Managerial Accounting

Eighth Edition

Weygandt Kimmel Kieso

Chapter 11
Standard Costs and Balanced Scorecard
standard cost > budget cost/ actual cost: unfavorable,
standard cost: unit cost adverse
budget cost: total cost
standard cost < actual cost: favorable
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Chapter Outline
Learning Objectives
LO 1 Describe standard costs.
LO 2 Determine direct materials variances.
LO 3 Determine direct labor and total manufacturing
overhead variances.
LO 4 Prepare variance reports and balanced scorecards.

Copyright ©2018 John Wiley & Sons, Inc. 2

 Overview of Standard Costs

LEARNING OBJECTIVE 1

Describe standard costs.

Advantages of Standard Costs:

1. Facilitate management planning
2. Promote greater economy by making employees more “cost-
conscious ”
3. Useful in setting selling prices
4. Contribute to management control by providing basis for
evaluation of cost control
5. Useful in highlighting variances in management by exception
6. Simplify costing of inventories and reduce clerical costs

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Distinguishing Standards vs Budgets
• Similarities: Both standards and budgets are
• Predetermined costs;
• Contribute to management planning and control.
• Differences:
• A standard is a unit amount.
• A budget is a total amount.

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Setting Standard Costs
• Setting standard costs requires input from all persons
who have responsibility for costs and quantities.
• Standards should change whenever managers determine
that the existing standard is not a good measure of
performance.

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Setting Standard Costs - Ideal vs Normal
Companies set standards at one of two levels:
• Ideal standards represent optimum levels of
performance under perfect operating conditions
• Normal sta ndard s represent effi cient lev els of
performance that are attainable under expected operating
conditions
o Should be rigorous but attainable.

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Setting Standard Costs - Question
Most companies that use standards set them at a(n):
a. optimum level
b. ideal level
c. normal level
d. practical level

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Setting Standard Costs
Direct materials price standard
Direct materials price standard is the cost per finished unit
of direct materials that should be incurred.

Item Price
Purchase price, net of discounts $2.70
Freight 0.20
Receiving and handling 0.10
Standard direct materials price per pound $3.00

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Setting Standard Costs
Direct materials quantity standard
Direct materials quantity standard is the quantity of direct
materials that should be used per unit of finished goods.
Quantity
Item
(pounds)
Required materials 3.5
Allowance for waste .4
Allowance for spoilage .1
Standard direct materials quantity per unit 4.0

Standard direct materials cost is $12.00 ($3.00 × 4.0 pounds)

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Setting Standard Costs - Question

The direct materials price standard should include an

amount for all of the following except:
a. receiving costs
b. storing costs
c. handling costs
d. normal spoilage costs

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Setting Standard Costs
Direct labor price standard
Direct labor price standard is the rate per hour that should be
incurred for direct labor.

Item Price
Hourly wage rate $12.50
CO LA 0.25
Payroll taxes 0.75
Fringe benefits 1.50
Standard direct labor price per hour $15.00

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Setting Standard Costs
Direct labor quantity standard
Direct labor quantity standard is the time that should be
required to make one unit of product.

Quantity
Item
(Hours)
Actual production time 1.5
Rest periods and cleanup 0.2
Setup and downtime 0.3
Standard direct labor hours per unit 2.0

Standard direct labor cost is $30.00 ($15.00 × 2.0 hours)

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Setting Standard Costs
Manufacturing overhead
• For manufacturing overhead, companies use a standard
predetermined overhead rate in setting the standard.
• Overhead rate is determined by dividing budgeted
overhead costs by an expected standard activity index,
such as standard direct labor hours or standard machine
hours.

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Manufacturing Overhead
Xonic uses standard direct labor hours as the activity index
and expects to produce 13,200 gallons during the year at
normal capacity. It takes 2 direct labor hours for each gallon.
Budgeted
Standard Direct Overhead Rate per
Overhead Amount ÷ =
Labor Hours Direct Labor Hours
Costs

Variable $79,200 26,400 $3.00

Fixed 52,800 26,400 2.00
Total $132,000 26,400 $5.00

Standard manufacturing overhead rate per gallon is

$10 ($5 × 2 hours).
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Total Standard Cost per Unit
The total standard cost per unit is the sum of the standard costs
of direct materials, direct labor and manufacturing overhead.
Product: Xonic Tonic Unit Measure: Gallon
Manufacturing Cost Standard Standard Standard
Elements × =
Quantity Price Cost
Direct materials 4 pounds $ 3.00 $12.00
Direct labor 2 hours 15.00 30.00
Manufacturing overhead 2 hours 5.00 10.00
Total $52.00

The total standard cost per gallon is $52.00.

