Standard Costs and the Balanced Scorecard Chapter 10

Standard Costs and the Balanced Scorecard Chapter 10 Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -2 Standard Costs Standards are benchmarks or “norms” for measuring performance. Two types of standards are commonly used. Quantity standards specify how much of an input should be used to make a product or provide a service. Mc. Graw-Hill/Irwin Cost (price) standards specify how much should be paid for each unit of the input. Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -3 Standard Costs Amount Deviations from standards deemed significant are brought to the attention of management, a practice known as management by exception. Standard Direct Labor Direct Material Manufacturing Overhead Type of Product Cost Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -4 Variance Analysis Cycle Identify questions Receive explanations Take corrective actions Conduct next period’s operations Analyze variances Prepare standard cost performance report Mc. Graw-Hill/Irwin Exhibit 10 -1 Begin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -5 Setting Standard Costs Accountants, engineers, purchasing agents, and production managers combine efforts to set standards that encourage efficient future production. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -6 Setting Standard Costs Should we use ideal standards that require employees to work at 100 percent peak efficiency? Engineer Mc. Graw-Hill/Irwin I recommend using practical standards that are currently attainable with reasonable and efficient effort. Managerial Accountant Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -7 Learning Objective 1 Explain how direct materials standards and direct labor standards are set. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -8 Setting Direct Material Standards Price Standards Quantity Standards Final, delivered cost of materials, net of discounts. Summarized in a Bill of Materials. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -9 Setting Standards Six Sigma advocates have sought to eliminate all defects and waste, rather than continually build them into standards. As a result allowances for waste and spoilage that are built into standards should be reduced over time. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -10 Setting Direct Labor Standards Rate Standards Time Standards Often a single rate is used that reflects the mix of wages earned. Use time and motion studies for each labor operation. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -11 Setting Variable Overhead Standards 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. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

Standard Cost Card – Variable Production Cost 10 -12 A standard cost card for one unit of product might look like this: Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -13 Standards vs. Budgets Are standards the same as budgets? A budget is set for total costs. Mc. Graw-Hill/Irwin A standard is a per unit cost. Standards are often used when preparing budgets. Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -14 Price and Quantity Standards Price and quantity standards are determined separately for two reasons: The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw material used. The buying and using activities occur at different times. Raw material purchases may be held in inventory for a period of time before being used in production. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -15 A General Model for Variance Analysis Price Variance Quantity Variance Difference between actual price and standard price Difference between actual quantity and standard quantity Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -16 A General Model for Variance Analysis Price Variance Quantity Variance Materials price variance Labor rate variance VOH spending variance Materials quantity variance Labor efficiency variance VOH efficiency variance Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -17 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Variance Mc. Graw-Hill/Irwin Standard Quantity × Standard Price Quantity Variance Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -18 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Variance Standard Quantity × Standard Price Quantity Variance Actual quantity is the amount of direct materials, direct labor, and variable manufacturing overhead actually used. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -19 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 standard quantity allowed for the actual output of the period. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -20 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Variance Standard Quantity × Standard Price Quantity Variance Actual price is the amount actually paid for the input used. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -21 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 input used. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -22 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Variance Standard Quantity × Standard Price Quantity Variance (AQ × AP) – (AQ × SP) – (SQ × SP) AQ = Actual Quantity AP = Actual Price SP = Standard Price SQ = Standard Quantity Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -23 Learning Objective 2 Compute the direct materials price and quantity variances and explain their significance. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -24 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. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -25 Material Variances Summary Actual Quantity × Actual Price Actual Quantity × Standard Price 210 kgs. × $4. 90 per kg. 210 kgs. × $5. 00 per kg. = $1, 029 Price variance $21 favorable Mc. Graw-Hill/Irwin = $1, 050 Standard Quantity × Standard Price 200 kgs. × $5. 00 per kg. = $1, 000 Quantity variance $50 unfavorable Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -26 Material Variances Summary Actual Quantity × Actual Price 210 kgs. × $4. 90 per kg. Actual Quantity × Standard Price 210 kgs. $1, 029 × 210 kgs $5. 00 per perkg kg. = $4. 90 = $1, 029 Price variance $21 favorable Mc. Graw-Hill/Irwin = $1, 050 Standard Quantity × Standard Price 200 kgs. × $5. 00 per kg. = $1, 000 Quantity variance $50 unfavorable Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -27 Material Variances Summary Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price 210 kgs. 200 kgs. × × 0. 1 kg per parka× 2, 000 parkas $4. 90 per kg. $5. 00 per kg. = 200 per kgs kg. = $1, 029 Price variance $21 favorable Mc. Graw-Hill/Irwin = $1, 050 = $1, 000 Quantity variance $50 unfavorable Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

