Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Garrison 15e/Week 11_12...

Standard Costs and

Operating Performance

Measures

Chapter 10

Total Price/Cost VarianceActual Activity x( Actual Price/Cost- Planned Price/Cost)

Note: Price/cost is per unit of activity

Total Activity VariancePlanned Price/Cost(Actual activity – Planned Activity)

Note: Planned Price/Cost is per unit of activity

Actual Activity Actual Activity Planned Activity× × ×

Actual Price/Cost Planned Price/cost Planned Price/cost

Overview: A General Model for Actual Results Variance Analysis

Master/Static BudgetActual Results Flexible Budget

Standard Costs per unit of

ActivityStandards are benchmarks or “norms” for

measuring performance. In managerial accounting,

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.

Price standards

specify how much

should be paid for

each unit of the

input.

Examples: Proctor & Gamble, General Mills, Ford, Chipolte, McDonald’s,

hospitals, construction and manufacturing companies.

Standard Costs

DirectMaterial

Deviations from standards deemed significant

are brought to the attention of management, a

practice known as management by exception.

Type of Product Cost

Am

ou

nt

DirectLabor

ManufacturingOverhead

Standard

Overview: Actual Results Cost Variance Analysis

Actual Activity Actual Activity

× ×Actual Cost Planned Cost

Actual Results Flexible Budget

Total Cost VarianceTotal Actual Activity x( Actual cost/unit – Planned cost/unit)

Note: Cost is per unit of activity

Cost/Rate Variance Usage/Activity Variance

Actual Qty/unit Actual Qty/unit Standard Qty/unit× × ×

Actual cost/rate Standard cost/rate Standard cost/rate

Divider FlexibleActual Results

Actual Activity Actual Activity Actual Activity

Variance Analysis Cycle

Prepare standard

cost performance

report

Analyze

variances

Begin

Identify

questions

Receive

explanations

Take

corrective

actions

Conduct next

period’s

operations

Setting Standard CostsAccountants, engineers, purchasing

agents, and production managers

combine efforts to set standards that encourage

efficient future operations.

Setting Standard Costs

Engineer

Should we use

ideal standards that

require employees to

work at 100 percent

peak efficiency?

Managerial Accountant

I recommend using practical

standards that are currently

attainable with reasonable

and efficient effort.

How direct materials

standards and direct labor

standards are set.

Setting Direct Material

Standards

Price

Standards

Summarized in

a Bill of Materials.

Final, delivered

cost of materials,

net of discounts.

Quantity

Standards

Setting Direct Labor

Standards

Rate

Standards

Often a single

rate is used that reflects

the mix of wages earned.

Time

Standards

Use time and

motion studies for

each labor operation.

Setting Variable

Manufacturing Overhead

Standards Rate

Standards

The rate is the

variable portion of the

predetermined overhead

rate.

Quantity

Standards

The quantity is

the activity in the

allocation base for

predetermined overhead.

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$

B

Price and Quantity Standards

Price 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

Difference between

actual price and

standard price

Quantity Variance

Difference between

actual quantity and

standard quantity

Variance Analysis

•Materials price variance

•Labor rate variance

•VOH rate variance

•Materials quantity variance

•Labor efficiency variance

•VOH efficiency variance


Cost(price/rate)

Variance

Quantity/activity

Variance

Cost(Price)

Variance

Quantity Variance

Actual Quantity Actual Quantity Standard Quantity× × ×

Actual Cost Standard Cost Standard Cost


Cost(price)

Variance

Quantity Variance

Actual Quantity Actual Quantity Standard Quantityx × ×

Actual Cost Standard Cost Standard Price


Actual quantity is the amount of direct

materials, direct labor, and variable

manufacturing overhead actually used.

Cost(price)

Variance

Quantity Variance




Standard quantity is the standard quantity

allowed for the actual output of the period.

Cost(price)

Variance

Quantity Variance




Actual Cost(price) is the amount actually

paid for the input used.


Standard price is the amount that should

have been paid for the input used.

Cost(price)

Variance

Quantity Variance




(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)

AQ = Actual Quantity SP = Standard Price

AP = Actual Price SQ = Standard Quantity

Rate/Price Variance Usage/Quantity Variance


Actual Price Standard Price Standard Price

PV = AQ (AP - SP) QV = SP (AQ - SQ)

Compute the direct

materials price and

quantity variances and

explain their significance.

Material Variances – An Example

Glacier Peak Outfitters has the following direct

material standard for the fiberfill in its mountain

parka.

0.1 kg. of fiberfill per parka at $5.00 per kg.

Last month 210 kgs. of fiberfill were purchased and

used to make 2,000 parkas. The material cost a

total of $1,029 @ $4.90/kgs

210 kgs. 210 kgs. 200 kgs.

