Standard Costs and the

Balanced Scorecard
Chapter Ten

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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.

McGrawHill/Irwin

Cost (price)
standards specify
how much should be
paid for each unit
of the input.

Copyright2008,TheMcGrawHillCompanies,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

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-4

Variance Analysis Cycle

Identify
questions

Receive
explanations

Take
corrective
actions

Conduct next
periods
operations

Analyze
variances
Prepare standard
cost performance
report
McGrawHill/Irwin

Exhibit
10-1

Begin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-5

Setting Standard Costs

Accountants, engineers, purchasing
agents, and production managers
combine efforts to set standards that encourage
efficient future production.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-6

Setting Standard Costs

Should we use
ideal standards that
require employees to
work at 100 percent
peak efficiency?

Engineer
McGrawHill/Irwin

I recommend using practical

standards that are currently
attainable with reasonable and
efficient effort.

Managerial
Accountant

Copyright2008,TheMcGrawHillCompanies,Inc.

10-7

Learning Objective 1

Explain how direct

materials standards
and direct labor
standards are set.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-9

Setting Standards
Six
Six Sigma
Sigma advocates
advocates have
have sought
sought to
to
eliminate
eliminate all
all defects
defects and
and waste,
waste, rather
rather than
than
continually
continually build
build them
them into
into standards.
standards.
As
As aa result
result allowances
allowances for
for waste
waste and
and
spoilage
spoilage that
that are
are built
built into
into standards
standards
should
should be
be reduced
reduced over
over time.
time.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-12

Standard Cost Card Variable

Production Cost
A standard cost card for one unit
of product might look like this:

Inputs
Direct materials
Direct labor
Variable mfg. overhead
Total standard unit cost
McGrawHill/Irwin

AxB

Standard
Quantity
or Hours

Standard
Price
or Rate

Standard
Cost
per Unit

3.0 lbs.
2.5 hours
2.5 hours

$ 4.00 per lb.

$
14.00 per hour
3.00 per hour
$

12.00
35.00
7.50
54.50

Copyright2008,TheMcGrawHillCompanies,Inc.

10-13

Standards vs. Budgets

Are standards the

same as budgets?
A budget is set for
total costs.

McGrawHill/Irwin

A standard is a per
unit cost.
Standards are often
used when
preparing budgets.
Copyright2008,TheMcGrawHillCompanies,Inc.

10-14

Price and Quantity Standards

Price and and quantity standards are
determined separately for two reasons:

The
The purchasing
purchasing manager
manager is
is responsible
responsible for
for raw
raw
material
material purchase
purchase prices
prices and
and the
the production
production manager
manager
is
is responsible
responsible for
for the
the quantity
quantity of
of raw
raw material
material used.
used.

The
The buying
buying and
and using
using activities
activities occur
occur at
at different
different times.
times.
Raw
Raw material
material purchases
purchases may
may be
be held
held in
in inventory
inventory for
for aa
period
period of
of time
time before
before being
being used
used in
in production.
production.
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-15

A General Model for Variance Analysis

Variance Analysis

Price Variance

Quantity Variance

Difference between
actual price and
standard price

Difference between
actual quantity and
standard quantity

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-16

A General Model for Variance Analysis

Variance Analysis

Price Variance

Quantity Variance

Materials price variance

Labor rate variance
VOH spending variance

Materials quantity variance

Labor efficiency variance
VOH efficiency variance

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-17

A General Model for Variance Analysis

Actual Quantity

Actual Price

Actual Quantity

Standard Price

Price Variance

McGrawHill/Irwin

Standard Quantity

Standard Price

Quantity Variance

Copyright2008,TheMcGrawHillCompanies,Inc.

