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Lecture Managerial accounting: Creating value in a dynamic business environment (9/e): Chapter 10 - Ronald W. Hilton

Chapter 10 - Standard costing, operational performance measures, and the balanced scorecard. After completing this chapter, you should be able to: Describe the elements of a cost control system, describe two ways to set cost standards and distinguish between perfection and practical standards, compute and interpret the direct-material price and quantity variances and the direct-labor rate and efficiency variances,. | Chapter 10 Standard Costing, Operational Performance Measures, and the Balanced Scorecard Managing Costs Standard cost Actual cost Comparison between standard and actual performance level Cost variance Learning Objective 1 Management by Exception Direct Material Managers focus on quantities and costs that exceed standards, a practice known as management by exception. Type of Product Cost Amount Direct Labor Standard Setting Standards Analysis of Historical Data Task Analysis Cost Standards Learning Objective 2 Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations. Participation in Setting Standards Perfection versus Practical Standards: A Behavioral Issue Should we use practical standards or perfection standards? Practical standards should be set at levels that are currently attainable with reasonable and efficient effort. I agree. Perfection standards are unattainable and therefore discouraging to most employees. Perfection versus Practical Standards: A Behavioral Issue Use of Standards by Service Organizations Standard cost analysis may be used in any organization with repetitive tasks. A relationship between tasks and output measures must be established. A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Materials price variance Materials quantity variance Labor rate variance Labor efficiency variance Variable overhead Variable overhead spending variance efficiency variance AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity Learning Objective 3 Size of variance Dollar amount Percentage of standard Recurring variances Trends Controllability Favorable variances Costs and benefits of investigation Significance of Cost Variances What clues help me to determine the variances that I should investigate? Learning Objective 4 Statistical Control Chart 1 2 3 4 5 6 7 8 9 Variance Measurements Favorable Limit Unfavorable Limit Desired Value • • • • • • • • • Warning signals for investigation If I buy cheaper materials, my direct-materials expenses will be lower than what is budgeted. Then I’ll get my bonus. But we may lose customers because of lower quality. Behavioral Impact of Standard Costing Learning Objective 5 Interaction among Variances I am not responsible for the 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. Standard Costs and Product Costing Standard material and labor costs are entered into Work-in-Process inventory instead of actual costs. Standard cost variances are closed directly to Cost of Goods Sold. Learning Objective 6 Advantages of Standard Costing Management by Exception Stable Product Costs Sensible Cost Comparisons Advantages Performance Evaluation Employee Motivation Learning Objective 7