ACC 202 Intro to Management Accounting Chapter 10: Standard Costs & The Balanced Scorecard obj 1 Learning Objectives how DM & DL standards are set and used. Compute DM price & quantity variances. Compute DL rate & efficiency variances. Understand 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. Cost (price) standards specify how much should be paid for each unit of the input. Standard Costs Deviations from standard deemed significant are brought to the attention of management, a practice known as management by exception. Amount Standard Direct Material Direct Labor Manufacturing Overhead Type of Product Cost Exh. 10-1 Variance Analysis Cycle Identify questions Receive explanations Take corrective actions Analyze variances Prepare standard cost performance report Conduct next period’s operations Begin Setting Standard Costs Accountants, engineers, purchasing agents, and production managers combine efforts to set standards that encourage efficient future production. Setting Direct Material Standards Price Standards Quantity Standards Final, delivered cost of materials, net of discounts. Summarized in a Bill of Materials. 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. 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. Standard Cost Card – Variable Production Cost A standard cost card for one unit of product might look like this: A Standard Quantity or Hours 3.0 lbs. 2.5 hours 2.5 hours B Standard Price or Rate AxB Standard Cost per Unit 12.00 35.00 7.50 54.50 Inputs Direct materials Direct labor Variable mfg. overhead Total standard unit cost $ 4.00 per lb. $ 14.00 per hour 3.00 per hour $ Standards vs. Budgets Are standards the same as budgets? A budget is set for total costs. A standard is a per unit cost. Standards are often used when preparing budgets. Price and Quantity Standards Price and and quantity standards are determined separately for two reasons: The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw material used. The buying and using activities occur at different times. Raw material purchases may be held in inventory for a period of time before being used in production. 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 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 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price Price Variance Quantity Variance A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price Price Variance Quantity Variance Actual quantity is the amount of direct materials, direct labor, and variable manufacturing overhead actually used. A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price Price Variance Quantity Variance Standard quantity is the standard quantity allowed for the actual output for the period. A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price Price Variance Quantity Variance Actual price is the amount actually paid for the for the input used. A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price Price Variance Quantity Variance Standard price is the amount that should have been paid for the input used. A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price Price Variance (AQ × AP) – (AQ × SP) AQ = Actual Quantity AP = Actual Price Quantity Variance (AQ × SP) – (SQ × SP) SP = Standard Price SQ = Standard Quantity Class Practice Responsibility for Material Variances Materials Quantity Variance Materials Price Variance Production Manager Purchasing Manager The standard price is used to compute the quantity variance so that the production manager is not held responsible for the purchasing manager’s performance. 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 Quality of training provided to employees. Variance Analysis and Management by Exception How do I know which variances to investigate? Larger variances, in dollar amount or as a percentage of the standard, are investigated first. Advantages of Standard Costs Management by exception Promotes economy and efficiency Advantages Simplified bookkeeping Enhances responsibility accounting Potential Problems with Standard Costs Emphasizing standards may exclude other important objectives. Potential Problems Favorable variances may be misinterpreted. Standard cost reports may not be timely. Emphasis on negative may impact morale. Continuous improvement may be more important than meeting standards. Invalid assumptions about the relationship between labor cost and output. The Balanced Scorecard Management translates its strategy into performance measures that employees understand and accept. Customers Financial Performance measures Internal business processes Learning and growth From Strategy to Performance Measures Performance Measures Financial Has our financial performance improved? Exh. 10-11 What are our financial goals? What customers do we want to serve and how are we going to win and retain them? What internal business processes are critical to providing value to customers? Customer Do customers recognize that we are delivering more value? Vision and Strategy Internal Business Processes Have we improved key business processes so that we can deliver more value to customers? Learning and Growth Are we maintaining our ability to change and improve? The Balanced Scorecard: Non-financial Measures The balanced scorecard relies on non-financial measures in addition to financial measures for two reasons: Financial measures are lag indicators that summarize the results of past actions. Non-financial measures are leading indicators of future financial performance. Top managers are ordinarily responsible for financial performance measures – not lower level managers. Non-financial measures are more likely to be understood and controlled by lower level managers. The Balanced Scorecard for Individuals The entire organization should have an overall balanced scorecard. Each individual should have a personal balanced scorecard. A personal scorecard should contain measures that can be influenced by the individual being evaluated and that support the measures in the overall balanced scorecard. 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. The Balanced Scorecard and Compensation Incentive compensation should be linked to balanced scorecard performance measures.