Standard costing operational performance measures and the balanced scorecard l.jpg
This presentation is the property of its rightful owner.
Sponsored Links
1 / 60

Standard Costing, Operational Performance Measures, and the Balanced Scorecard PowerPoint PPT Presentation


  • 189 Views
  • Uploaded on
  • Presentation posted in: General

10. Chapter Ten. Standard Costing, Operational Performance Measures, and the Balanced Scorecard. Managing Costs. Standard performance level. Actual performance level. Comparison between standard and actual performance level. Cost variance. Standard Costs are . Standard Costs.

Download Presentation

Standard Costing, Operational Performance Measures, and the Balanced Scorecard

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Standard costing operational performance measures and the balanced scorecard l.jpg

10

Chapter Ten

Standard Costing, Operational Performance Measures, and the Balanced Scorecard


Managing costs l.jpg

Managing Costs

Standardperformancelevel

Actualperformancelevel

Comparison between standard and actual performancelevel

Costvariance


Standard costs l.jpg

Standard Costs are

Standard Costs

Based on carefullypredetermined amounts.

Used for planning labor

and material requirements.

The expected levelof performance.

Benchmarks formeasuring performance.


Management by exception l.jpg

Management by Exception

Managers focus on quantities and coststhat exceed standards, a practice known asmanagement by exception.

Standard

Amount

DirectMaterial

DirectLabor

Type of Product Cost


Setting standards l.jpg

Analysis ofHistorical Data

TaskAnalysis

Setting Standards

CostStandards


Participation in setting standards l.jpg

Participation in Setting Standards

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


Perfection versus practical standards a behavioral issue l.jpg

Practical standardsshould be set at levelsthat are currentlyattainable with

reasonable and

efficient effort.

Should we usepractical standardsor perfection standards?

Perfection versus Practical Standards: A Behavioral Issue


Perfection versus practical standards a behavioral issue8 l.jpg

Perfection versus Practical Standards: A Behavioral Issue

I agree. Perfection standards areunattainable and therefore discouraging to most employees.


Use of standards by nonmanufacturing organizations l.jpg

Use of Standards by Nonmanufacturing Organizations

  • Standard cost analysis may be used in any organization with repetitive tasks.

  • A relationship between tasks and output measures must be established.


Variance analysis cycle l.jpg

Variance Analysis Cycle

Takecorrective actions.

Identifyquestions.

Receive explanations.

Conduct next period’s operations.

Analyze variances.

Prepare standard cost performance report.

Begin


Cost variance analysis l.jpg

Standard Cost Variances

Price Variance

Quantity Variance

The difference betweenthe actual price and thestandard price

The difference betweenthe actual quantity andthe standard quantity

Cost Variance Analysis


A general model for variance analysis l.jpg

Standard price is the amount that should have been paid for the resources acquired.

A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

Price Variance

Quantity Variance


A general model for variance analysis13 l.jpg

A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

Price Variance

Quantity Variance

Standard quantity is the quantity allowed for the actual good output.


A general model for variance analysis14 l.jpg

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

Price Variance

Quantity Variance

Materials price variance Materials quantity varianceLabor rate variance Labor efficiency varianceVariable overhead Variable overhead spending variance efficiency variance

A General Model for Variance Analysis

AQ(AP - SP) SP(AQ - SQ)

AQ = Actual Quantity SP = Standard PriceAP = Actual Price SQ = Standard Quantity


Standard costs15 l.jpg

Standard Costs

Let’s use the concepts of the general model to calculate standard cost variances, starting withdirect material.


Material variances l.jpg

Zippy

Material Variances

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 variances17 l.jpg

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.


Material variances18 l.jpg

Zippy

Material Variances

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 variances19 l.jpg

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.


Material variances20 l.jpg

Zippy

Material Variances

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. × ($3.90 - 4.00) MPV = $170 Favorable


Material variances21 l.jpg

Zippy

Material Variances

The standard quantity of material thatshould 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 variances22 l.jpg

Zippy

Material Variances

The standard quantity of material thatshould 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 variances23 l.jpg

Zippy

Material Variances

Hanson’s material quantity variance (MQV) for the week was:

a.$170 unfavorable.

b.$170 favorable.

c.$800 unfavorable.

d.$800 favorable.


Material variances24 l.jpg

Zippy

Material Variances

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


Material variances summary l.jpg

Price variance$170 favorable

Quantity variance$800 unfavorable

Material Variances Summary

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


Material variances26 l.jpg

Zippy

  • 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?

Material Variances


Material variances27 l.jpg

Zippy

Material Variances

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 variances28 l.jpg

Zippy

Price variance increases because quantity purchased increases.

Price variance$280 favorable

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


Material variances29 l.jpg

Zippy

Quantity variance is unchanged because actual and standard quantities are unchanged.

Quantity variance$800 unfavorable

Material Variances

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


Isolation of material variances l.jpg

I need the variances as soonas possible so that I canbetter identify problems and control costs.

You accountants just don’tunderstand the problems we production managers have.

Okay. I’ll start computingthe price variance whenmaterial is purchased andthe quantity variance assoon as material is used.

Isolation of Material Variances


Responsibility for material variances l.jpg

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 materialquantity variance.

You purchased cheapmaterial, so my peoplehad to use more of it.

Responsibility for Material Variances


Standard costs32 l.jpg

Standard Costs

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


Labor variances l.jpg

Zippy

Labor Variances

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 variances34 l.jpg

Zippy

Labor Variances

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 variances35 l.jpg

Zippy

Labor Variances

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.

AR = $15,810 ÷ 1,550 hours AR = $10.20 per hour


Labor variances36 l.jpg

Zippy

Labor Variances

Hanson’s labor rate variance (LRV)for the week was:

a.$310 unfavorable.

b.$310 favorable.

c.$300 unfavorable.

d.$300 favorable.