Material Variances: Using the Factored Equations 10 -28 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 - 200 kgs) = $5. 00/kg (10 kgs) = $50 U Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -29 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. Mc. Graw-Hill/Irwin I’ll start computing the price variance when material is purchased rather than when it’s used. Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -30 Material Variances Hanson purchased and used 1, 700 pounds. How are the variances computed if the amount purchased differs from the amount used? Mc. Graw-Hill/Irwin The price variance is computed on the entire quantity purchased. The quantity variance is computed only on the quantity used. Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -31 Responsibility for Material Variances Materials Quantity Variance Production Manager Materials Price Variance Purchasing Manager The standard price is used to compute the quantity variance so that the production manager is not held responsible for the purchasing manager’s performance. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -32 Responsibility for 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. Mc. Graw-Hill/Irwin Your poor scheduling sometimes requires me to rush order material at a higher price, causing unfavorable price variances. Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -33 Quick Check 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. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -34 Quick Check Zippy Hanson’s material price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -35 Quick Check Zippy Hanson’s material price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. MPV = AQ(AP - SP) d. $800 favorable. MPV = 1, 700 lbs. × ($3. 90 - 4. 00) MPV = $170 Favorable Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -36 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. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -37 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 Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -38 Quick Check 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 Mc. Graw-Hill/Irwin Standard Quantity × Standard Price Quantity variance $800 unfavorable Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -39 Quick Check 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. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -40 Quick Check 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 Mc. Graw-Hill/Irwin Zippy Price variance increases because quantity purchased increases. Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -41 Quick Check 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. Mc. Graw-Hill/Irwin Zippy Quantity variance $800 unfavorable Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -42 Learning Objective 3 Compute the direct labor rate and efficiency variances and explain their significance. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -43 Labor Variances Example Glacier Peak Outfitters has the following direct labor standard for its mountain parka. 1. 2 standard hours per parka at $10. 00 per hour Last month, employees actually worked 2, 500 hours at a total labor cost of $26, 250 to make 2, 000 parkas. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -44 Labor Variances Summary Actual Hours × Actual Rate Actual Hours × Standard Rate Standard Hours × Standard Rate 2, 500 hours × $10. 50 per hour 2, 500 hours × $10. 00 per hour. 2, 400 hours × $10. 00 per hour = $26, 250 = $25, 000 Rate variance $1, 250 unfavorable Mc. Graw-Hill/Irwin = $24, 000 Efficiency variance $1, 000 unfavorable Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -45 Labor Variances Summary Actual Hours × Actual Rate 2, 500 hours × $10. 50 per hour = $26, 250 Actual Hours × Standard Rate 2, 500 hours 2, 400 hours × 2, 500 hours × $26, 250 $10. 00 per hour. = $10. 50 per hour $10. 00 per hour = $25, 000 Rate variance $1, 250 unfavorable Mc. Graw-Hill/Irwin Standard Hours × Standard Rate = $24, 000 Efficiency variance $1, 000 unfavorable Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -46 Labor Variances Summary Actual Hours × Actual Rate Actual Hours × Standard Rate Standard Hours × Standard Rate 2, 500 hours 2, 400 hours × × 1. 2 hours per × parka 2, 000 $10. 50 per hour parkas $10. 00 per hour = 2, 400 hours = $26, 250 = $25, 000 Rate variance $1, 250 unfavorable Mc. Graw-Hill/Irwin = $24, 000 Efficiency variance $1, 000 unfavorable Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

Labor Variances: Using the Factored Equations 10 -47 Labor rate variance LRV = AH (AR - SR) = 2, 500 hours ($10. 50 per hour – $10. 00 per hour) = 2, 500 hours ($0. 50 per hour) = $1, 250 unfavorable Labor efficiency variance LEV = SR (AH - SH) = $10. 00 per hour (2, 500 hours – 2, 400 hours) = $10. 00 per hour (100 hours) = $1, 000 unfavorable Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -48 Responsibility for Labor Variances Production managers are usually held accountable for labor variances because they can influence the: Mix of skill levels assigned to work tasks. Level of employee motivation. Quality of production supervision. Production Manager Mc. Graw-Hill/Irwin Quality of training provided to employees. Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

