Chapter 10 Standard Costs and Operating Performance Measures

Chapter 10 Standard Costs and Operating Performance Measures

Standard Costs Based on carefully predetermined amounts. Standard Costs are Used for planning labor, material and overhead requirements. The expected level of performance. Benchmarks for measuring performance. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Standard Costs Amount Managers focus on quantities and costs that exceed standards, a practice known as management by exception. Standard Direct Labor Direct Material Manufacturing Overhead Type of Product Cost Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Setting Standard Costs Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Setting Standard Costs Should we use practical standards or ideal standards? Engineer Irwin/Mc. Graw-Hill Managerial Accountant © The Mc. Graw-Hill Companies, Inc. , 2000

Setting Standard Costs Practical standards should be set at levels that are currently attainable with reasonable and efficient effort. Production manager Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Setting Standard Costs I agree. Ideal standards, that are based on perfection, are unattainable and discourage most employees. Human Resources Manager Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Setting Direct Material Standards Price Standards Final, delivered cost of materials, net of discounts. Irwin/Mc. Graw-Hill Quantity Standards Use product design specifications. © The Mc. Graw-Hill Companies, Inc. , 2000

Setting Direct Labor Standards Rate Standards Time Standards Use wage surveys and labor contracts. Use time and motion studies for each labor operation. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

科目一模拟考试C 1 http: //www. kmyks. com/c 1/ 科目一 考试网 Rate Standards Activity Standards The rate is the variable portion of the predetermined overhead rate. The activity is the base used to calculate the predetermined overhead. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Standard Cost Card – Variable Production Cost A standard cost card for one unit of product might look like this: Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Standards vs. Budgets Are standards the same as budgets? Irwin/Mc. Graw-Hill A standard is the expected cost for one unit. A budget is the expected cost for all units. © The Mc. Graw-Hill Companies, Inc. , 2000

科目一模拟考试 2016题库 http: //www. kmyks. com/ 科目一考试网 A standard cost variance is the amount by which an actual cost differs from the standard cost. Product Cost Standard Irwin/Mc. Graw-Hill This variance is unfavorable because the actual cost exceeds the standard cost. © The Mc. Graw-Hill Companies, Inc. , 2000

Standard Cost Variances I see that there is an unfavorable variance. But why are variances important to me? Irwin/Mc. Graw-Hill First, they point to causes of problems and directions for improvement. Second, they trigger investigations in departments having responsibility for incurring the costs. © The Mc. Graw-Hill Companies, Inc. , 2000

Variance Analysis Cycle Identify questions Receive explanations Conduct next period’s operations Analyze variances Begin Irwin/Mc. Graw-Hill Take corrective actions Prepare standard cost performance report © The Mc. Graw-Hill Companies, Inc. , 2000

Standard Cost Variances Price Variance Quantity Variance The difference between the actual price and the standard price The difference between the actual quantity and the standard quantity Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Variance Standard Quantity × Standard Price Quantity Variance Standard price is the amount that should have been paid for the resources acquired. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Variance Standard Quantity × Standard Price Quantity Variance Standard quantity is the quantity allowed for the actual good output. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price Variance Quantity Variance AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity AP = Actual Price Irwin/Mc. Graw-Hill SP = Standard Price SQ = Standard Quantity © The Mc. Graw-Hill Companies, Inc. , 2000

Standard Costs Let’s use the general model to calculate standard cost variances, starting with direct material. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Material Variances Example Zippy 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. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Material Variances 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. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Material Variances Zippy What is the actual price per pound paid for the material? a. $4. 00 per pound. b. $4. 10 per pound. AP = $6, 630 ÷ 1, 700 lbs. c. $3. 90 per pound. AP = $3. 90 per lb. d. $6. 63 per pound. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Material Variances Zippy Hanson’s material price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Material Variances Zippy Hanson’s material price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. MPV = AQ(AP - SP) MPV = 1, 700 lbs. × ($3. 90 - 4. 00) d. $800 favorable. MPV = $170 Favorable Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Material Variances 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. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Material Variances 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. SQ = 1, 000 units × 1. 5 lbs per unit d. 2, 000 pounds. SQ = 1, 500 lbs Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Material Variances Zippy Hanson’s material quantity variance (MQV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Material Variances 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 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Material Variances Summary Zippy Actual Quantity × Actual Price Actual Quantity × Standard Price 1, 700 lbs. × $3. 90 per lb. 1, 700 lbs. × $4. 00 per lb. 1, 500 lbs. × $4. 00 per lb. = $6, 630 = $ 6, 800 = $6, 000 Price variance $170 favorable Irwin/Mc. Graw-Hill Standard Quantity × Standard Price Quantity variance $800 unfavorable © The Mc. Graw-Hill Companies, Inc. , 2000

