Standard Costs and the Balanced Scorecard.ppt
Transcript of 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.
%aterial Variances Example
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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.
%aterial Variances Example
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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$00 unfa&orable
'uantit( &ariance isunchanged becauseactual and standard
*uantities are unchanged.
%aterial Variances Example
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$% &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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,he Balanced Scorecard
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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,he Balanced Scorecard
earning impro&esbusiness processes.
-mpro&ed businessprocesses impro&e
customer satisfaction.
-mpro&ing customersatisfaction impro&es
financial results.
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