second, they trigger investigations in departments having responsibility for incurring the costs.
I see that there is an unfavorable variance.
But why are variances important to me?

16. Variance Analysis Cycle
Identify questions
Receive explanations
Take corrective actions
Conduct next period’s operations
Analyze variances
Prepare standard cost performance report
Begin

17. 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

18. A General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance
Quantity Variance
Standard price is the amount that should have been paid for the resources acquired.

19. A General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Standard quantity is the quantity allowed for the actual good output.
Standard input per unit of output times amount of good output.
Price Variance
Quantity Variance

20. A General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance
Quantity Variance
AQ(AP - SP) SP(AQ - SQ)
AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity

21. Standard Costs
Let’s use the general model to calculate standard cost variances for direct material.

22. Material Variances Example
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.

23. Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
210 kgs kgs kgs × × × $4.90 per kg $5.00 per kg $5.00 per kg.
= $1, = $1, = $1,000
Price variance $21 favorable
Quantity variance $50 unfavorable

24. Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
210 kgs kgs kgs × × × $4.90 per kg $5.00 per kg $5.00 per kg.
= $1, = $1, = $1,000
$1,029  210 kgs = $4.90 per kg
Price variance $21 favorable
Quantity variance $50 unfavorable

25. Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
210 kgs kgs kgs × × × $4.90 per kg $5.00 per kg $5.00 per kg.
= $1, = $1, = $1,000
0.1 kg per parka  2,000 parkas = 200 kgs
Price variance $21 favorable
Quantity variance $50 unfavorable

26. 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 kgs)
= $5.00/kg (10 kgs)
= $50 U

27. 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

28. 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
MQV = SP (AQ - SQ)
= $5.00/kg (190 kgs-(0.1 kg/parka 2,000 parkas))
= $5.00/kg (190 kgs kgs)
= $5.00/kg (-10 kgs)
= $50 F

29. Quick Check 
If the material quantity standard specifies exactly how much material should be in the final product without any wastage, is a favorable (F) materials quantity variance a good thing?
a. Yes
b. No

30. Quick Check 
If the material quantity standard specifies exactly how much material should be in the final product without any wastage, is a favorable (F) materials quantity variance a good thing?
a. Yes
b. No

31. Standard Costs
Let’s use the general model to calculate all standard cost variances, starting with direct material.

32. Material Variances Example
Zippy
Material Variances Example
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.

33. Quick Check 
Zippy
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.

34. Quick Check 
Zippy
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.

35. Quick Check  Hanson’s material price variance (MPV) for the week was:
Zippy
Hanson’s material price variance (MPV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.

36. Quick Check  Hanson’s material price variance (MPV) for the week was:
Zippy
Hanson’s material price variance (MPV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
MPV = AQ(AP - SP) MPV = 1,700 lbs. × ($ ) MPV = $170 Favorable

37. Quick Check 
Zippy
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.

38. Quick Check 
Zippy
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

39. Quick Check 
Zippy
Hanson’s material quantity variance (MQV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.

40. Quick Check 
Zippy
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

41. Material Variances Summary
Zippy
Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
1,700 lbs ,700 lbs ,500 lbs × × × $3.90 per lb $4.00 per lb $4.00 per lb.
= $6, = $ 6, = $6,000
Price variance $170 favorable
Quantity variance $800 unfavorable

42. Material Variances
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?

43. Material Variances Continued
Zippy
Material Variances Continued
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.

44. Material Variances Continued
Zippy
Material Variances Continued
Actual Quantity Actual Quantity Purchased Purchased × × Actual Price Standard Price
2,800 lbs ,800 lbs × × $3.90 per lb $4.00 per lb.
= $10, = $11,200
Price variance $280 favorable
Price variance increases because quantity purchased increases.

45. Material Variances Continued
Zippy
Material Variances Continued
Actual Quantity Used Standard Quantity × × Standard Price Standard Price
1,700 lbs ,500 lbs × × $4.00 per lb $4.00 per lb.
= $6, = $6,000
Quantity variance is unchanged because actual and standard quantities are unchanged.
Quantity variance $800 unfavorable

46. Isolation of Material Variances
I’ll start computing the price variance when material is purchased rather than when it’s used.
I need the price variance sooner so that I can better identify purchasing problems.
You accountants just don’t understand the problems that purchasing managers have.

