Standard Costs and
Operating Performance
Measures
Chapter
Standard Costs
Benchmarks for
measuring performance. The expected level
of performance. Based on carefully
predetermined amounts.
Used for planning labor, material and overhead requirements.
Standard Costs
Direct Material
Managers focus on quantities and costs that exceed standards, a practice known as
management by exception.
Type of Product Cost
Accountants, engineers, personnel administrators, and
production managers combine efforts to set standards
based on experience and expectations.
Setting Standard Costs
Should we use practical standards or ideal standards?
Setting Standard Costs
Practical standardsshould be set at levels that are currently
attainable with reasonable and
Setting Standard Costs
I agree. Ideal standards, that are based on
perfection, are unattainable and
discourage most employees.
Setting Direct Material Standards
Quantity
Standards
Use product
design specifications.
Price
Standards
Final, delivered cost of materials,
Setting Direct Labor Standards
Rate
Standards
Use wage surveys and labor contracts.
Time
Standards
Setting Variable Overhead
Standards
Rate
Standards
The rate is the
variable portion of the predetermined overhead
rate.
Activity
Standards
The activity is the
base used to calculate the predetermined
Standard Cost Card – Variable
Production Cost
A standard cost card for one unit of product
might look like this:
A A x B
Standard Standard Standard
Quantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. $ 4.00 per lb. $ 12.00 Direct labor 2.5 hours 14.00 per hour 35.00 Variable mfg. overhead 2.5 hours 3.00 per hour 7.50 Total standard unit cost $ 54.50
Are standards the same as budgets?
A standard is the expected cost for one
unit.
A budget is the expected cost for all
Standard Cost Variances
This variance is unfavorable
because the actual cost exceeds the standard cost. A standard cost variance is the amount by which
Standard Cost Variances
I see that there is an unfavorable
variance. But why are
variances
important to me?
First, they point to causes of problems and directions
for improvement. Second, they trigger
investigations in departments having responsibility
Standard Cost Variances
Price Variance
The difference between the actual price and the
Standard Cost Variances
Quantity Variance
A General Model for Variance
Analysis
Actual Quantity Actual Quantity Standard Quantity × × ×
Actual Price Standard Price Standard Price
Price Variance
Quantity Variance
Price Variance
Quantity Variance
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
A General Model for Variance
Analysis
A General Model for Variance
Analysis
AQ(AP - SP) SP(AQ - SQ)
AQ
= Actual Quantity
SP
= Standard Price
AP
= Actual Price
SQ
= Standard Quantity
Price Variance
Quantity Variance
Actual Quantity Actual Quantity Standard Quantity
× × ×
Standard Costs
Let’s use the
general model to
calculate standard
cost variances,
starting with
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.
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.
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.
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.
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.
Hanson’s material price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Hanson’s material price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Hanson’s material price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
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
The standard quantity of material that
should 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.
The
standard quantity
of material that
The standard quantity of material that
should 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.
The
standard quantity
of material that
Hanson’s material quantity variance (MQV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Hanson’s material quantity variance (MQV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Hanson’s material quantity variance (MQV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Hanson’s material quantity variance (MQV)
for the week was:
a. $170 unfavorable.
MQV = $800 unfavorable1,700 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
Price variance Quantity variance
Actual Quantity Actual Quantity Standard Quantity × × ×
Actual Price Standard Price Standard Price
Material Variances
Hanson purchased and used 1,700 pounds. How are the variances computed if the amount
purchased differs from the amount used?
The price variance is computed on the entire
quantity purchased. The quantity variance is
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.
Actual Quantity Actual Quantity
Price variance increases because quantity
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
Quantity variance Quantity variance is
unchanged because
Isolation of Material Variances
I need the price variance sooner so that I can better identify purchasing problems.
You accountants just don’t understand the problems that
purchasing managers have.
I’ll start computing the price variance
when material is purchased rather than
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.
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
Standard Costs
Now let’s calculate
standard cost
variances for
Hanson Inc. has the following direct labor
standard to manufacture one Zippy:
1.5 standard hours per Zippy at $6.00 per
direct labor hour
Last week 1,550 direct labor hours were
worked at a total labor cost of $9,610 to
make 1,000 Zippies.
What was Hanson’s actual rate (AR)
for labor for the week?
a. $6.20 per hour.
b. $6.00 per hour.
c. $5.80 per hour.
d. $5.60 per hour.
What was Hanson’s actual rate (AR)
for labor for the week?
a. $6.20 per hour.
b. $6.00 per hour.
c. $5.80 per hour.
d. $5.60 per hour.
