STANDARD COSTS AND OPERATING PERFORMANCE MEASURES Chapter 10 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reser McGraw-Hill/Irwin
STANDARD COSTS AND OPERATING PERFORMANCE MEASURES Chapter 10 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon.
Jan 12, 2016
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STANDARD COSTS AND
OPERATING PERFORMANCE
MEASURES
Chapter 10
PowerPoint Authors:Susan Coomer Galbreath, Ph.D.,
CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIA
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
10-22
Standard CostsStandard Costs
Standards are benchmarks or “norms” formeasuring performance. In managerial accounting,
two types of standards are commonly used.
Quantity standardsspecify how much of aninput should be used to
make a product orprovide a service.
Price standardsspecify how muchshould be paid foreach unit of the
input.
Examples: Firestone, Sears, McDonald’s, hospitals, construction and manufacturing companies.
10-33
Standard CostsStandard Costs
DirectMaterial
Deviations from standards deemed significantare brought to the attention of management, apractice known as management by exception.
Type of Product Cost
Am
ou
nt
DirectLabor
ManufacturingOverhead
Standard
10-44
Variance Analysis CycleVariance Analysis Cycle
Prepare standard Prepare standard cost performance cost performance
reportreport
Analyze variances
Begin
Identifyquestions
Receive explanations
Takecorrective
actions
Conduct next period’s
operations
10-5
Setting Standard CostsSetting Standard CostsShould we use
ideal standards that require employees towork at 100 percent
peak efficiency?
Engineer Managerial Accountant
I recommend using practical standards that are currently
attainable with reasonable and efficient effort.
10-6
Setting Direct Material Standards Setting Direct Material Standards
PriceStandards
Summarized in a Bill of Materials.
Final, deliveredcost of materials,net of discounts.
QuantityStandards
10-7
Setting Direct Labor Standards Setting Direct Labor Standards
RateStandards
Often a singlerate is used that reflectsthe mix of wages earned.
TimeStandards
Use time and motion studies for
each labor operation.
10-8
Setting Variable Manufacturing Setting Variable Manufacturing Overhead Standards Overhead Standards
RateStandards
The rate is the variable portion of the
predetermined overhead rate.
QuantityStandards
The quantity is the activity in the
allocation base for predetermined overhead.
10-99
Price and Quantity StandardsPrice 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 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.
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.
10-10
A General Model for Variance A General Model for Variance AnalysisAnalysis
Variance Analysis
Price Variance
Difference betweenDifference betweenactual price and actual price and standard pricestandard price
Quantity Variance
Difference betweenDifference betweenactual quantity andactual quantity andstandard quantitystandard quantity
10-1111
Variance Analysis
Materials price varianceLabor rate varianceVOH rate variance
Materials quantity varianceLabor efficiency varianceVOH efficiency variance
A General Model for Variance A General Model for Variance AnalysisAnalysis
Price Variance Quantity Variance
10-1212
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
A General Model for Variance A General Model for Variance AnalysisAnalysis
10-1313
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
A General Model for Variance A General Model for Variance AnalysisAnalysis
Actual quantity is the amount of direct materials, direct labor, and variable
manufacturing overhead actually used.
10-1414
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
A General Model for Variance A General Model for Variance Analysis Analysis
Standard quantity is the standard quantity allowed for the actual output of the period.
10-1515
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
A General Model for Variance A General Model for Variance Analysis Analysis
Actual price is the amount actuallypaid for the input used.
10-1616
A General Model for Variance A General Model for Variance Analysis Analysis
Standard price is the amount that should have been paid for the input used.
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
10-1717
A General Model for Variance A General Model for Variance Analysis Analysis
(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)
AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
10-1818
Responsibility for Material VariancesResponsibility for Material Variances
Materials Price VarianceMaterials Quantity Variance
Production Manager Purchasing Manager
The standard price is used to compute the quantity varianceso that the production manager is not held responsible for
the purchasing manager’s performance.
The standard price is used to compute the quantity varianceso that the production manager is not held responsible for
the purchasing manager’s performance.
10-19
Responsibility for Labor VariancesResponsibility for Labor Variances
Production Manager
Production managers areusually held accountable
for labor variancesbecause they can
influence the:
Mix of skill levelsassigned to work tasks.
Level of employee motivation.
Quality of production supervision.
Quality of training provided to employees.
10-20
Advantages of Standard CostsAdvantages of Standard Costs
Management byexception
Advantages
Promotes economy and efficiency
Simplifiedbookkeeping
Enhances responsibility
accounting
10-21
PotentialProblems
Emphasis onnegative may
impact morale.
Emphasizing standardsmay exclude other
important objectives.
Favorablevariances may
be misinterpreted.
Continuous improvement maybe more important
than meeting standards.
Standard costreports may
not be timely.
Invalid assumptionsabout the relationship
between laborcost and output.
Potential Potential ProblemsProblems with Standard with Standard CostsCosts
10-2222
Process time is the only value-added time.Process time is the only value-added time.
Delivery Performance MeasuresDelivery Performance Measures
Wait TimeProcess Time + Inspection Time
+ Move Time + Queue Time
Delivery Cycle Time
Order Received
ProductionStarted
Goods Shipped
Throughput Time
10-2323
ManufacturingCycle
Efficiency
Value-added time
Manufacturing cycle time=
Wait TimeProcess Time + Inspection Time
+ Move Time + Queue Time
Delivery Cycle Time
Throughput Time
Order Received
ProductionStarted
Goods Shipped
Delivery Performance MeasuresDelivery Performance Measures
10-2424
End of Chapter 10
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