Responsibility for Labor Variances 10 -49 I am not responsible for the unfavorable labor efficiency variance! You purchased cheap material, so it took more time to process it. Mc. Graw-Hill/Irwin I think it took more time to process the materials because the Maintenance Department has poorly maintained your equipment. Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -50 Quick Check 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. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -51 Quick Check Zippy Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -52 Quick Check 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($12. 20 - $12. 00) d. $300 favorable. LRV = $310 unfavorable Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -53 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. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -54 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 Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -55 Quick Check Actual Hours × Actual Rate Actual Hours × Standard Rate 1, 550 hours × $12. 20 per hour 1, 550 hours × $12. 00 per hour = $18, 910 = $18, 600 Rate variance $310 unfavorable Mc. Graw-Hill/Irwin Zippy Standard Hours × Standard Rate 1, 500 hours × $12. 00 per hour = $18, 000 Efficiency variance $600 unfavorable Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -56 Learning Objective 4 Compute the variable manufacturing overhead spending and efficiency variances. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -57 Variable Manufacturing Overhead Variances Example Glacier Peak Outfitters has the following direct variable manufacturing overhead labor standard for its mountain parka. 1. 2 standard hours per parka at $4. 00 per hour Last month, employees actually worked 2, 500 hours to make 2, 000 parkas. Actual variable manufacturing overhead for the month was $10, 500. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -58 Variable Manufacturing Overhead Variances Summary Actual Hours × Actual Rate Actual Hours × Standard Rate Standard Hours × Standard Rate 2, 500 hours × $4. 20 per hour 2, 500 hours × $4. 00 per hour 2, 400 hours × $4. 00 per hour = $10, 500 = $10, 000 = $9, 600 Spending variance $500 unfavorable Mc. Graw-Hill/Irwin Efficiency variance $400 unfavorable Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -59 Variable Manufacturing Overhead Variances Summary Actual Hours × Actual Rate 2, 500 hours × $4. 20 per hour = $10, 500 Actual Hours × Standard Rate 2, 500 hours 2, 400 hours × $10, 500× 2, 500 hours $4. 00 per hour = $4. 20 = $10, 000 Spending variance $500 unfavorable Mc. Graw-Hill/Irwin Standard Hours × Standard Rate = $9, 600 Efficiency variance $400 unfavorable Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -60 Variable Manufacturing Overhead Variances Summary Actual Hours × Actual Rate Actual Hours × Standard Rate 2, 500 hours × 1. 2 hours per × parka 2, 000 $4. 20 per hour parkas $4. 00 per hour = 2, 400 hours = $10, 500 = $10, 000 Spending variance $500 unfavorable Mc. Graw-Hill/Irwin Standard Hours × Standard Rate 2, 400 hours × $4. 00 per hour = $9, 600 Efficiency variance $400 unfavorable Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -61 Variable Manufacturing Overhead Variances: Using Factored Equations Variable manufacturing overhead spending variance VMSV = AH (AR - SR) = 2, 500 hours ($4. 20 per hour – $4. 00 per hour) = 2, 500 hours ($0. 20 per hour) = $500 unfavorable Variable manufacturing overhead efficiency variance VMEV = SR (AH - SH) = $4. 00 per hour (2, 500 hours – 2, 400 hours) = $4. 00 per hour (100 hours) = $400 unfavorable Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -62 Quick Check 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. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -63 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. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -64 Quick Check Zippy Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was: a. $465 unfavorable. b. $400 favorable. VOSV = AH(AR - SR) c. $335 unfavorable. VOSV = 1, 550 hrs($3. 30 - $3. 00) d. $300 favorable. VOSV = $465 unfavorable Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -65 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. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -66 Quick Check Zippy Hanson’s efficiency variance (VOEV) 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. VOEV = SR(AH - SH) VOEV = $3. 00(1, 550 hrs - 1, 500 hrs) VOEV = $150 unfavorable Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -67 Quick Check 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 Mc. Graw-Hill/Irwin Efficiency variance $150 unfavorable Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