× × ×$4.90 per kg. $5.00 per kg. $5.00 per kg.

= $1,029 = $1,050 = $1,000

Price variance

$21 favorable

Quantity variance

$50 unfavorable



Material Variances Summary

210 kgs. 210 kgs. 200 kgs.


= $1,029 = $1,050 = $1,000

Price variance

$21 favorable

Quantity variance

$50 unfavorable



$1,029 210 kgs

= $4.90 per kg


210 kgs. 210 kgs. 200 kgs.


= $1,029 = $1,050 = $1,000

Price variance

$21 favorable

Quantity variance

$50 unfavorable



0.1 kg per parka 2,000 parkas

= 200 kgs


Material Variances:Using the Factored Equations

Materials price variance

MPV = AQ (AP - SP)

= 210 kgs ($4.90/kg - $5.00/kg)

= 210 kgs (-$0.10/kg)

= $21 F

Materials quantity variance

MQV = SP (AQ - SQ)

= $5.00/kg (210 kgs-(0.1 kg/parka 2,000 parkas))

= $5.00/kg (210 kgs - 200 kgs)

= $5.00/kg (10 kgs)

= $50 U

Isolation of Material Variances

I need the price variancesooner so that I can better

identify purchasing problems.

You accountants just don’tunderstand the problems thatpurchasing managers have.

I’ll start computing

the price variance

when material is

purchased rather

than when it’s used.

Material Variances

A Business 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 computed only on

the quantity used.

Materials Price VarianceMaterials Quantity 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 Material Variances

I am not responsible forthis unfavorable material

quantity variance.

You purchased cheapmaterial, so my peoplehad to use more of it.

Your poor scheduling sometimes requires me to

rush order material at a higher price, causing

unfavorable price variances.

Responsibility for Material Variances

Material Variances – An Example

Glacier Peak Outfitters has the following direct

material standard for the fiberfill in its mountain

parka.

0.1 kg. of fiberfill per parka at $5.00 per kg.

Last month 300 kg. of fiberfill were purchased at

$1,470. 210kg was used to make 2,000 parkas.

Actual Quantity Actual QuantityPurchased Purchased× ×

Actual Price Standard Price

300kg. 300kg.

× ×$4.90 per kg. $5.00 per kg.

= $1,470 = $1,500

Price variance

$30 favorable

Price variance increases

because quantity

purchased increases.

Quick Check Continued

Actual QuantityUsed Standard Quantity × ×

Standard Price Standard Price

210 kg. 200 kg.

× ×$5.00 per kg. $5.00 per kg.

= $1,050 = $1,000

Quantity variance

$50 unfavorable

Quantity variance is

unchanged because

actual and standard

quantities are unchanged.

Quick Check Continued

Compute the direct labor

rate and efficiency

variances and explain

their significance.

Labor Variances – An Example

Glacier Peak Outfitters has the following direct labor

standard for its mountain parka.

$12 standard cost per parka, for 1900 parkas

Last month, employees actually worked 2,500 hours

at a total labor cost of $13.125 to make 2,000

parkas.

Rate variance

$2,250 unfavorable

Usage variance

$1200 unfavorable

Actual Units Actual Units Standard Units × × ×

Actual Rate Standard Rate Standard Rate

Labor Variances Summary

2,000 parkas 2,000 parkas 1,900 parkas

× × ×$13.125 per Parka $12.00 per Parka $12.00 per Parka

= $26,250 = $24,000 = $22,800

Labor Variances – An Example

Glacier Peak Outfitters has the following direct labor

standard for its mountain parka.

1.2 standard hours per parka at $10.00 per hour =

$12/parka

Last month, employees actually worked 2,500 hours

at a total labor cost of $26,250 to make 2,000

parkas.

Rate variance

$1,250 unfavorable

Efficiency variance

$1,000 unfavorable

Actual Hours Actual Hours Standard Hours× × ×



2,500 hours 2,500 hours 2,400 hours

× × ×$10.50 per hour $10.00 per hour. $10.00 per hour

= $26,250 = $25,000 = $24,000




= $26,250 = $25,000 = $24,000



$26,250 2,500 hours

= $10.50 per hour

Rate variance

$1,250 unfavorable

Efficiency variance

$1,000 unfavorable




= $26,250 = $25,000 = $24,000



1.2 hours per parka 2,000

parkas = 2,400 hours

Rate variance

$1,250 unfavorable

Efficiency variance

$1,000 unfavorable

Labor Variances:Using the Factored Equations

Labor rate variance

LRV = AH (AR - SR)

= 2,500 hours ($10.50 per hour – $10.00 per hour)

= 2,500 hours ($0.50 per hour)

= $1,250 unfavorable

Labor efficiency variance

LEV = SR (AH - SH)

= $10.00 per hour (2,500 hours – 2,400 hours)

= $10.00 per hour (100 hours)

= $1,000 unfavorable

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.