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DO IT! 1: Standard Costs
Ridette Inc. accumulated the following standard cost data
concerning product Cty31.
Direct materials per unit: 1.5 pounds at $4 per pound
Direct labor per unit: 0.25 hours at $13 per hour
Manufacturing overhead: rate of $15.60 per direct labor hour
Compute the standard cost of one unit of product Cty31.
 Direct Materials Variances

LEARNING OBJECTIVE 2

Determine direct materials variances.

Analyzing and Reporting Variances

Variances are differences between total actual costs and total
standard costs.
• Actual costs < Standard costs = Favorable variance
• Actual costs > Standard costs = Unfavorable variance

Must be analyzed to determine underlying factors.

Analyzing begins by determining the cost elements that
comprise the variance.

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Analyzing and Reporting Variances
Question
A variance is favorable if actual costs are:
a. less than budgeted costs.
b. less than standard costs.
c. greater than budgeted costs.
d. greater than standard costs

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Analyzing and Reporting Variances
Computation of total variance
Illustration: Assume that in Direct materials $13,020
producing 1,000 gallons of Direct labor 31,080
Xonic Tonic in the month of Variable overhead 6,500
June, Xonic incurred the costs
to the right. Fixed overhead 4,400
Total actual costs $55,000

The total standard cost of Actual costs $55,000

Xonic Tonic is $52,000 Less: Standard costs 52,000
(1,000 gallons × $52).
Total variance $ 3,000

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Analyzing and Reporting Variances
Components of total variance
A variance can result from differences related to the cost of
materials, labor, or overhead.

Materials Labor Overhead Total

+ + =
Variance Variance Variance Variance

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Analyzing and Reporting Variances
Format for computing price and quantity variances

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Computing Direct Materials Variances
Formula for total materials variance
In completing the order for 1,000 gallons of Xonic Tonic,
Xonic used 4,200 pounds of direct materials. These were
purchased at a cost of $3.10 per unit. Standard price is $3.

Actual Quantity Standard Quantity Total Materials

× Actual Price  × Standard Price = Variance
(AQ) × (AP) (SQ) × (SP) (TMV)

$13, 020 $12, 000

 = $1, 020 U
(4, 200  $3.10) (4, 000  $3.00)

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Computing Direct Materials Variances
Formula for materials price variance
Next, Xonic analyzes total variance to determine the amount
attributable to price (costs) and to quantity (use). Materials
price variance is computed from the following formula.
Actual Quantity Actual Quantity Materials Price
× Actual Price  × Standard Price = Variance
(AQ) × (AP) (AQ) × (SP) (MPV)

$13, 020 $12, 600

 = $420 U
(4, 200  $3.10) (4, 200  $3.00)

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Computing Direct Materials Variances
Formula for materials quantity variance
The materials quantity variance is determined from the
following formula.
Actual Quantity Standard Quantity Materials Quantity
× Actual Price  × Standard Price = Variance
(AQ) × (AP) (SQ) × (SP) (MQV)
$12, 600 $12,000
 = $600 U
(4, 200  $3.10) (4, 000  $3.00)
Materials price variance $ 420 U
Materials quantity variance 600 U
Total materials variance $1,020 U
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Analyzing and Reporting Variances
Matrix for direct materials variances

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Analyzing and Reporting Variances
Causes of materials price variance
Materials price variance – factors that affect price paid for
raw materials include
• availability of quantity and cash discounts
• quality of the materials requested
• delivery method used
To the extent that these factors are considered in setting the
price standard, the purchasing department is responsible.
Materials quantity variance – if the variance is due to
inexperienced workers, faulty machinery, or carelessness, the
production department is responsible.
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DO IT! 2: Direct Materials Variances
The standard cost of Wonder Walkers includes 2 units of direct
materials at $8.00 per unit. During July, the company buys 22,000
units of direct materials at $7.50 and uses those materials to produce
10,000 Wonder Walkers. Compute the total, price, and quantity
variances for materials.

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 Direct Labor and Manufacturing Overhead Variances

LEARNING OBJECTIVE 3
Determine direct labor and total manufacturing
overhead variances.