Labor variances37 l.jpg

Zippy

Labor Variances

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($10.20 - $10.00) LRV = $310 unfavorable


Labor variances38 l.jpg

Zippy

Labor Variances

The standard hours (SH) of labor thatshould 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 variances39 l.jpg

Zippy

Labor Variances

The standard hours (SH) of labor thatshould 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


Labor variances40 l.jpg

Zippy

Labor Variances

Hanson’s labor efficiency variance (LEV)for the week was:

a.$510 unfavorable.

b.$510 favorable.

c.$500 unfavorable.

d.$500 favorable.


Labor variances41 l.jpg

Zippy

Labor Variances

Hanson’s labor efficiency variance (LEV)for the week was:

a.$510 unfavorable.

b.$510 favorable.

c.$500 unfavorable.

d.$500 favorable.

LEV = SR(AH - SH) LEV = $10.00(1,550 hrs - 1,500 hrs) LEV = $500 unfavorable


Labor variances summary l.jpg

Rate variance$310 unfavorable

Efficiency variance$500 unfavorable

Labor Variances Summary

Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate

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


Labor rate variance a closer look l.jpg

Labor Rate Variance – A Closer Look

Using highly paid skilled workers toperform unskilled tasks results in anunfavorable rate variance.

High skill,high rate

Low skill,low rate

Production managers who make work assignmentsare generally responsible for rate variances.


Labor efficiency variance a closer look l.jpg

Poorlytrainedworkers

Poorqualitymaterials

UnfavorableEfficiencyVariance

Poorsupervisionof workers

Poorlymaintainedequipment

Labor Efficiency Variance –A Closer Look


Responsibility for labor variances l.jpg

You used too much time because of poorly trained workers and poor supervision.

Responsibility for Labor Variances

I am not responsible for the unfavorable laborefficiency variance!

You purchased cheapmaterial, so it took moretime to process it.


Responsibility for labor variances46 l.jpg

Responsibility for Labor Variances

Maybe I can attribute the laborand material variances to personnel for hiring the wrong peopleand training them poorly.


Significance of cost variances l.jpg

What clues help me to determine the variances that I should investigate?

Significance of Cost Variances

  • Size of variance

    • Dollar amount

    • Percentage of standard

  • Recurring variances

  • Trends

  • Controllability

  • Favorable variances

  • Costs and benefits of investigation


A statistical approach l.jpg

Display variations in a process and help to analyze the variationsover time.

Distinguish between random variationsand variations thatshould be investigated.

Provide a warning signal when variationsare beyond a specified level.

A Statistical Approach

ControlCharts


Statistical control chart l.jpg

Statistical Control Chart

Warning signals for investigation

Favorable Limit

Desired Value

Unfavorable Limit

1

2

3

4

5

6

7

8

9

Variance Measurements


Standard costs and product costing l.jpg

Standard Costs and Product Costing

Standard material and labor costsare entered into the manufacturingaccounts instead of actual costs.

Standard cost variancesare closed directly toCost of Goods Sold.


Advantages of standard costing l.jpg

Advantages

Advantages of Standard Costing

Sensible CostComparisons

Management byException

PerformanceEvaluation

EmployeeMotivation


Criticisms of standard costing l.jpg

Standard costing may be inappropriate in some modern manufacturing environments.

Undue concern for variances and cost minimization may lead to lower quality.

Automation reduces labor costs andthe significance of labor variances.

Standard costing may not be applicablein flexible manufacturing operationswith short life-cycle products.

Criticisms of Standard Costing


Operational control measures in today s manufacturing environment l.jpg

Operational Control Measures in Today’s Manufacturing Environment

  • Raw Material and Scrap Control

  • Inventory Control

  • Machine Performance

  • Product Quality

  • Production and Delivery

  • Productivity

  • Innovation and Learning


Operational control measures in today s manufacturing environment54 l.jpg

Material & Scrap Control

Quality

Lead time

Cost of scrap

Total cost

Inventory Control

Turnover ratio

No. of inventory items

Ratio of inventory value to sales revenue

Operational Control Measures in Today’s Manufacturing Environment


Operational control measures in today s manufacturing environment55 l.jpg

Machine Performance

Availability

Downtime

Usage

Setup time

Product Quality

Warranty claims

Customer complaints

Defective products

Cost of rework

Operational Control Measures in Today’s Manufacturing Environment


Operational control measures in today s manufacturing environment56 l.jpg

Productivity

Units produced per day per employee

Ratio of output value to input value

Innovation and Learning

Percentage of sales from new products

Cost savings from process improvements

Operational Control Measures in Today’s Manufacturing Environment


Production and delivery performance measures l.jpg

Production and Delivery Performance Measures

Order Received

ProductionStarted

Goods Shipped

Process Time + Inspection Time+ Move Time + Waiting Time

Wait Time

Manufacturing Cycle Time

Delivery Cycle Time

Process time is the only value-added activity.


Production and delivery performance measures58 l.jpg

Manufacturing

Cycle

Efficiency

Process TimeManufacturing Cycle Time

=

Production and Delivery Performance Measures

Order Received

ProductionStarted

Goods Shipped

Process Time + Inspection Time+ Move Time + Waiting Time

Wait Time

Manufacturing Cycle Time

Delivery Cycle Time


The balanced scorecard l.jpg

The Balanced Scorecard

Exh.10-8

Financial Perspective

How do we lookto the firm’s owners?

Internal OperationsPerspective

In which activities must we excel?

Customer Perspective

How do our customers see us?

Innovation andLearning PerspectiveHow can we continuallyimprove and create value?


End of chapter 10 l.jpg

End of Chapter 10

Let’s set the standard alittle higher.


  • Login