Quality of training

provided to employees.

I am not responsible forthe unfavorable laborefficiency variance!

You purchased cheapmaterial, so it took more

time to process it.

I think it took more time to process the

materials because the Maintenance

Department has poorly maintained your

equipment.

Responsibility for Labor

Variances

Compute the variable

manufacturing overhead

rate and efficiency

variances.









Variable Manufacturing Overhead Variances – An

ExampleGlacier Peak Outfitters has the following direct variable manufacturing overhead labor standard for its mountain

parka.

1.2 standard hours per parka at $4.00 per hour

Last month, employees actually worked 2,500 hours to make 2,000 parkas. Actual variable manufacturing overhead for

the month was $10,500.


× × ×$4.20 per hour $4.00 per hour $4.00 per hour

= $10,500 = $10,000 = $9,600

Rate variance

$500 unfavorable

Efficiency variance

$400 unfavorable



Variable Manufacturing Overhead Variances

Summary





= $10,500 = $10,000 = $9,600

Rate variance

$500 unfavorable

Efficiency variance

$400 unfavorable

$10,500 2,500 hours

= $4.20 per hour


Summary





= $10,500 = $10,000 = $9,600

Rate variance

$500 unfavorable

Efficiency variance

$400 unfavorable

1.2 hours per parka 2,000

parkas = 2,400 hours


Summary

Variable Manufacturing Overhead Variances: Using

Factored EquationsVariable manufacturing overhead rate variance

VMRV = AH (AR - SR)

= 2,500 hours ($4.20 per hour – $4.00 per hour)

= 2,500 hours ($0.20 per hour)

= $500 unfavorable

Variable manufacturing overhead efficiency variance

VMEV = SR (AH - SH)

= $4.00 per hour (2,500 hours – 2,400 hours)

= $4.00 per hour (100 hours)

= $400 unfavorable









Demonstration Case 3

Usage and Cost Variances

Variable Costs Per

Unit

Standard Actual

Direct Materials Cost $16.00 $16.34

Direct Labor Cost 12.00 10.92

Overhead Cost 14.00 14.20

Total $42.00 41.46

Expected Fixed Cost

Manufacturing $120,400 $114,000

# of Units 43,000 44,000

Demonstration Case

Material Usage and Cost Variances

Variable Costs Per

Unit

Standard Actual

Direct Materials Cost $16.00 $16.34

# board Feet/unit 8 ft 8.6 ft

Cost per bd foot $2 $1.90

Material Flexible-Budget Variances

Total flexible-budget variance

= Total actual results

– Total flexible-budget planned results

Flexible-budget variances

ActualResults

16.34 x 44,000$(718,960)

FlexibleBudget

16.00 x 44,000$(704,000)

$14,960 Unfavorable

Material Cost and

Volume Variances

Actual Quantity

Used

×Actual (fixed) Cost

Actual Quantity

Used

×Standard (fixed) Cost

Standard

Quantity


44,000

×8.6 ft

x

$1.90

$718,960

44,000

x

8.6 ft

x

$2/ ft

756,800

Cost Variance

$37,960 Favorable

44,000

x

8 ft

x

$2/ft

$704,000

Volume Variance

$52,800 Unfavorable

Total Variance

$14,960 UnFavorable

Actual Cost

Column

Variance Dividing

Column

Flexible Standard Cost

Column

Demonstration Case

Labor Usage and Cost

Variances

Variable Costs Per

Unit

Standard Actual

Direct Labor Cost $12.00 $10.92

# hours /unit 1.5 hr 1.4 hrs

Labor cost/hr $8.00 $7.80

Labor Flexible-Budget Variances





ActualResults

10.92 x 44,000$(480,480)

FlexibleBudget

12.00 x 44,000$(528,000)

$47,520 Favorable

Labor Cost and

Volume Variances

Actual Quantity

Used


Actual Quantity

Used


Standard

Quantity


×1.4 hr

x

$7.80

$480,480

44,000 44,000

x

1.4 hr

x

$ 8.00

492,800

Cost Variance

$12,320 Favorable

44,000

x

1.5 hr

x

$ 8.00

$528,000

Volume Variance

$35,200 Favorable

Total Variance

$47,520 Favorable

Actual Cost

Column

Variance Dividing

Column


Column

Demonstration Case

Variable MFG Overhead Usage and

Cost Variances

Variable Costs Per

Unit

Standard Actual

Overhead Cost $14.00 $14.20

Variable MFG Overhead Flexible-Budget

Variances





ActualResults

14.20 x 44,000$(624,000)