Direct Labor Variances

Process of determining direct labor variances is the same as
for determining the direct materials variances.
Total labor variance is the difference between the amount
actually paid for labor versus the amount that should have
been paid.

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 Direct Labor Variances
Formula for total labor variance
In completing the Xonic order, Xonic incurred 2,100 direct
labor hours at an average hourly rate of $14.80. The standard
hours allowed for the units produced were 2,000 hours
(1,000 gallons × 2 hours). The standard labor rate was $15
per hour. The total labor variance is computed as follows.
Actual Hours Standard Hours Total Labor
× Actual Rate  × Standard Rate = Variance
(AH) × (AR) (SH) × (SR) (TLV)

$31, 080 $30, 000

  $1, 080U
(4, 200  $3.10) (4, 200  $3.00)

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Direct Labor Variances
Formula for labor price variance
Next, Xonic analyzes the total variance to determine the
amount attributable to price (costs) and to quantity (use). The
labor price variance is computed from the following formula.

Actual Hours Actual Hours Labor Price

× Actual Rate  × Standard Rate = Variance
(AH) × (AR) (AH) × (SR) (LPV)

$31, 080 $31, 500

  $420F
(2,100 $14.80) (2,100  $15.00)

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Direct Labor Variances
Formula for labor quantity variance
The labor quantity variance is computed from the following
formula.
Actual Hours Standard Hours Labor Quantity
× Actual Rate  × Standard Rate = Variance
(AH) × (AR) (SH) × (SR) (LQV)
$31, 500 $30, 000
  $1, 500 U
(2,100 $15.00) (2, 000  $15.00)
Labor price variance $ 420 F
Labor quantity variance 1,500 U
Total direct labor variance $1,080 U
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Analyzing and Reporting Variances
Matrix for direct labor variances

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Analyzing and Reporting Variances
Causes of labor price variance
Labor price variance – usually results from two factors:
1. Paying works different wages than expected
2. Misallocation of workers
When workers are not unionized, manager who authorized
wage increase is responsible for higher wages.
Production department generally is responsible for labor
price variances resulting from misallocation of workforce.

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Analyzing and Reporting Variances
Causes of labor quantity variance
Labor quantity variance
• Relates to the efficiency of workers
• Cause of a quantity variance generally can be traced to
production department

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Analyzing and Reporting Variances
Manufacturing overhead variances
Total overhead variance is the difference between actual
overhead costs and overhead costs applied to work done.
Computation of actual overhead is comprised of a variable
and a fixed component.
Variable overhead $ 6,500
Fixed overhead 4,400
Total actual overhead $10,900

Predetermined overhead rate for Xonic Tonic is $5.

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Analyzing and Reporting Variances
Formula for total overhead variance
The formula for the total overhead variance and the
calculation for Xonic, Inc. for the month of June.
Actual Overhead Total Ov erhead
 =
Overhead Applied * Var iance
$10, 900 $10, 000
  $900 U
($6, 500 + $4,400) ($5  2,000 hours)

Standard hours allowed are hours that should have been

worked for units produced.

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Analyzing and Reporting Variances
Overhead controllable and volume variances
Overhead variance is generally analyzed through a price
variance and a quantity variance.
Overhead controllable variance (price variance) shows
whether overhead costs are effectively controlled.
Overhead volume variance (quantity variance) relates to
whether fixed costs were under- or over-applied during the
year.

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Analyzing and Reporting Variances
Causes of manufacturing overhead variances
• Over- or underspending on overhead items such as
indirect labor, electricity, etc.
• Poor maintenance on machines.
• Flow of materials through production is impeded
because lack of skilled labor to perform necessary
production tasks, due to a lack of planning.
• Lack of sales orders.

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DO IT! 3: Labor/Man. Over Variances
The standard cost of Product YY includes 3 hours of direct
labor at $12.00 per hour. The predetermined overhead rate
is $20.00 per direct labor hour. During July, the company
incurred 3,500 hours of direct labor at an average rate of
$12.40 per hour and $71,300 of manufacturing overhead
costs. It produced 1,200 units.
a. Compute the total, price, and quantity variances for
labor.
b. Compute the total overhead variance.

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 Variance Reports and Balanced Scorecards

LEARNING OBJECTIVE 4

Prepare variance reports and balanced scorecards.

