Standard Costs and the Balanced Scorecard
Learning Objectives • Explain how direct materials and labor standards are set. • Understand the advantages of and the potential problems with using standard costs. • Compute the direct materials price and quantity variances and explain their significance. • Compute the direct labor rate and efficiency variances and explain their significance. • Compute the variable overhead spending and efficiency variances. • Understand how a balanced scorecard supports strategy. • Compute the delivery cycle time, the throughput time, and the manufacturing cycle efficiency. efficiency.
Learning Objectives • Explain how direct materials and labor standards are set. • Understand the advantages of and the potential problems with using standard costs. • Compute the direct materials price and quantity variances and explain their significance. • Compute the direct labor rate and efficiency variances and explain their significance. • Compute the variable overhead spending and efficiency variances. • Understand how a balanced scorecard supports strategy. • Compute the delivery cycle time, the throughput time, and the manufacturing cycle efficiency. efficiency.
Standard Costs • Standard costs are the same as budgets, except that standard costs are a unit concept. • i!e budgets, standard costs are mainly used for planning and control. • "he planning stage involves developing a standard cost #card$ for each product or service. • Control involves comparing actual with standard costs and investigating the differences differences #variances$.
Setting Standard Costs • Since cost of product%service is affected by quantity and price of materials, labor, and overhead, managers have to set quantity and cost standards for these cost elements. & 'uantity standards indicate how much of a cost element should be used. & Cost standards indicate what the cost should be. • i!e budgets, standards usually allow for normal inefficiencies.
Standard Cost Card – An Example A standard cost card for one unit of product might look like this:
Inputs Direct materials Direct laor 'ariale m(). o*er&ead ,otal standard unit cost
A
B
AxB
Standard Quantity or Hours
Standard Price or Rate
Standard Cost per Unit
3.0 ls. $.% &ours $.% &ours
" !.00 per l. " #!.00 per &our 3.00 per &our "
#$.00 3%.00 +.%0 %!.%0
Standard Cost Variances • ( #standard cost$ variance is the amount by which an actual cost differs from the standard cost. • Since cost is affected by two factors #quantity used and price paid$ and since these factors are the responsibility of two different managers, control over these factors is assessed #exercised$ separately. • "hat is, two types of variances are computed and investigated) quantity and price.
General Frameor! "or Variance Anal#sis ( general model is used to perform variance analysis for all variable manufacturing costs. "he variances are called by different names, however. (ctual Cost (' (/
#*lexible$ +udget at the (ctual nput evel (' S/
0. price variance . rate variance 1-2 spending variance
#*lexible$ +udget at th (ctual -utput evel S' S/
0. quantity or usage variance . efficiency variance 1-2 efficiency variance
S' is the standard quant ity of input allowed for act ual outpu t, i.e., S' 3 actual output standard requirment per unit
General Frameor! "or Variance Anal#sis ( general model is used to perform variance analysis for all variable manufacturing costs. "he variances are called by different names, however. (ctual Cost (' (/
#*lexible$ +udget at the (ctual nput evel (' S/
0. price variance . rate variance 1-2 spending variance
AQ -AP SP/
#*lexible$ +udget at th (ctual -utput evel S' S/
0. quantity or usage variance . efficiency variance 1-2 efficiency variance
SP -AQ SQ/
S' is the standardQuantity quant ity of input allowed act ual outpu t, i.e., AQ Actual SP for Standard Price S' 3 actual output standard requirment per unit
AP Actual Price
SQ Standard Quantity
Exception to the General Frameor! "or $irect %aterials
(' . (/
(' . S/ (' . S/
S' . S/
/rice variance
Caculated when purchased (' is the quantity purchased
'uantity variance
C a c u la te d p e r io d ic a lly ( ' is th e q u a n tity u s e d
%aterial Variances Example • 2anson nc. has the following direct material standard to manufacture one 4ippy) 5.6 pounds per 4ippy at 78.99 per pound
• ast wee! 5,:99 pounds of material were purchased and used to ma!e 5,999 4ippies. "he material cost a total of 7;,;<9.
%aterial Variances Example
AQ x AP
AQ x SP
SQ 1 SP
1,700 lbs. × $3.0 per lb.
1,700 lbs. × $!.00 per lb.
1,500 lbs. × $!.00 per lb.
" $#,#30
" $ #,00
" $#,000
%rice &ariance $170 fa&orable
'uantit( &ariance $00 unfa&orable
%aterial Variances
Hanson purc&ased and used #2+00 pounds. Ho are t&e *ariances computed i( t&e amount purc&ased di((ers (rom t&e amount used4
,&e price *ariance is computed on t&e entire 5uantity purc&ased. ,&e 5uantity *ariance is computed only on t&e 5uantity used.