47. Responsibility for Material Variances
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.
I am not responsible for this unfavorable material quantity variance.
You purchased cheap material, so my people had to use more of it.

48. Now let’s calculate standard cost variances for direct labor.
Standard Costs
Now let’s calculate standard cost variances for direct labor.

49. Note Materials variances: Labor variances: Material price variance
MPV = AQ (AP - SP)
Material quantity variance
MQV = SP (AQ - SQ)
Labor variances:
Labor rate variance
LRV = AH (AR - SR)
Labor efficiency variance
LEV = SR (AH - SH)
Actual hours
Actual rate
Standard rate
Standard hours allowed for the actual good output

50. Labor Variances Example
Zippy
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.

51. Quick Check 
Zippy
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.

52. Quick Check 
Zippy
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.
AR = $18,910 ÷ 1,550 hours AR = $12.20 per hour

53. Quick Check  Hanson’s labor rate variance (LRV) for the week was:
Zippy
Hanson’s labor rate variance (LRV) for the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.

54. Quick Check  Hanson’s labor rate variance (LRV) for the week was:
Zippy
Hanson’s labor rate variance (LRV) for the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
LRV = AH(AR - SR) LRV = 1,550 hrs($ $12.00) LRV = $310 unfavorable

55. Quick Check 
Zippy
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.

56. Quick Check 
Zippy
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.
SH = 1,000 units × 1.5 hours per unit SH = 1,500 hours

57. Quick Check 
Zippy
Hanson’s labor efficiency variance (LEV) for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.

58. Quick Check 
Zippy
Hanson’s labor efficiency variance (LEV) for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
LEV = SR(AH - SH) LEV = $12.00(1,550 hrs - 1,500 hrs) LEV = $600 unfavorable

59. Labor Variances Summary
Zippy
Labor Variances Summary
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
1,550 hours ,550 hours ,500 hours × × × $12.20 per hour $12.00 per hour $12.00 per hour
= $18, = $18, = $18,000
Rate variance $310 unfavorable
Efficiency variance $600 unfavorable

60. Labor Rate Variance – A Closer Look
High skill, high rate
Low skill, low rate
Using highly paid skilled workers to perform unskilled tasks results in an unfavorable rate variance.
Production managers who make work assignments are generally responsible for rate variances.

61. Labor Efficiency Variance – A Closer Look
Insufficient
demand
Poorly trained workers
Poor quality materials
Unfavorable Efficiency Variance
Poor supervision of workers
Poorly maintained equipment

62. Responsibility for Labor 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.

63. Responsibility for Labor Variances
Maybe I can attribute the labor and material variances to personnel for hiring the wrong people and training them poorly.

64. Standard Costs
Now let’s calculate standard cost variances for the last of the variable production costs – variable manufacturing overhead.

65. Note Labor variances: Variable overhead variances:
Actual hours of the allocation base
Labor variances:
Labor rate variance
LRV = AH (AR - SR)
Labor efficiency variance
LEV = SR (AH - SH)
Variable overhead variances:
Variable overhead spending variance
VOSV = AH (AR - SR)
Variable overhead efficiency variance
VOEV = SR (AH Quick Check 
Actual variable overhead rate
Standard variable overhead rate
Standard hours allowed for the actual good output

66. Quick Check 
Zippy
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.

67. Quick Check 
Zippy
Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
SV = AH(AR - SR) SV = 1,550 hrs($ $3.00) SV = $465 unfavorable

68. Quick Check 
Zippy
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.

69. Quick Check 
Zippy
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.
1,000 units × 1.5 hrs per unit
EV = SR(AH - SH) EV = $3.00(1,550 hrs - 1,500 hrs) EV = $150 unfavorable

70. Variable Manufacturing Overhead Variances
Zippy
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
1,550 hours ,550 hours ,500 hours × × × $3.30 per hour $3.00 per hour $3.00 per hour
= $5, = $4, = $4,500
Spending variance $465 unfavorable
Efficiency variance $150 unfavorable

71. Variable Manufacturing Overhead Variances – A Closer Look
If variable overhead is applied on the basis of direct labor hours, the labor efficiency and variable overhead efficiency variances will move in tandem.