Reporting Variances
• Variances should be reported to appropriate levels of
management
• Form, content, and frequency of variance reports vary
• Facilitate principle of “management by exception”
• Management normally looks for significant variances

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 Reporting Variances
Materials price variance report for Xonic, Inc., with materials
for Xonic Tonic order listed first.

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Income State. Presentation of Variances
Under a standard cost accounting system, cost of goods
sold is stated at standard cost and the variances are
disclosed separately.
• Unfavorable variances increase cost of goods sold
• Favorable variances decrease cost of goods sold

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 Income State. Presentation of Variances
Variances in income statement for management

Based on production and sale of 1,000 units of Xonic Tonic at $70 per unit.
Variance Reports - Question
Which of the following is incorrect about variance reports?
a. They facilitate “management by exception”.
b. They should only be sent to the top level of management.
c. They should be prepared as soon as possible.
d. They may vary in form, content, and frequency among
companies.

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 Balanced Scorecard
• Incorporates financial and nonfinancial measures in an
integrated system that links performance measurement
and a company’s strategic goals
• Evaluates company performance from a series of
“perspectives”
Four most commonly employed perspectives are:

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Balanced Scorecard - Nonfinancial measures
Industry Measure
Automobiles Capacity utilization of plants
Average age of key assets
Impact of strikes
Brand-loyalty statistics
Computer Systems Market profile of customer end-products
Number of new products
Employee stock ownership percentages
Number of scientists and technicians used in R&D
Chemicals Customer satisfaction data
Factors affecting customer product selection
Number of patents and trademarks held
Customer brand awareness
Regional Banks Number of ATMs by state
Number of products used by average customer
% of customer service calls handled by interactive voice response units
Personnel cost per employee
Credit card retention rates
Balanced Scorecard
Eg. of objectives within the four perspectives
Perspectives Objective
Financial Return on assets Net income
Credit rating Share price
Profit per employee
Percentage of customers who would recommend
Customer product
Customer retention Brand recognition
Response time per customer request
Customer service expense per customer
Internal Process Percentage of defect-free products
Labor utilization rates Stockouts
Waste reduction Planning accuracy
Learning and % of employees leaving in less than one year.
Number of cross-trained employees.
Growth Ethics violations Training hours
Reportable accidents
Balanced Scorecard
Question
Which of the following would not be an objective used in
the customer perspective of the balanced scorecard
approach?
a. Percentage of customers who would recommend
product to a friend
b. Customer retention
c. Brand recognition
d. Earning per share

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Balanced Scorecard - Summary
1. Employs both financial and nonfinancial measures.
2. Creates linkages so high-level corporate goals can be
communicated to the shop floor.
3. Provides measurable objectives for nonfinancial
measures.
4. Integrates company’s goals into a single performance
measurement system.

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DO IT! 4: Reporting Variances
Polar Vortex Corporation experienced the following variances:
materials price $250 F, materials quantity $1,100 F, labor price
$700 U, labor quantity $300 F, and overhead $800 F. Sales revenue
was $102,700, and cost of goods sold (at standard) was $61,900.
Determine the actual gross profit.
Appendix 11A : Standard Cost System
A standard cost accounting system is a double-entry
system of accounting. Standard cost systems are used with
either
• job order costing or
• process costing

System is based on two important assumptions:

1. Variances are recognized at earliest opportunity
2. Work in Process account is maintained exclusively on
basis of standard costs

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Standard Cost Accounting System
Journal entries 1 and 2
1. Purchase raw materials on account for $13,020 when the
standard cost is $12,600.
Raw Materials Inventory 12,600
Materials Price Variance 420
Accounts Payable 13,000
2. Incur direct labor costs of $31,080 when the standard labor cost
is $31,500.
Factory Labor 31,500
Labor Price Variance 420
Factory Wages Payable 31,080

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Standard Cost Accounting System
Journal entries 3 and 4
3. Incur actual manufacturing overhead costs of $10,900.