10-18

A General Model for Variance Analysis

Actual Quantity

Actual Price

Actual Quantity

Standard Price

Price Variance

Standard Quantity

Standard Price

Quantity Variance

Actual quantity is the amount of direct

materials, direct labor, and variable
manufacturing overhead actually used.
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-19

A General Model for Variance Analysis

Actual Quantity

Actual Price

Actual Quantity

Standard Price

Price Variance

Standard Quantity

Standard Price

Quantity Variance

Standard quantity is the standard quantity

allowed for the actual output of the period.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-20

A General Model for Variance Analysis

Actual Quantity

Actual Price

Actual Quantity

Standard Price

Price Variance

Standard Quantity

Standard Price

Quantity Variance

Actual price is the amount actually

paid for the input used.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-21

A General Model for Variance Analysis

Actual Quantity

Actual Price

Actual Quantity

Standard Price

Price Variance

Standard Quantity

Standard Price

Quantity Variance

Standard price is the amount that should

have been paid for the input used.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-22

A General Model for Variance Analysis

Actual Quantity

Actual Price

Actual Quantity

Standard Price

Price Variance

Standard Quantity

Standard Price

Quantity Variance

(AQ AP) (AQ SP)

(AQ SP) (SQ SP)

AQ = Actual Quantity
AP = Actual Price

SP = Standard Price
SQ = Standard Quantity

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-23

Learning Objective 2

Compute the direct

materials price and
quantity variances and
explain their significance.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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

McGrawHill/Irwin

= $1,050

Standard Quantity

Standard Price
200 kgs.

$5.00 per kg.

= $1,000

Quantity variance
$50 unfavorable

Copyright2008,TheMcGrawHillCompanies,Inc.

10-26

Material Variances Summary

Actual Quantity

Actual Price
210 kgs.

$4.90 per kg.

Actual Quantity

Standard Price
210 kgs.
kgs
$1,029 210
$5.00per
perkg
kg.
= $4.90

= $1,029

Price variance
$21 favorable

McGrawHill/Irwin

= $1,050

Standard Quantity

Standard Price
200 kgs.

$5.00 per kg.

= $1,000

Quantity variance
$50 unfavorable

Copyright2008,TheMcGrawHillCompanies,Inc.

10-27

Material Variances Summary

Actual Quantity

Actual Price

Actual Quantity

Standard Price

Standard Quantity

Standard Price

210 kgs.
210 kgs.
200 kgs.

0.1 kg per parka 2,000 parkas

$4.90 per kg.
$5.00
$5.00 per kg.
= 200 per
kgs kg.
= $1,029

Price variance
$21 favorable

McGrawHill/Irwin

= $1,050

= $1,000

Quantity variance
$50 unfavorable

Copyright2008,TheMcGrawHillCompanies,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
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-29

Isolation of Material Variances

I need the price variance
sooner so that I can better
identify purchasing problems.
You accountants just dont
understand the problems that
purchasing managers have.

McGrawHill/Irwin

Ill start computing

the price variance
when material is
purchased rather than
when its used.

Copyright2008,TheMcGrawHillCompanies,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?
McGrawHill/Irwin

The price variance is

computed on the entire
quantity purchased.
The quantity variance
is computed only on
the quantity used.
Copyright2008,TheMcGrawHillCompanies,Inc.

10-31

Responsibility for Material Variances

Materials Quantity Variance

Production Manager

Materials Price Variance

Purchasing Manager

The
The standard
standard price
price is
is used
used to
to compute
compute the
the quantity
quantity variance
variance
so
so that
that the
the production
production manager
manager is
is not
not held
held responsible
responsible for
for
the
the purchasing
purchasing managers
managers performance.
performance.
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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.

McGrawHill/Irwin

Your poor scheduling

sometimes requires me to
rush order material at a
higher price, causing
unfavorable price variances.