Material Variances Hanson purchased and used 1, 700 pounds. How are the variances computed if the amount purchased differs from the amount used? Irwin/Mc. Graw-Hill The price variance is computed on the entire quantity purchased. The quantity variance is computed only on the quantity used. © The Mc. Graw-Hill Companies, Inc. , 2000

Material Variances Continued Zippy 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. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Material Variances Continued Actual Quantity Purchased × Actual Price Actual Quantity Purchased × Standard Price 2, 800 lbs. × $3. 90 per lb. 2, 800 lbs. × $4. 00 per lb. = $10, 920 = $11, 200 Price variance $280 favorable Irwin/Mc. Graw-Hill Zippy Price variance increases because quantity purchased increases. © The Mc. Graw-Hill Companies, Inc. , 2000

Material Variances Continued Actual Quantity Used × Standard Price Standard Quantity × Standard Price 1, 700 lbs. × $4. 00 per lb. 1, 500 lbs. × $4. 00 per lb. = $6, 800 = $6, 000 Quantity variance is unchanged because actual and standard quantities are unchanged. Irwin/Mc. Graw-Hill Zippy Quantity variance $800 unfavorable © The Mc. Graw-Hill Companies, Inc. , 2000

Isolation of Material Variances 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. Irwin/Mc. Graw-Hill I’ll start computing the price variance when material is purchased rather than when it’s used. © The Mc. Graw-Hill Companies, Inc. , 2000

Responsibility for Material You used too much 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. Irwin/Mc. Graw-Hill 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. © The Mc. Graw-Hill Companies, Inc. , 2000

Standard Costs Now let’s calculate standard cost variances for direct labor. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Labor Variances Example Zippy Hanson Inc. has the following direct labor standard to manufacture one Zippy: 1. 5 standard hours per Zippy at $6. 00 per direct labor hour Last week 1, 550 direct labor hours were worked at a total labor cost of $9, 610 to make 1, 000 Zippies. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Labor Variances Zippy What was Hanson’s actual rate (AR) for labor for the week? a. $6. 20 per hour. b. $6. 00 per hour. c. $5. 80 per hour. d. $5. 60 per hour. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Labor Variances Zippy What was Hanson’s actual rate (AR) for labor for the week? AR = $9, 610 ÷ 1, 550 hours a. $6. 20 per hour. AR = $6. 20 per hour b. $6. 00 per hour. c. $5. 80 per hour. d. $5. 60 per hour. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Labor Variances Zippy Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Labor Variances Zippy Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. LRV = AH(AR - SR) c. $300 unfavorable. LRV = 1, 550 hrs($6. 20 - $6. 00) d. $300 favorable. LRV = $310 unfavorable Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Labor Variances 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. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Labor Variances 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 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Labor Variances Zippy Hanson’s labor efficiency variance (LEV) for the week was: a. $290 unfavorable. b. $290 favorable. c. $300 unfavorable. d. $300 favorable. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Labor Variances Zippy Hanson’s labor efficiency variance (LEV) for the week was: a. $290 unfavorable. b. $290 favorable. c. $300 unfavorable. d. $300 favorable. LEV = SR(AH - SH) LEV = $6. 00(1, 550 hrs - 1, 500 hrs) LEV = $300 unfavorable Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Labor Variances Summary Actual Hours × Actual Rate Zippy Actual Hours × Standard Rate Standard Hours × Standard Rate 1, 550 hours × $6. 20 per hour 1, 550 hours × $6. 00 per hour 1, 500 hours × $6. 00 per hour = $9, 610 = $9, 300 Rate variance $310 unfavorable Irwin/Mc. Graw-Hill = $9, 000 Efficiency variance $300 unfavorable © The Mc. Graw-Hill Companies, Inc. , 2000

Labor Rate Variance – A Closer Look Using highly paid skilled workers to perform unskilled tasks results in an unfavorable rate variance. High skill, high rate Low skill, low rate Production managers who make work assignments are generally responsible for rate variances. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Labor Efficiency Variance – A Closer Look Poorly trained workers Poor quality materials Unfavorable Efficiency Variance Poor supervision of workers Irwin/Mc. Graw-Hill Poorly maintained equipment © The Mc. Graw-Hill Companies, Inc. , 2000

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. Irwin/Mc. Graw-Hill You used too much time because of poorly trained workers and poor supervision. © The Mc. Graw-Hill Companies, Inc. , 2000

