standard costs and the balanced scorecard.ppt

7/25/2019 Standard Costs and the Balanced Scorecard.ppt

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Standard Costs and the

Balanced Scorecard


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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.


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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 forplanning 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 #variances$.


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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.


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Standard Cost Card An Example

A standard cost card for one unit of productmight look like this:

A A x B

Standard Standard Standard

Quantity Price Cost

Inputs or Hours or Rate per Unit

Direct materials 3.0 ls. !.00" per l. #$.00"

Direct laor $.% &ours #!.00 per &our 3%.00

'ariale m(). o*er&ead $.% &ours 3.00 per &our +.%0

,otal standard unit cost %!.%0"

B


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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 andinvestigated) quantity and price.


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General Frameor! "or Variance

Anal#sis

(ctual Cost #*lexible$ +udget at the #*lexible$ +udget at th(ctual nput evel (ctual -utput evel

(' (/ (' S/ S' S/

0. price variance. rate variance

1-2 spending variance

0. quantity or usage variance

. efficiency variance1-2 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 model is used to perform variance analysis

for all variable manufacturing costs. "he variances are

called by different names, however.


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General Frameor! "or Variance

Anal#sis

(ctual Cost #*lexible$ +udget at the #*lexible$ +udget at th(ctual nput evel (ctual -utput evel

(' (/ (' S/ S' S/

0. price variance. rate variance

1-2 spending variance

0. quantity or usage variance

. efficiency variance1-2 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 model is used to perform variance analysis

for all variable manufacturing costs. "he variances are

called by different names, however.

AQ -AP SP/ SP -AQ SQ/

AQ Actual Quantity SP Standard Price

AP Actual Price SQ Standard Quantity


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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 l a t e d p e r i o d i c a l l y( ' i s t h e q u a n t i t y u s e d


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2anson nc. has the following direct material standard tomanufacture one 4ippy)

5.6 pounds per 4ippy at 78.99 per pound

ast wee! 5,:99 pounds of material were purchased andused to ma!e 5,999 4ippies. "he material cost a total of7;,;


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1,700 lbs. 1,700 lbs. 1,500 lbs. $3.0 per lb. $!.00 per lb. $!.00 per lb.

"$#,#30 " $ #,00 " $#,000

%rice &ariance$170 fa&orable

'uantit( &ariance$00 unfa&orable

AQ x AP AQ x SP SQ 1 SP

%aterial Variances Example


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%aterial Variances

Hanson purc&ased andused #2+00 pounds.

Ho are t&e *ariancescomputed i( t&e amountpurc&aseddi((ers(rom

t&e amount used4

,&e price *ariance iscomputed on t&e entire

5uantitypurc&ased.

,&e 5uantity *ariance iscomputed only on t&e

5uantityused.


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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.



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AQ x AP AQ x SP

),00 lbs. ),00 lbs.

$3.0 per lb. $!.00 per lb.

" $10,)0 " $11,)00

%rice &ariance$)0 fa&orable

%rice &ariance increasedbecause *uantit(

purchasedincreased.



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AQ x SP SQ x SP

1,700 lbs. 1,500 lbs.

$!.00 per lb. $!.00 per lb.

" $#,00 " $#,000

'uantit( &ariance$00 unfa&orable

'uantit( &ariance isunchanged becauseactual and standard

*uantities are unchanged.



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$% &rice Variance &ossible 'easons

'uality of material

'uantity discount

Unexpected change in price #based on demand forand supply of material$

@egotiation

0ode of transportation Change of vendors


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$% ()antit# Variance &ossible

'easons 'uality of material

S!ill of labor

Condition of equipment Employee morale

Supervision


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+ anson -nc. has the folloing direct laborstandard to manufacture one /ipp(:

#.% standard &ours per 6ippy at "7.00 perdirect laor &our

+ ast eek 1,550 direct labor hours ere

orked at a total labor cost of $,#10 to make1,000 /ippies.

Labor Variances Example


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AQ x AP AQ x SP SQ x SP -AH x AR/ -AH x SR/ -SH x SR/

Labor Variances Example

ate &ariance$310 unfa&orable

2fficienc( &ariance$300 unfa&orable

1,550 hours 1,550 hours 1,500 hours $#.)0 per hour $#.00 per hour $#.00 per hour

" $,#10 " $,300 " $,000


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Labor 'ate Variance &ossible

'easons Unexpected rate change

Composition of labor


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Labor E""icienc# Variance &ossible

'easons 'uality of material

S!ill of labor

Condition of equipment Employee morale

Supervision

/roductivity change


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+ anson -nc. has the folloing &ariablemanufacturing o&erhead standard tomanufacture one /ipp(:

#.% standard &ours per 6ippy at "3.00 perdirect laor &our

+ ast eek 1,550 hours ere orked to make1,000 /ippies, and $5,115 as spent for&ariable manufacturing o&erhead.

Variable %an)"act)ring

Overhead Variances Example


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pending &ariance$!#5 unfa&orable

2fficienc( &ariance$150 unfa&orable

1,550 hours 1,550 hours 1,500 hours $3.30 per hour $3.00 per hour $3.00 per hour

" $5,115 " $!,#50 " $!,500

AQ x AP AQ x SP SQ 1 SP -AH x AR/ -AH 1 SR/ -SH 1 SR/

Variable %an)"act)ring

Overhead Variances Example


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Criteria "or Variance *nvestigation

Significance #in A, 7, or in statistical term$ BB

investigate significant variances

/ersistence BB investigate a variance that iscontinuously 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


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$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.


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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 promoteseconomy and efficiency, i.e., it is a source of motivation.

Standard costing can assist in implementing responsibilityaccounting.

+y focusing on material variances, trends may not benoticed at an early stage.

mproper use of standard costs #e.g., emphasis on negative$can lead to behavioral problems.


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,he Balanced Scorecard

8ana)ement translates its strate)y intoper(ormance measures t&at employees

understand and accept.

8ana)ement translates its strate)y intoper(ormance measures t&at employees

understand and accept.

Per(ormancemeasures

9inancial Customers

:earnin)and )rot&

Internalusiness

processes


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o do e lookto the oners4

o can econtinuall( learn,

gro, and impro&e4

-n hich internalbusiness processes

must e ecel4

o do e lookto customers4


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earning impro&esbusiness processes.

-mpro&ed businessprocesses impro&e

customer satisfaction.

-mpro&ing customersatisfaction impro&es

financial results.


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standard costs and the balanced scorecard.ppt

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