72. Variance Analysis and Management by Exception
Larger variances, in dollar amount or as a percentage of the standard, are investigated first.
How do I know which variances to investigate?

73. Advantages of Standard Costs
Possible reductions in production costs
Advantages
Management by exception
Improved cost control and performance evaluation
Better Information for planning and decision making

74. Disadvantages of Standard Costs
Emphasis on negative may impact morale.
Favorable variances may be misinterpreted.
Potential Problems
Continuous improvement may be more important than meeting standards.
Standard cost reports may not be timely.
Emphasizing standards may exclude other important objectives.
Incentives to build
inventories.

75. The Balanced Scorecard
Management translates its strategy into performance measures that employees understand and accept.
Customers
Financial
Performance measures
Learning and growth
Internal business processes

76. The Balanced Scorecard
How do we look to the owners?
How can we continually learn, grow, and improve?
In which internal business processes must we excel?
How do we look to customers?

77. The Balanced Scorecard
Learning improves business processes.
Improved business processes improve customer satisfaction.
Improving customer satisfaction improves financial results.

78. Benefits of Balance Scorecard
If implemented well:
Forces management to articulate a coherent strategy.
Strategy is communicated throughout organization.
Performance measures are more likely to be consistent with strategy and actionable.
Portfolio of measures reduces gaming problems.
Feedback loop makes strategy dynamic.

79. Some Possible Problems
Cultural/behavioral
Program fatigue.
Culture shock/resistance.
Every existing performance measure has a champion.
Gaming still possible.

80. Delivery Performance Measures
Order Received
Production Started
Goods Shipped
Process Time + Inspection Time + Move Time + Queue Time
Wait Time
Throughput Time
Delivery Cycle Time
Process time is the only value-added time.

81. Delivery Performance Measures
Order Received
Production Started
Goods Shipped
Process Time + Inspection Time + Move Time + Queue Time
Wait Time
Throughput Time
Delivery Cycle Time
Manufacturing
Cycle
Efficiency
Value-added time Manufacturing cycle time =

82. Quick Check 
A TQM team at Narton Corp has recorded the following average times for production:
Wait days Move days
Inspection 0.4 days Queue days
Process days
What is the throughput time?
a days
b days
c days
d days

83. Quick Check 
A TQM team at Narton Corp has recorded the following average times for production:
Wait days Move days
Inspection 0.4 days Queue days
Process days
What is the throughput time?
a days
b days
c days
d days
Throughput time = Process + Inspection + Move + Queue
= 0.2 days days days days
= 10.4 days

84. Quick Check 
A TQM team at Narton Corp has recorded the following average times for production:
Wait days Move days
Inspection 0.4 days Queue days
Process days
What is the MCE?
a. 50.0%
b %
c. 52.0%
d %

85. Quick Check 
A TQM team at Narton Corp has recorded the following average times for production:
Wait days Move days
Inspection 0.4 days Queue days
Process days
What is the MCE?
a. 50.0%
b %
c. 52.0%
d %
MCE = Value-added time ÷ Throughput time
= Process time ÷ Throughput time
= 0.2 days ÷ 10.4 days
= 1.9%

86. Quick Check 
A TQM team at Narton Corp has recorded the following average times for production:
Wait days Move days
Inspection 0.4 days Queue days
Process days
What is the delivery cycle time?
a days
b days
c days
d days

87. Quick Check 
Delivery cycle time = Wait time + Throughput time
= 3.0 days days
= 13.4 days
A TQM team at Narton Corp has recorded the following average times for production:
Wait days Move days
Inspection 0.4 days Queue days
Process days
What is the delivery cycle time?
a days
b days
c days
d days

88. End of Chapter 10