Copyright2008,TheMcGrawHillCompanies,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.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-34

Quick Check

Zippy

Hansons
Hansons material
material price
price variance
variance (MPV)
(MPV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
d.
d. $800
$800 favorable.
favorable.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-35

Quick Check

Zippy

Hansons
Hansons material
material price
price variance
variance (MPV)
(MPV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
MPV = AQ(AP - SP)
MPV = 1,700 lbs. ($3.90 - 4.00)
d.
$800
favorable.
d. $800 favorable.
MPV = $170 Favorable

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-36

Quick Check

Zippy

Hansons
Hansons material
material quantity
quantity variance
variance (MQV)
(MQV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
d.
d. $800
$800 favorable.
favorable.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-37

Quick Check

Zippy

Hansons
Hansons material
material quantity
quantity variance
variance (MQV)
(MQV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
d.
d. $800
$800 favorable.
favorable.

MQV = SP(AQ - SQ)

MQV = $4.00(1,700 lbs - 1,500 lbs)
MQV = $800 unfavorable

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-38

Quick Check

Actual Quantity

Actual Price

Actual Quantity

Standard Price

Zippy

Standard 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
McGrawHill/Irwin

Quantity variance
$800 unfavorable
Copyright2008,TheMcGrawHillCompanies,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.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-40

Quick Check Continued

Actual Quantity
Purchased

Actual Quantity
Purchased

2,800Price
lbs.
Actual

$3.90 per lb.

2,800 lbs.
Standard
Price

$4.00 per lb.

= $10,920

= $11,200

Price variance
$280 favorable
McGrawHill/Irwin

Zippy

Price variance increases

because quantity
purchased increases.
Copyright2008,TheMcGrawHillCompanies,Inc.

10-41

Quick Check Continued

Quantity

Actual Quantity
Used

Standard Price
1,700 lbs.

$4.00 per lb.

= $6,800

Quantity variance is
unchanged because
actual and standard
quantities are unchanged.
McGrawHill/Irwin

Zippy

Standard

Standard Price
1,500 lbs.

$4.00 per lb.

= $6,000

Quantity variance
$800 unfavorable
Copyright2008,TheMcGrawHillCompanies,Inc.

10-42

Learning Objective 3

Compute the direct labor

rate and efficiency
variances and explain
their significance.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-44

Labor Variances Summary

Actual Hours

Actual Rate

Actual Hours

Standard Rate

2,500 hours

$10.50 per hour

2,500 hours

$10.00 per hour.

= $26,250

= $25,000

Rate variance
$1,250 unfavorable

McGrawHill/Irwin

Standard Hours

Standard Rate
2,400 hours

$10.00 per hour

= $24,000

Efficiency variance
$1,000 unfavorable

Copyright2008,TheMcGrawHillCompanies,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

McGrawHill/Irwin

Standard Hours

Standard Rate

= $24,000

Efficiency variance
$1,000 unfavorable

Copyright2008,TheMcGrawHillCompanies,Inc.

10-46

Labor Variances Summary

Actual Hours

Actual Rate

Actual Hours

Standard Rate

Standard Hours

Standard Rate

2,500 hours
2,500 hours
2,400 hours

1.2 hours per parka

2,000
$10.50 per hour parkas
$10.00
per hour.
$10.00 per hour
= 2,400
hours
= $26,250

= $25,000

Rate variance
$1,250 unfavorable

McGrawHill/Irwin

= $24,000

Efficiency variance
$1,000 unfavorable

Copyright2008,TheMcGrawHillCompanies,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

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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
McGrawHill/Irwin

Quality of training
provided to employees.
Copyright2008,TheMcGrawHillCompanies,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.

McGrawHill/Irwin

I think it took more time

to process the
materials because the
Maintenance
Department has poorly
maintained your
equipment.