What was Hanson’s actual rate (AR)
for labor for the week?
a. $6.20 per hour.
b. $6.00 per hour.
c. $5.80 per hour.
d. $5.60 per hour.
What was Hanson’s actual rate (AR)
for labor for the week?
Hanson’s labor rate variance (LRV) for
the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Hanson’s labor rate variance (LRV) for
the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Hanson’s labor rate variance (LRV) for
Hanson’s labor rate variance (LRV) for
the week was:
LRV = $310 unfavorableThe standard hours (SH) of labor that
should have been worked to produce
1,000 Zippies is:
The standard hours (SH) of labor that
should have been worked to produce
1,000 Zippies is:
Hanson’s labor efficiency variance (LEV)
for the week was:
a. $290 unfavorable.
b. $290 favorable.
c. $300 unfavorable.
d. $300 favorable.
Hanson’s labor efficiency variance (LEV)
for the week was:
a. $290 unfavorable.
b. $290 favorable.
c. $300 unfavorable.
d. $300 favorable.
Hanson’s labor efficiency variance (LEV)
for the week was:
a. $290 unfavorable.
b. $290 favorable.
c. $300 unfavorable.
d. $300 favorable.
Hanson’s labor efficiency variance (LEV)
for the week was:
Actual Hours Actual Hours Standard Hours × × ×
Actual Rate Standard Rate Standard Rate
Labor Variances Summary
Rate variance $310 unfavorable
Efficiency variance $300 unfavorable
1,550 hours 1,550 hours 1,500 hours × × ×
$6.20 per hour $6.00 per hour $6.00 per hour
= $9,610 = $9,300 = $9,000
Labor Rate Variance –
A Closer Look
High skill, high rate
Low skill, low rate
Using highly paid skilled workers to perform unskilled tasks results in an
unfavorable rate variance.
Production managers who make work assignments
are generally responsible for rate variances.
Responsibility for Labor Variances
I am not responsible for the unfavorable labor
efficiency variance! You purchased cheap material, so it took more
time to process it.
You used too much time because of poorly
Responsibility for Labor Variances
Maybe I can attribute the labor and material variances to personnel
Standard Costs
Now let’s calculate
standard cost
variances for the
last of the variable
production costs –
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.
Variable Manufacturing
Hanson’s spending variance (SV) for
variable manufacturing overhead for
the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
Hanson’s spending variance (SV) for
variable manufacturing overhead for
the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
Hanson’s spending variance (SV) for
variable manufacturing overhead for
the week was:
SV = $465 unfavorableHanson’s efficiency variance (EV) for
variable manufacturing overhead for the
week was:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.
Hanson’s efficiency variance (EV) for
Hanson’s efficiency variance (EV) for
variable manufacturing overhead for the
week was:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.
Hanson’s efficiency variance (EV) for
variable manufacturing overhead for the
week was:
1,000 units × 1.5 hrs per unit
Spending variance Efficiency variance
1,550 hours 1,550 hours 1,500 hours × × ×
$3.30 per hour $3.00 per hour $3.00 per hour
= $5,115 = $4,650 = $4,500
Actual Hours Actual Hours Standard Hours × × ×
Actual Rate Standard Rate Standard Rate
Variable Manufacturing
Variable Manufacturing Overhead
Variances – A Closer Look
If variable overhead is applied on the basis
of direct labor hours, the labor efficiency
and variable overhead efficiency variances
will move in tandem.
If variable overhead is applied on the basis
of direct labor hours, the labor efficiency
and variable overhead efficiency variances
Larger variances, in dollar amount or as
a percentage of the standard, are
Variance Analysis and Management
by Exception
How do I know which variances to
Advantages of Standard Costs
Management by exception
Improved cost control and performance
evaluation
Better Information for planning and decision making Possible reductions
in production costs
The Balanced Scorecard
Management translates its strategy into
performance measures that employees
understand and accept.
Management translates its strategy into
performance measures that employees
The Balanced Scorecard
How do we look to the owners?
How can we continually learn, grow, and improve? In which internal
business processes must we excel?
The Balanced Scorecard
Learning improves business processes.
Improved business processes improve customer satisfaction.
Delivery Performance Measures
Wait Time Process Time + Inspection Time+ Move Time + Queue Time
Order
Received ProductionStarted ShippedGoods
Delivery Cycle Time
Delivery Performance Measures
Manufacturing
Cycle Value-added time
Manufacturing cycle time
=
Wait TimeThroughput Time
Process Time + Inspection Time + Move Time + Queue Time Order
Received ProductionStarted ShippedGoods