Variance Analysis and Management by Exception 10 -68 How do I know which variances to investigate? Mc. Graw-Hill/Irwin Larger variances, in dollar amount or as a percentage of the standard, are investigated first. Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -69 Exhibit 10 -9 A Statistical Control Chart Warning signals for investigation Favorable Limit • Desired Value • • • Unfavorable Limit 1 2 3 4 5 6 7 • 8 • 9 Variance Measurements Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -70 Advantages of Standard Costs Management by exception Promotes economy and efficiency Advantages Simplified bookkeeping Mc. Graw-Hill/Irwin Enhances responsibility accounting Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -71 Potential Problems with Standard Costs Emphasizing standards may exclude other important objectives. Standard cost reports may not be timely. Invalid assumptions about the relationship between labor cost and output. Mc. Graw-Hill/Irwin Potential Problems Favorable variances may be misinterpreted. Emphasis on negative may impact morale. Continuous improvement may be more important than meeting standards. Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -72 Learning Objective 5 Understand how a balanced scorecard fits together and how it supports a company’s strategy. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -73 The Balanced Scorecard Management translates its strategy into performance measures that employees understand accept. Customers Financial Performance measures Internal business processes Mc. Graw-Hill/Irwin Learning and growth Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -74 The Balanced Scorecard: From Strategy to Performance Measures Exhibit 10 -11 Performance Measures Financial What are our financial goals? Customer What customers do we want to serve and how are we going to win and retain them? Internal Business Processes What internal business processes are critical to providing value to customers? Has our financial performance improved? Do customers recognize that we are delivering more value? Have we improved key business processes so that we can deliver more value to customers? Vision and Strategy Learning and Growth Are we maintaining our ability to change and improve? Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

The Balanced Scorecard: Non-financial Measures 10 -75 The balanced scorecard relies on non-financial measures in addition to financial measures for two reasons: Financial measures are lag indicators that summarize the results of past actions. Non-financial measures are leading indicators of future financial performance. Top managers are ordinarily responsible for financial performance measures – not lower level managers. Non-financial measures are more likely to be understood and controlled by lower level managers. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -76 The Balanced Scorecard for Individuals The entire organization should have an overall balanced scorecard. Each individual should have a personal balanced scorecard. A personal scorecard should contain measures that can be influenced by the individual being evaluated and that support the measures in the overall balanced scorecard. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -77 The Balanced Scorecard A balanced scorecard should have measures that are linked together on a cause-and-effect basis. If we improve one performance measure. . . Then Another desired performance measure will improve. The balanced scorecard lays out concrete actions to attain desired outcomes. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

The Balanced Scorecard and Compensation 10 -78 Incentive compensation should be linked to balanced scorecard performance measures. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

The Balanced Scorecard Jaguar Example 10 -79 Exhibit 10 -13 Profit Financial Contribution per car Number of cars sold Customer satisfaction with options Internal Business Processes Learning and Growth Mc. Graw-Hill/Irwin Number of options available Time to install option Employee skills in installing options Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