Responsibility for Labor Variances Maybe I can attribute the labor and material variances to personnel for hiring the wrong people and training them poorly. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Standard Costs Now let’s calculate standard cost variances for the last of the variable production costs – variable manufacturing overhead. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Variable Manufacturing Overhead Variances Example Zippy Hanson Inc. has the following variable manufacturing overhead standard to manufacture one Zippy: 1. 5 standard hours per Zippy at $3. 00 per direct labor hour Last week 1, 550 hours were worked to make 1, 000 Zippies, and $5, 115 was spent for variable manufacturing overhead. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Variable Manufacturing Overhead Variances Zippy What was Hanson’s actual rate (AR) for variable manufacturing overhead rate for the week? a. $3. 00 per hour. b. $3. 19 per hour. c. $3. 30 per hour. d. $4. 50 per hour. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Variable Manufacturing Overhead Variances Zippy What was Hanson’s actual rate (AR) for variable manufacturing overhead rate for the week? a. $3. 00 per hour. b. $3. 19 per hour. AR = $5, 115 ÷ 1, 550 hours c. $3. 30 per hour. AR = $3. 30 per hour d. $4. 50 per hour. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Variable Manufacturing Overhead Variances Zippy Hanson’s spending variance (SV) for variable manufacturing overhead for the week was: a. $465 unfavorable. b. $400 favorable. c. $335 unfavorable. d. $300 favorable. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Variable Manufacturing Overhead Variances Zippy Hanson’s spending variance (SV) for variable manufacturing overhead for the week was: a. $465 unfavorable. b. $400 favorable. SV = AH(AR - SR) c. $335 unfavorable. SV = 1, 550 hrs($3. 30 - $3. 00) d. $300 favorable. SV = $465 unfavorable Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Variable Manufacturing Overhead Variances Zippy Hanson’s efficiency variance (EV) for variable manufacturing overhead for the week was: a. $435 unfavorable. b. $435 favorable. c. $150 unfavorable. d. $150 favorable. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Variable Manufacturing Overhead Variances Zippy Hanson’s efficiency variance (EV) for variable manufacturing overhead for the week was: a. $435 unfavorable. b. $435 favorable. 1, 000 units × 1. 5 hrs per unit c. $150 unfavorable. d. $150 favorable. EV = SR(AH - SH) EV = $3. 00(1, 550 hrs - 1, 500 hrs) EV = $150 unfavorable Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Variable Manufacturing Overhead Variances Zippy Actual Hours × Actual Rate Actual Hours × Standard Rate Standard Hours × Standard Rate 1, 550 hours × $3. 30 per hour 1, 550 hours × $3. 00 per hour 1, 500 hours × $3. 00 per hour = $5, 115 = $4, 650 = $4, 500 Spending variance $465 unfavorable Irwin/Mc. Graw-Hill Efficiency variance $150 unfavorable © The Mc. Graw-Hill Companies, Inc. , 2000

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. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Variance Analysis and Management by Exception How do I know which variances to investigate? Irwin/Mc. Graw-Hill Larger variances, in dollar amount or as a percentage of the standard, are investigated first. © The Mc. Graw-Hill Companies, Inc. , 2000

Advantages of Standard Costs Possible reductions in production costs Management by exception Advantages Improved cost control and performance evaluation Irwin/Mc. Graw-Hill Better Information for planning and decision making © The Mc. Graw-Hill Companies, Inc. , 2000

Emphasis on negative may impact morale. Standard cost reports may not be timely. Favorable variances may be misinterpreted. Potential Problems Labor quantity standards and efficiency variances may not be appropriate. Irwin/Mc. Graw-Hill Continuous improvement may be more important than meeting standards. Emphasizing standards may exclude other important objectives. © The Mc. Graw-Hill Companies, Inc. , 2000

The Balanced Scorecard Management translates its strategy into performance measures that employees understand accept. Customers Financial Performance measures Internal business processes Irwin/Mc. Graw-Hill Learning and growth © The Mc. Graw-Hill Companies, Inc. , 2000

The Balanced Scorecard How do we look to the owners? In which internal business processes must we excel? How can we continually learn, grow, and improve? How do we look to customers? Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

The Balanced Scorecard Learning improves business processes. Improved business processes improve customer satisfaction. Improving customer satisfaction improves financial results. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Delivery Performance Measures Order Received Wait Time Goods Shipped Production Started Process Time + Inspection Time + Move Time + Queue Time Throughput Time Delivery Cycle Time Process time is the only value-added time. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Delivery Performance Measures Order Received Wait Time Goods Shipped Production Started Process Time + Inspection Time + Move Time + Queue Time Throughput Time Delivery Cycle Time Manufacturing Cycle = Efficiency Irwin/Mc. Graw-Hill Value-added time Manufacturing cycle time © The Mc. Graw-Hill Companies, Inc. , 2000

End of Chapter 10 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000