BAB 13 STANDARD AND PERFORMANCE MEASUREMENTS
Standard Costs and
Operating Performance
Measures
Chapter
(2)
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 are
(3)
Standard Costs
Direct Material
Managers focus on quantities and costs that exceed standards, a practice known as
management by exception.
Type of Product Cost
A
m
o
u
n
t
Direct
Labor ManufacturingOverhead
(4)
Accountants, engineers, personnel administrators, and
production managers combine efforts to set standards
based on experience and expectations.
(5)
Setting Standard Costs
Should we usepractical standards or ideal standards?
(6)
Setting Standard Costs
Practical standardsshould be set at levels that are currently
attainable with reasonable and
(7)
Setting Standard Costs
I agree. Ideal standards, that are based on
perfection, are unattainable and
discourage most employees.
(8)
Setting Direct Material Standards
Quantity
Standards
Use product
design specifications.
Price
Standards
Final, delivered cost of materials,
(9)
Setting Direct Labor Standards
Rate
Standards
Use wage surveys and labor contracts.
Time
Standards
Use time and motion studies for each labor operation.
(10)
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
(11)
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
(12)
Are standards the same as budgets?
A standard is the expected cost for one
unit.
A budget is the expected cost for all
units.
Standards vs. Budgets
(13)
Standard Cost Variances
P
ro
d
u
ct
C
o
s
t
Standard
This variance is unfavorable
because the actual cost exceeds the standard cost. A standard cost variance is the amount by which
(14)
Standard Cost Variances
I see that thereis 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
(15)
Variance Analysis Cycle
Prepare standard cost performance
report
Conduct next period’s operations Analyze
variances Identify questions
Receive explanations
Take
corrective actions
(16)
Standard Cost Variances
Price Variance
The difference between the actual price and the
Standard Cost Variances
Quantity Variance
The difference between the actual quantity and
(17)
A General Model for Variance
Analysis
Actual Quantity Actual Quantity Standard Quantity × × ×
Actual Price Standard Price Standard Price
Price Variance
Quantity Variance
Standard price
is the amount that should
have been paid for the resources acquired.
(18)
Price Variance
Quantity Variance
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
A General Model for Variance
Analysis
Standard quantity
is the quantity allowed for
the actual good output.
(19)
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
× × ×
(20)
Standard Costs
Let’s use the
general model to
calculate standard
cost variances,
starting with
(21)
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.
(22)
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.
(23)
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.
(24)
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.
(25)
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
(26)
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
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.
(27)
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
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.
SQ = 1,000 units × 1.5 lbs per unitSQ = 1,500 lbs
(28)
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.
(29)
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.
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable
(30)
1,700 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
(31)
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
computed only on the quantity used.
(32)
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.
(33)
Actual Quantity Actual Quantity
Purchased Purchased
× ×
Actual Price Standard Price
2,800 lbs. 2,800 lbs. × × $3.90 per lb. $4.00 per lb. = $10,920 = $11,200
Price variance $280 favorable
Price variance increases because quantity
(34)
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
(35)
Isolation of Material Variances
I need the price variancesooner 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
(36)
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
(37)
Standard Costs
Now let’s calculate
standard cost
variances for
(38)
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.
(39)
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.
(40)
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.
Labor Variances
AR = $9,610 ÷ 1,550 hours AR = $6.20 per hour
(41)
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.
(42)
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.
Labor Variances
LRV = AH(AR - SR)
LRV = 1,550 hrs($6.20 - $6.00) LRV = $310 unfavorable
(43)
The standard hours (SH) of labor that
should have been worked to produce
1,000 Zippies is:
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.
The
standard hours
(SH) of labor that
should have been worked to produce
1,000 Zippies is:
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.
(44)
The standard hours (SH) of labor that
should have been worked to produce
1,000 Zippies is:
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.
The
standard hours
(SH) of labor that
should have been worked to produce
1,000 Zippies is:
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.
Labor Variances
SH = 1,000 units × 1.5 hours per unit
(45)
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.
(46)
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.
Labor Variances
LEV = SR(AH - SH)
(47)
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
(48)
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.
Production managers who make work assignments
are generally responsible for rate variances.