Manufacturing Overhead 10,900

Accounts Payable/Cash/Acc. Depre. 10,900

4. Issue raw materials for production at a cost of $12,600

when the standard cost is $12,000.
Work in Process Inventory 12,000
Materials Quantity Variance 600
Raw Materials Inventory 12,600

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Standard Cost Accounting System
Journal entries 5 and 6
5. Assign factory labor to production at a cost of $31,500
when standard cost is $30,000.
Work in Process 30,000
Inventory
Labor Quantity Variance 1,500
Factory Labor 31,500
6. Apply manufacturing overhead to production $10,000.
Work in Process Inventory 10,000
Manufacturing Overhead 10,000
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Standard Cost Accounting System
Journal entries 7 and 8
7. Transfer completed work to finished goods $52,000.
Finished Goods Inventory 52,000
Work in Process Inventory 52,000
8. Sell the 1,000 gallons of Xonic Tonic for $70,000.
Accounts Receivable 70,000
Cost of Goods Sold 52,000
Sales 70,000
Finished Goods Inventory 52,000

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Standard Cost Accounting System
Journal entry 9
Prior to this next entry, a debit balance of $900 exists in
Manufacturing Overhead because overhead of $10,900 was
incurred but only $10,000 of overhead was applied.
9. Recognize unfavorable total overhead variance.

Overhead Variance 900

Manufacturing Overhead 900

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Ledger Accounts

Each debit balance in variance

accounts indicates an unfavorable
variance; each credit balance
indicates a favorable variance.

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Appendix 11B: Overhead
Controllable and Volume Variances
Overhead variance is analyzed through a price variance and a
quantity variance.
• Overhead controllable variance (price variance) shows
whether overhead costs are effectively controlled
• Overhead volume variance (quantity variance) relates to
whether fixed costs were under- or over-applied

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Overhead Controllable Variance
Overhead controllable variance shows whether
overhead costs are effectively controlled.
To compute, compare actual overhead costs incurred
with budgeted costs for standard hours allowed.
• Budgeted costs are determined from a flexible
manufacturing overhead budget

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Overhead Controllable Variance
Flexible budget using standard direct labor hours
For Xonic the budget formula for manufacturing overhead is variable
manufacturing overhead cost of $3 per hour of labor plus fixed manufacturing
overhead costs of $4,400.
Flexible Manufacturing Overhead Monthly Budget
Activity Index blank blank blank blank
Standard direct labor hours 1,800 2,000 2,200 2,400
Costs blank blank blank blank
Variable costs blank blank blank blank
Indirect materials $1,800 $2,000 $2,200 $2,400
Indirect labor 2,700 3,000 3,300 3,600
Utilities 900 1,000 1,100 1,200
Total variable costs 5,400 6,000 6,600 7,200
Fixed costs blank blank blank blank
Supervision 3,000 3,000 3,000 3,000
Depreciation 1,400 1,400 1,400 1,400
Total fixed costs 4,400 4,400 4,400 4,400
Total costs $9,800 $10,400 $11,000 $11,600
Overhead Controllable Variance
Formula for overhead controllable variance
Formula for overhead controllable variance and
calculation for Xonic, Inc.
Actual Overhead Overhead
 =
Overhead Budgeted * Controllable
Variance

$10,900 $10,400
 = $500U
($6,500 + $4,400) (6,000 + $4, 400)

*Based on standard hours allowed.

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Overhead Volume Variance
Formula for overhead volume variance
Difference between normal capacity hours and standard
hours allowed times the fixed overhead rate.

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Overhead Volume Variance
Problem data
Xonic budgeted fixed overhead cost for the year of $52,800
(Illustration 11.6). At normal capacity, 26,400 standard direct
labor hours are required. The fixed overhead rate is therefore
$2 per hour ($52,800 ÷ 26,400 hours).
Xonic produced 1,000 units of Xonic Tonic in June. The
standard hours allowed for the 1,000 gallons produced in
June is 2,000 (1,000 gallons × 2 hours). For Xonic, normal
capacity for June is 1,100, so standard direct labor hours for
June at normal capacity is 2,200 (26,400 annual hours ÷ 12
months).
Show the computation of the overhead volume variance.

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Overhead Volume Variance
Computation of overhead volume variance
Show the computation of the overhead volume variance.

$2 × (2, 200  2, 000) = $400 U

The volume variance is unfavorable because Xonic produced
only 1,000 gallons rather than the normal capacity of 1,100
gallons in the month of June.

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Overhead Controllable/Volume Variances
In computing overhead variances, it is important to
remember the following.
1. Standard hours allowed are used in each variance
2. Budgeted costs for controllable variance are derived
from flexible budget
3. Controllable variance generally pertains to variable costs
4. Volume variance pertains solely to fixed costs

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Copyright ©2018 John Wiley & Son, Inc. 66