Copyright2008,TheMcGrawHillCompanies,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.
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-51

Quick Check

Zippy

Hansons
Hansons labor
labor rate
rate variance
variance (LRV)
(LRV) for
for
the
the week
week was:
was:
a.
a. $310
$310 unfavorable.
unfavorable.
b.
b. $310
$310 favorable.
favorable.
c.
c. $300
$300 unfavorable.
unfavorable.
d.
d. $300
$300 favorable.
favorable.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-52

Quick Check

Zippy

Hansons
Hansons labor
labor rate
rate variance
variance (LRV)
(LRV) for
for
the
the week
week was:
was:
a.
a. $310
$310 unfavorable.
unfavorable.
b.
b. $310
$310 favorable.
favorable.
LRV = AH(AR - SR)
c.
c. $300
$300 unfavorable.
unfavorable.
LRV = 1,550 hrs($12.20 - $12.00)
d.
d. $300
$300 favorable.
favorable.
LRV = $310 unfavorable

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-53

Quick Check

Zippy

Hansons
Hansons labor
labor efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was:
was:
a.
a. $590
$590 unfavorable.
unfavorable.
b.
b. $590
$590 favorable.
favorable.
c.
c. $600
$600 unfavorable.
unfavorable.
d.
d. $600
$600 favorable.
favorable.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-54

Quick Check

Zippy

Hansons
Hansons labor
labor efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was:
was:
a.
a. $590
$590 unfavorable.
unfavorable.
b.
b. $590
$590 favorable.
favorable.
c.
c. $600
$600 unfavorable.
unfavorable.
d.
d. $600
$600 favorable.
favorable.

LEV = SR(AH - SH)

LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-55

Quick Check

Actual Hours

Actual Rate
1,550 hours

$12.20 per hour

= $18,910

Actual Hours

Standard Rate
1,550 hours

$12.00 per hour

= $18,600

Rate variance
$310 unfavorable
McGrawHill/Irwin

Zippy

Standard Hours

Standard Rate
1,500 hours

$12.00 per hour

= $18,000

Efficiency variance
$600 unfavorable
Copyright2008,TheMcGrawHillCompanies,Inc.

10-56

Learning Objective 4

Compute the variable

manufacturing overhead
spending and efficiency
variances.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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

McGrawHill/Irwin

Efficiency variance
$400 unfavorable

Copyright2008,TheMcGrawHillCompanies,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
$10,500 2,500 hours
$4.00
per per
hourhour
= $4.20
= $10,000

Spending variance
$500 unfavorable

McGrawHill/Irwin

Standard Hours

Standard Rate
2,400 hours

$4.00 per hour

= $9,600

Efficiency variance
$400 unfavorable

Copyright2008,TheMcGrawHillCompanies,Inc.

10-60

Variable Manufacturing Overhead

Variances Summary
Actual Hours

Actual Rate

Actual Hours

Standard Rate

2,500 hours
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

McGrawHill/Irwin

Standard Hours

Standard Rate
2,400 hours

$4.00 per hour

= $9,600

Efficiency variance
$400 unfavorable

Copyright2008,TheMcGrawHillCompanies,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

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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.
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-63

Quick Check

Zippy

Hansons
Hansons spending
spending variance
variance (VOSV)
(VOSV) for
for
variable
variable manufacturing
manufacturing overhead
overhead for
for
the
the week
week was:
was:
a.
a. $465
$465 unfavorable.
unfavorable.
b.
b. $400
$400 favorable.
favorable.
c.
c. $335
$335 unfavorable.
unfavorable.
d.
d. $300
$300 favorable.
favorable.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-64

Quick Check

Zippy

Hansons
Hansons spending
spending variance
variance (VOSV)
(VOSV) for
for
variable
variable manufacturing
manufacturing overhead
overhead for
for
the
the week
week was:
was:
a.
a. $465
$465 unfavorable.
unfavorable.
b.
b. $400
$400 favorable.
favorable.
VOSV = AH(AR - SR)
c.
c. $335
$335 unfavorable.
unfavorable.
VOSV = 1,550 hrs($3.30 - $3.00)
d.
d. $300
$300 favorable.
favorable.VOSV = $465 unfavorable

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-65

Quick Check

Zippy

Hansons
Hansons efficiency
efficiency variance
variance (VOEV)
(VOEV) for
for
variable
variable manufacturing
manufacturing overhead
overhead for
for the
the
week
week was:
was:
a.
a. $435
$435 unfavorable.
unfavorable.
b.
b. $435
$435 favorable.
favorable.
c.
c. $150
$150 unfavorable.
unfavorable.
d.
d. $150
$150 favorable.
favorable.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-66