(49)
Labor Efficiency Variance –
A Closer Look
Unfavorable
Efficiency
Variance
Poorly
trained
workers
Poor
quality
materials
Poorly
maintained
equipment
Poor
supervision
of workers
(50)
Responsibility for Labor Variances
I am not responsible forthe unfavorable labor efficiency variance! You purchased cheap material, so it took more
time to process it.
You used too much time because of poorly
trained workers and poor supervision.
(51)
Responsibility for Labor Variances
Maybe I can attribute the laborand material variances to personnel for hiring the wrong people
(52)
Standard Costs
Now let’s calculate
standard cost
variances for the
last of the variable
production costs –
(53)
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
(54)
What was Hanson’s actual rate (AR) for
variable manufacturing overhead rate
for the week?
a. $3.00 per hour.
b. $3.19 per hour.
c. $3.30 per hour.
d. $4.50 per hour.
What was Hanson’s actual rate (AR) for
variable manufacturing overhead rate
for the week?
a. $3.00 per hour.
b. $3.19 per hour.
c. $3.30 per hour.
d. $4.50 per hour.
Variable Manufacturing
(55)
What was Hanson’s actual rate (AR) for
variable manufacturing overhead rate
for the week?
a. $3.00 per hour.
b. $3.19 per hour.
c. $3.30 per hour.
d. $4.50 per hour.
What was Hanson’s actual rate (AR) for
variable manufacturing overhead rate
for the week?
a. $3.00 per hour.
b. $3.19 per hour.
c. $3.30 per hour.
d. $4.50 per hour.
Variable Manufacturing
Overhead Variances
AR = $5,115 ÷ 1,550 hours AR = $3.30 per hour
(56)
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.
Variable Manufacturing
(57)
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.
Variable Manufacturing
Overhead Variances
SV = AH(AR - SR)
SV = 1,550 hrs($3.30 - $3.00) SV = $465 unfavorable
(58)
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:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.
Variable Manufacturing
(59)
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:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.
Variable Manufacturing
Overhead Variances
EV = SR(AH - SH)
EV = $3.00(1,550 hrs - 1,500 hrs)
1,000 units × 1.5 hrs per unit
(60)
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
(61)
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
(62)
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
(63)
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
(64)
Potential
Problems
Emphasis on negative may impact morale.
Emphasizing standards may exclude other
Favorable variances may be misinterpreted.
Continuous improvement
may be more important than meeting standards.
Standard cost reports may not be timely.
Labor quantity standards and efficiency variances
(65)
The Balanced Scorecard
Management translates its strategy into
performance measures that employees
understand and accept.
Management translates its strategy into
performance measures that employees
understand and accept.
Performance
measures
Financial Customers
Learning and growth Internal
(66)
The Balanced Scorecard
How do we lookto the owners?
How can we continually learn, grow, and improve? In which internal
business processes must we excel?
(67)
The Balanced Scorecard
Learning improves business processes.
Improved business processes improve customer satisfaction.
Improving customer satisfaction improves
(68)
Delivery Performance Measures
Wait Time Process Time + Inspection Time+ Move Time + Queue Time
Order
Received ProductionStarted ShippedGoods
Delivery Cycle Time
(69)
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
(70)
(1)
The Balanced Scorecard
Management translates its strategy into
performance measures that employees
understand and accept.
Management translates its strategy into
performance measures that employees
understand and accept.
Performance
measures
Financial
Customers
Learning
and growth
Internal
business
(2)
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?
How do we look
to customers?
(3)
The Balanced Scorecard
Learning improves
business processes.
Improved business
processes improve
customer satisfaction.
Improving customer
satisfaction improves
(4)
Process time is the only value-added time.
Delivery Performance Measures
Wait Time
Process Time + Inspection Time
+ Move Time + Queue Time
Order
Received
Production
Started
Shipped
Goods
Delivery Cycle Time
(5)
Delivery Performance Measures
Manufacturing
Cycle
Value-added time
Manufacturing cycle time
=
Wait Time
Throughput Time
Process Time + Inspection Time
+ Move Time + Queue Time
Order
Received
Production
Started
Shipped
Goods
(6)