FlexibleBudget

14.00 x 44,000$(616,000)

$8,800 Unfavorable

Demonstration Case

Summary of Usage and Cost Variances

Variable Costs Per

Unit

Standard Actual Variance

Direct Materials Cost $16.00 $16.34 $14, 960 UF

Direct Labor Cost 12.00 10.92 $ 47,520 F

Overhead Cost 14.00 14.20 $ 8,800 UF

Total $42.00 41.46 $ 23,760 F

Expected Fixed Cost

Manufacturing $120,400 $114,000 $ 6,400 F

# of Units 43,000 44,000

Demonstration Case

Fixed Overhead Volume and

SpendingVariances

Variable Costs Per

Unit

Standard Actual

OVH Cost $120,400 $114,000

Cost/unit 2.80 2.59 (114,000/44,000=2.59)

Total Units 43,000 44,000

Fixed Overhead Flexible-

Budget Variances





ActualResults

2.59 x 44,000$(114,000) rnd

MasterBudget

2.80 x 43,000$(120,400)

$6,400 Favorable

Fixed Overhead Spending and

Volume Variances

Actual Quantity

Used


Standard Quantity

Used


Actual

Quantity


44,000

×2.59

114,000

43,000

x

2.80

120,400

Spending Variance

$6,400 Favorable

44,000

x

2.80

$123,200

Volume Variance

$2,800 Favorable

Actual Cost

Column

Master Budget Dividing

Column


Column

Total Variance

$9,200 Favorable

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.

A Statistical Control Chart

1 2 3 4 5 6 7 8 9

Variance Measurements

Favorable Limit

Unfavorable Limit

••

•• •

••

••

Warning signals for investigation

Desired Value

Advantages of Standard

Costs

Management by

exception

Advantages

Promotes economy

and efficiency

Simplified

bookkeeping

Enhances

responsibility

accounting

Potential

Problems

Emphasis onnegative may

impact morale.

Emphasizing standardsmay exclude other

important objectives.

Favorablevariances may

be misinterpreted.

Continuousimprovement maybe more important

than meeting standards.

Standard costreports may

not be timely.

Invalid assumptionsabout the relationship

between laborcost and output.

Potential Problems with

Standard Costs

Compute delivery cycle

time, throughput time, and

manufacturing cycle

efficiency (MCE).

Process time is the only value-added time.

Delivery Performance

Measures

Wait TimeProcess Time + Inspection Time

+ Move Time + Queue Time

Delivery Cycle Time

Order Received

ProductionStarted

Goods Shipped

Throughput Time

Manufacturing

Cycle

Efficiency

Value-added time

Manufacturing cycle time=

Wait TimeProcess Time + Inspection Time

+ Move Time + Queue Time

Delivery Cycle Time

Order Received

ProductionStarted

Goods Shipped

Throughput(Manufacturing Cycle) Time

Delivery Performance Measures

Quick Check A TQM team at Narton Corp has recorded the following

average times for production:

Wait 3.0 days Move 0.5 days

Inspection 0.4 days Queue 9.3 days

Process 0.2 days

What is the throughput time?

a. 10.4 days.

b. 0.2 days.

c. 4.1 days.

d. 13.4 days.





Process 0.2 days

What is the throughput time?

a. 10.4 days.

b. 0.2 days.

c. 4.1 days.

d. 13.4 days.

Throughput time = Process + Inspection + Move + Queue

= 0.2 days + 0.4 days + 0.5 days + 9.3 days

= 10.4 days





Process 0.2 days

What is the Manufacturing Cycle Efficiency (MCE)?

a. 50.0%.

b. 1.9%.

c. 52.0%.

d. 5.1%.





Process 0.2 days

What is the Manufacturing Cycle Efficiency (MCE)?

a. 50.0%.

b. 1.9%.

c. 52.0%.

d. 5.1%.

MCE = Value-added time ÷ Throughput time

= Process time ÷ Throughput time

= 0.2 days÷ 10.4 days

= 1.9%

Quick Check

A TQM team at Narton Corp has recorded the following




Process 0.2 days

What is the delivery cycle time (DCT)?

a. 0.5 days.

b. 0.7 days.

c. 13.4 days.

d. 10.4 days.





Process 0.2 days

What is the delivery cycle time (DCT)?

a. 0.5 days.

b. 0.7 days.

c. 13.4 days.

d. 10.4 days.DCT = Wait time + Throughput time

= 3.0 days + 10.4 days

= 13.4 days

Assignments:

See web: http//cabrillo.edu/~mbooth

This will be updated weekly

Note: Use McGrawHill CONNECT manager to submit assignments

http://www.cabrillo.edu/~mbooth/index_files/Related_links.htm

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