Quick Check

Zippy

Hansons
Hansons efficiency
efficiency variance
variance (VOEV)
(VOEV) for
for
variable
variable manufacturing
manufacturing overhead
overhead for
for the
the
week
week was:
was:
a.
a. $435
$435 unfavorable.
unfavorable.
b.
b. $435
$435 favorable.
favorable. 1,000 units 1.5 hrs per unit
c.
c. $150
$150 unfavorable.
unfavorable.
d.
VOEV = SR(AH - SH)
d. $150
$150 favorable.
favorable.
VOEV = $3.00(1,550 hrs - 1,500 hrs)
VOEV = $150 unfavorable

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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

Spending variance
$465 unfavorable
McGrawHill/Irwin

= $4,500

Efficiency variance
$150 unfavorable
Copyright2008,TheMcGrawHillCompanies,Inc.

Variance Analysis and

Management by Exception

10-68

How do I know
which variances to
investigate?

McGrawHill/Irwin

Larger variances, in
dollar amount or as
a percentage of the
standard, are
investigated first.
Copyright2008,TheMcGrawHillCompanies,Inc.

10-69

Exhibit
10-9

A Statistical Control Chart

Warning signals for investigation

Favorable Limit

Desired Value

Unfavorable Limit

Variance Measurements
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-70

Advantages of Standard Costs

Management by
exception

Promotes economy
and efficiency

Advantages
Simplified
bookkeeping
McGrawHill/Irwin

Enhances
responsibility
accounting
Copyright2008,TheMcGrawHillCompanies,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.
McGrawHill/Irwin

Potential
Problems

Favorable
variances may
be misinterpreted.

Emphasis on
negative may
impact morale.
Continuous
improvement may
be more important
than meeting standards.
Copyright2008,TheMcGrawHillCompanies,Inc.

10-72

Learning Objective 5

Understand how a
balanced scorecard
fits together and
how it supports a
companys strategy.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-73

The Balanced Scorecard

Management
Management translates
translates its
its strategy
strategy into
into
performance
performance measures
measures that
that employees
employees
understand
understand and
and accept.
accept.
Customers

Financial

Performance
measures
Internal
business
processes
McGrawHill/Irwin

Learning
and growth
Copyright2008,TheMcGrawHillCompanies,Inc.

10-74

The Balanced Scorecard: From

Strategy to Performance Measures

Exhibit
10-11

Performance Measures
Financial

Has our financial

performance improved?

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?

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?
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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
Financial measures
measures are
are lag
lag indicators
indicators that
that summarize
summarize
the
the results
results of
of past
past actions.
actions. Non-financial
Non-financial measures
measures are
are
leading
leading indicators
indicators of
of future
future financial
financial performance.
performance.

Top
Top managers
managers are
are ordinarily
ordinarily responsible
responsible for
for financial
financial
performance
performance measures
measures not
not lower
lower level
level managers.
managers.
Non-financial
Non-financial measures
measures are
are more
more likely
likely to
to be
be
understood
understood and
and controlled
controlled by
by lower
lower level
level managers.
managers.
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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.

AApersonal
personal scorecard
scorecard should
should contain
contain measures
measures that
that can
can be
be
influenced
influenced by
by the
the individual
individual being
being evaluated
evaluated and
and that
that
support
support the
the measures
measures in
in the
the overall
overall balanced
balanced scorecard.
scorecard.
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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.
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

The Balanced Scorecard

and Compensation

10-78

Incentive compensation
should be linked to
balanced scorecard
performance measures.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

The Balanced Scorecard

Jaguar Example

10-79

Exhibit
10-13

Profit

Financial
Contribution per car
Number of cars sold

Customer
Customer satisfaction
with options

Internal
Business
Processes
Learning
and Growth
McGrawHill/Irwin

Number of
options available

Time to
install option

Employee skills in
installing options
Copyright2008,TheMcGrawHillCompanies,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
McGrawHill/Irwin

Number of
options available

Time to
install option

Time
Decreases

Employee skills in
installing options
Copyright2008,TheMcGrawHillCompanies,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
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-84

Advantages of Graphic Feedbck

Tim e to Install an Option

Time to Install in Minutes

35
30
25
20
15
10
5
0
1

10

Week

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.
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.