%aterial Variances Example • 2anson nc. has the following material standard to manufacture one 4ippy) 5.6 pounds per 4ippy at 78.99 per pound
• ast wee! =,>99 pounds of material were purchased at a total cost of 759,?=9, and 5,:99 pounds were used to ma!e 5,999 4ippies.
%aterial Variances Example AQ x AP ),00 lbs. × $3.0 per lb.
AQ x SP ),00 lbs. × $!.00 per lb.
" $10,)0
" $11,)00
%rice &ariance $)0 fa&orable
%rice &ariance increased because *uantit( purchased increased.
%aterial Variances Example AQ x SP
SQ x SP
1,700 lbs. × $!.00 per lb.
1,500 lbs. × $!.00 per lb.
" $#,00
" $#,000
'uantit( &ariance is unchanged because actual and standard *uantities are unchanged.
'uantit( &ariance $00 unfa&orable
$% &rice Variance – &ossible 'easons • 'uality of material • 'uantity discount • Unexpected change in price #based on demand for and supply of material$ • @egotiation • 0ode of transportation • Change of vendors
$% ()antit# Variance – &ossible 'easons • 'uality of material • S!ill of labor • Condition of equipment • Employee morale • Supervision
Labor Variances Example + anson -nc. has the folloing direct labor standard to manufacture one /ipp(: #.% standard &ours per 6ippy at "7.00 per direct laor &our
+ ast eek 1,550 direct labor hours ere orked at a total labor cost of $,#10 to make 1,000 /ippies.
Labor Variances Example AQ x AP -AH x AR/
AQ x SP -AH x SR/
1,550 hours × $#.)0 per hour
1,550 hours × $#.00 per hour
" $,#10
" $,300
ate &ariance $310 unfa&orable
SQ x SP -SH x SR/
1,500 hours × $#.00 per hour " $,000
2fficienc( &ariance $300 unfa&orable
Labor 'ate Variance – &ossible 'easons • Unexpected rate change • Composition of labor
Labor E""icienc# Variance – &ossible 'easons • 'uality of material • S!ill of labor • Condition of equipment • Employee morale • Supervision • /roductivity change
Variable %an)"act)ring Overhead Variances Example + anson -nc. has the folloing &ariable manufacturing o&erhead standard to manufacture one /ipp(: #.% standard &ours per 6ippy at "3.00 per direct laor &our
+ ast eek 1,550 hours ere orked to make 1,000 /ippies, and $5,115 as spent for &ariable manufacturing o&erhead.
Variable %an)"act)ring Overhead Variances Example AQ x AP -AH x AR/
AQ x SP -AH 1 SR/
1,550 hours × $3.30 per hour
1,550 hours × $3.00 per hour
" $5,115
" $!,#50
pending &ariance $!#5 unfa&orable
SQ 1 SP -SH 1 SR/
1,500 hours × $3.00 per hour " $!,500
2fficienc( &ariance $150 unfa&orable
Criteria "or Variance *nvestigation • Significance #in A, 7, or in statistical term$ BB investigate significant variances • /ersistence BB investigate a variance that is continuously favorable or unfavorable • "he nature of the item BB always investigate the variance for cost items that affect future profitability • @onBcontrollability BB do not investigate the variance for cost items that are nonBcontrollable
$isposition o" Variances • f the net variance is insignificant, close variances to cost of goods sold #CS$. • f the net variance is significant, then) & /rorate the material price variance among direct materials, wor!BinBprocess #D/$, finishedB goods #*$ inventory, and CS, based on their ending balances. & /rorate all other variances among D/, * inventory, and CS, based on their ending balances.
Advantages+$isadvantages o" Standard Costing • Standard costing ma!es the concept of management by exception possible. • t facilitates cash and inventory planning. • f standards are set practically, standard costing promotes economy and efficiency, i.e., it is a source of motivation. • Standard costing can assist in implementing responsibility accounting. • +y focusing on material variances, trends may not be noticed at an early stage. • mproper use of standard costs #e.g., emphasis on negative$ can lead to behavioral problems.
,he Balanced Scorecard 8ana)ement 8ana)ement translates translates its its strate)y strate)y into into per(ormance per(ormance measures measures t&at t&at employees employees understand understand and and accept. accept. Customers
9inancial
Per(ormance measures Internal usiness processes
:earnin) and )rot&
,he Balanced Scorecard o do e look to the oners4
-n hich internal business processes must e ecel4
o can e continuall( learn, gro, and impro&e4
o do e look to customers4
,he Balanced Scorecard earning impro&es business processes.
-mpro&ed business processes impro&e customer satisfaction.
-mpro&ing customer satisfaction impro&es financial results.