The Balanced Scorecard Jaguar Example 10 -80 Profit Contribution per car Number of cars sold Results Customer satisfaction with options Satisfaction Increases Strategies Increase Options Increase Skills Mc. Graw-Hill/Irwin Number of options available Time to install option Time Decreases Employee skills in installing options Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -81 The Balanced Scorecard Jaguar Example Profit Contribution per car Results Cars sold Increase Number of cars sold Customer satisfaction with options Number of options available Satisfaction Increases Time to install option Employee skills in installing options Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -82 The Balanced Scorecard Jaguar Example Profit Results Contribution per car Contribution Increases Number of cars sold Customer satisfaction with options Number of options available Satisfaction Increases Time to install option Time Decreases Employee skills in installing options Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -83 The Balanced Scorecard Jaguar Example Results Profit If number of cars sold and contribution per car increase, profits increase. Profits Increase Contribution per car Contribution Increases Number of cars sold Cars Sold Increases Customer satisfaction with options Number of options available Time to install option Employee skills in installing options Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -84 Advantages of Graphic Feedbck When interpreting its performance, Jaguar will look for continual improvement. It is easier to spot trends or unusual performance if these data are presented graphically. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -85 Learning Objective 6 Compute delivery cycle time, throughput time, and manufacturing cycle efficiency (MCE). Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -86 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. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -87 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 Mc. Graw-Hill/Irwin Value-added time Manufacturing cycle time Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -88 Quick Check A TQM team at Narton Corp has recorded the following average times for production: Wait 3. 0 days Inspection 0. 4 days Process 0. 2 days Move 0. 5 days Queue 9. 3 days What is the throughput time? a. 10. 4 days b. 0. 2 days c. 4. 1 days d. 13. 4 days Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -89 Quick Check A TQM team at Narton Corp has recorded the following average times for production: Wait 3. 0 days Inspection 0. 4 days Process 0. 2 days Move 0. 5 days Queue 9. 3 days What is the throughput time? a. 10. 4 days b. 0. 2 days Throughput time = Process + Inspection + Move + Queue c. 4. 1 days = 0. 2 days + 0. 4 days + 0. 5 days + 9. 3 days = 10. 4 days d. 13. 4 days Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -90 Quick Check A TQM team at Narton Corp has recorded the following average times for production: Wait 3. 0 days Inspection 0. 4 days Process 0. 2 days Move 0. 5 days Queue 9. 3 days What is the Manufacturing Cycle Efficiency? a. 50. 0% b. 1. 9% c. 52. 0% d. 5. 1% Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -91 Quick Check A TQM team at Narton Corp has recorded the following average times for production: Wait 3. 0 days Inspection 0. 4 days Process 0. 2 days Move 0. 5 days Queue 9. 3 days What is the Manufacturing Cycle Efficiency? a. 50. 0% MCE = Value-added time ÷ Throughput time b. 1. 9% = Process time ÷ Throughput time c. 52. 0% = 0. 2 days ÷ 10. 4 days d. 5. 1% = 1. 9% Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -92 Quick Check A TQM team at Narton Corp has recorded the following average times for production: Wait 3. 0 days Inspection 0. 4 days Process 0. 2 days Move 0. 5 days Queue 9. 3 days What is the delivery cycle time? a. 0. 5 days b. 0. 7 days c. 13. 4 days d. 10. 4 days Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -93 Check Delivery cycle. Quick time = Wait time + Throughput time = 3. 0 days + 10. 4 days = 13. 4 days A TQM team at Narton Corp has recorded the following average times for production: Wait 3. 0 days Inspection 0. 4 days Process 0. 2 days Move 0. 5 days Queue 9. 3 days What is the delivery cycle time? a. 0. 5 days b. 0. 7 days c. 13. 4 days d. 10. 4 days Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

General Ledger Entries to Record Variances Appendix 10 A Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -95 Learning Objective 7 Prepare journal entries to record standard costs and variances. (Appendix 10 A) Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -96 Appendix 10 A Journal Entries to Record Variances We will use information from the Glacier Peak Outfitters example presented earlier in the chapter to illustrate journal entries for standard cost variances. Recall the following: Material AQ × AP = $1, 029 AQ × SP = $1, 050 SQ × SP = $1, 000 MPV = $21 F MQV = $50 U Labor AH × AR = $26, 250 AH × SR = $25, 000 SH × SR = $24, 000 LRV = $1, 250 U LEV = $1, 000 U Now, let’s prepare the entries to record the labor and material variances. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -97 Mc. Graw-Hill/Irwin Appendix 10 A Recording Material Variances Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -98 Mc. Graw-Hill/Irwin Appendix 10 A Recording Labor Variances Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -99 Appendix 10 A – Recording Variable Manufacturing Overhead Variances Variable manufacturing overhead variances are usually not recorded in the accounts separately, but are determined as part of the general analysis of overhead that is covered in the next chapter. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -100 Cost Flows in a Standard Cost System • Inventories are recorded at standard cost. • Variances are recorded as follows: w Favorable variances are credits, representing savings in production costs. w Unfavorable variances are debits, representing excess production costs. • Standard cost variances are usually closed to cost of goods sold. w Unfavorable variances increase cost of goods sold. w Favorable variances decrease cost of goods sold. Mc. Graw-Hill/Irwin Copyright © 2008, The Mc. Graw-Hill Companies, Inc.

10 -101 Mc. Graw-Hill/Irwin End of Chapter 10 Copyright © 2008, The Mc. Graw-Hill Companies, Inc.