10-85

Learning Objective 6

Compute delivery cycle

time, throughput time,
and manufacturing
cycle efficiency (MCE).

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,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
McGrawHill/Irwin

Value-added time
Manufacturing cycle time
Copyright2008,TheMcGrawHillCompanies,Inc.

10-88

Quick Check
A
A TQM
TQM team
team at
at Narton
Narton Corp
Corp has
has recorded
recorded the
the
following
following average
average times
times for
for production:
production:
Wait
3.0
Wait
3.0 days
days
Inspection
Inspection 0.4
0.4 days
days
Process
Process 0.2
0.2 days
days

Move
Move
Queue
Queue

0.5
0.5 days
days
9.3
9.3 days
days

What
What is
is the
the throughput
throughput time?
time?
a.
a. 10.4
10.4 days
days
b.
b. 0.2
0.2 days
days
c.
c. 4.1
4.1 days
days
d.
d. 13.4
13.4 days
days
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-89

Quick Check
A
A TQM
TQM team
team at
at Narton
Narton Corp
Corp has
has recorded
recorded the
the
following
following average
average times
times for
for production:
production:
Wait
3.0
Wait
3.0 days
days
Inspection
Inspection 0.4
0.4 days
days
Process
Process 0.2
0.2 days
days

Move
Move
Queue
Queue

0.5
0.5 days
days
9.3
9.3 days
days

What
What is
is the
the throughput
throughput time?
time?
a.
a. 10.4
10.4 days
days
b.
Throughput
time
b. 0.2
0.2 days
days= Process + Inspection + Move + Queue
c.
c. 4.1
4.1 days
days= 0.2 days + 0.4 days + 0.5 days + 9.3 days
= 10.4 days
d.
d. 13.4
13.4 days
days
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-90

Quick Check
A
A TQM
TQM team
team at
at Narton
Narton Corp
Corp has
has recorded
recorded the
the
following
following average
average times
times for
for production:
production:
Wait
3.0
Wait
3.0 days
days
Inspection
Inspection 0.4
0.4 days
days
Process
Process 0.2
0.2 days
days

Move
Move
Queue
Queue

0.5
0.5 days
days
9.3
9.3 days
days

What
What is
is the
the Manufacturing
Manufacturing Cycle
Cycle Efficiency?
Efficiency?
a.
a. 50.0%
50.0%
b.
b. 1.9%
1.9%
c.
c. 52.0%
52.0%
d.
d. 5.1%
5.1%
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-91

Quick Check
A
A TQM
TQM team
team at
at Narton
Narton Corp
Corp has
has recorded
recorded the
the
following
following average
average times
times for
for production:
production:
Wait
3.0
Wait
3.0 days
days
Inspection
Inspection 0.4
0.4 days
days
Process
Process 0.2
0.2 days
days

Move
Move
Queue
Queue

0.5
0.5 days
days
9.3
9.3 days
days

What
What is
is the
the Manufacturing
Manufacturing Cycle
Cycle Efficiency?
Efficiency?
a.
a. 50.0%
50.0% MCE = Value-added time Throughput time
b.
b. 1.9%
1.9%
= Process time Throughput time
c.
c. 52.0%
52.0%
= 0.2 days 10.4 days
= 1.9%
d.
d. 5.1%
5.1%
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-92

Quick Check
A
A TQM
TQM team
team at
at Narton
Narton Corp
Corp has
has recorded
recorded the
the
following
following average
average times
times for
for production:
production:
Wait
3.0
Wait
3.0 days
days
Inspection
Inspection 0.4
0.4 days
days
Process
Process 0.2
0.2 days
days

Move
Move
Queue
Queue

0.5
0.5 days
days
9.3
9.3 days
days

What
What is
is the
the delivery
delivery cycle
cycle time?
time?
a.
a. 0.5
0.5 days
days
b.
b. 0.7
0.7 days
days
c.
c. 13.4
13.4 days
days
d.
d. 10.4
10.4 days
days
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-93

Check

Delivery cycleQuick
time = Wait
time + Throughput
time
= 3.0 days + 10.4 days
= 13.4 days
A
A TQM
TQM team
team at
at Narton
Narton Corp
Corp has
has recorded
recorded the
the
following
following average
average times
times for
for production:
production:
Wait
3.0
Wait
3.0 days
days
Inspection
Inspection 0.4
0.4 days
days
Process
Process 0.2
0.2 days
days

Move
Move
Queue
Queue

0.5
0.5 days
days
9.3
9.3 days
days

What
What is
is the
the delivery
delivery cycle
cycle time?
time?
a.
a. 0.5
0.5 days
days
b.
b. 0.7
0.7 days
days
c.
c. 13.4
13.4 days
days
d.
d. 10.4
10.4 days
days
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

General Ledger Entries

to Record Variances
Appendix 10A

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-95

Learning Objective 7

Prepare journal entries

to record standard
costs and variances.
(Appendix 10A)

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-96

Appendix 10A
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
Material
AQ
AQ AP
AP == $1,029
$1,029
AQ
AQ SP
SP == $1,050
$1,050
SQ
SQ SP
SP == $1,000
$1,000
MPV
MPV == $21
$21 FF
MQV
MQV == $50
$50 U
U

Labor
Labor
AH
AH AR
AR == $26,250
$26,250
AH
AH SR
SR == $25,000
$25,000
SH
SH SR
SR == $24,000
$24,000
LRV
LRV == $1,250
$1,250 U
U
LEV
LEV == $1,000
$1,000 U
U

Now, lets prepare the entries to record

the labor and material variances.
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

Appendix 10A
Recording Material Variances

10-97

GENERAL JOURNAL
Date

Description
Raw Materials

Page 4

Post.
Ref.

Debit

Credit

1,050

Materials Price Variance

21

Accounts Payable

1,029

To record the purchase of material

Work in Process
Materials Quantity Variance
Raw materials

1,000
50
1,050

To record the use of material

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

Appendix 10A
Recording Labor Variances

10-98

GENERAL JOURNAL
Date

Description
Work in Process

Page 4

Post.
Ref.

Debit
24,000

Labor Rate Variance

1,250

Labor Efficiency variance

1,000

Wages Payable

Credit

26,250

To record direct labor

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-99

Appendix 10A 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.

McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-100

Cost Flows in a Standard Cost System

Inventories
Inventories are
are recorded
recorded at
at standard
standard cost.
cost.
Variances
Variances are
are recorded
recorded as
as follows:
follows:
Favorable
Favorable variances
variances are
are credits,
credits, representing
representing
savings
savings in
in production
production costs.
costs.
Unfavorable
Unfavorable variances
variances are
are debits,
debits, representing
representing
excess
excess production
production costs.
costs.

Standard
Standard cost
cost variances
variances are
are usually
usually closed
closed to
to
cost
cost of
of goods
goods sold.
sold.
Unfavorable
Unfavorable variances
variances increase
increase cost
cost of
of goods
goods sold.
sold.
Favorable
Favorable variances
variances decrease
decrease cost
cost of
of goods
goods sold.
sold.
McGrawHill/Irwin

Copyright2008,TheMcGrawHillCompanies,Inc.

10-101

McGrawHill/Irwin

End of Chapter 10

Copyright2008,TheMcGrawHillCompanies,Inc.