Standard costs (regulations if imposed by governmental agencies).
Predetermined unit costs, which are used as measures of performance.
Standards and budgets (both are predetermined costs, and both contribute to management planning and control).
- Standards: unit amount, journalized in accounting system.
- Budgets: total amount, not journalized in accounting system.
Advantages of standard costs.
- Facilitate management planning.
- Promote greater economy by making employees more cost conscious.
- Usefull in setting selling prices.
- Contribute to management control by providing basis for evaluation of cost control.
- Usefull in highlighting variances in management by exception.
- Simplify costing of inventories and reduce clerical error.
Optimum levels of performance under perfect operating conditions.
Efficient levels of performance that are attainable under expected operating conditions (rigorous but attainable).
Direct materials price standard.
The cost per unit of direct materials that should be incurred, based on the cost of raw material, should also include an amount for related costs such as receiving, storing, and handling.
Direct materials quantity standard.
The quantity of direct materials that should be used per unit of finished goods, expressed as a physical measures, hould include allowances for unavoidable waste and normal spoilage.
The standard direct materials cost per unit.
Is the standard direct materials price times the standard direct materials quantity.
Direct labor price standard.
The rate per hour that should be incurred for direct labor, this standard is based on current wage rates, adjusted for anticipated changes such as cost of living adjustments (COLAs), the price standard also generally includes employer payroll taxes and fringe benefits, such as paid holidays and vacations.
Direct labor quantity standard (efficiency standard).
The time that should be required to make one unit of the product, allowances should be made in this standard for rest periods, cleanup, machine setup, and machine downtime.
The standard direct labor cost per unit.
Is the standard direct labor rate times the standard direct labor hours.
Standard predetermined overhead rate.
Overhead rate is determined by dividing budgeted overhead costs by an expected standard activity index.
The standard manufacturing overhead rate per unit.
Is the predetermined overhead rate times the activity index quantity standard.
Total Standard Cost per Unit.
Standard quantity per unit * standard price per unit = total standard cost per unit.
- The differences between total actual costs and total standard costs.
- If actual costs exceed standard costs, the variance is unfavorable.
- If actual costs are less than standard costs, the variance is favorable.
- Analyzing variances begins by determining the cost elements that comprise the variance.
- For each manufacturing cost element, a total dollar variance is computed.
- Then this variance is analyzed into a price variance and a quantity variance.
Total materials variance (TMV).
The difference between: actual quantity (AQ) * actual price (AP) - standard quantity (SQ) * standard price (SP).
Materials price variance (MPV).
The difference between: actual quantity (AQ) * actual price (AP) - actual quantity (AQ) * standard price (SP).
Materials quantity variance (MQV).
The difference between: actual quantity (AQ) * standard price (SP) - standard quantity (SQ) * standard price (SP).
Causes of Materials Variances.
- Materials price variance begins in the purchasing department.
- Materials quantity variance begins in the production department.
Total labor variance (TLV).
The difference between: actual hours (AH) * actual rate (AR) - standard hours (SH) * standard rate (SR).
Labor price variance (LPV).
The difference between: actual hours (AH) * actual rate (AR) - actual hours (AH) * standard rate (SR).
Labor quantity variance (LQV).
The difference between: actual hours (AH) * standard rate (SR) - standard hours (SH) * standard rate (SR).
Causes of Labor Variances.
- Labor price variances usually result from two factors:
- (1) paying workers higher wages than expected, (2) misallocation of workers.
- Labor quantity variances relate to the efficiency of workers. The cause of a quantity variance generally can be traced to the production department. The causes of an unfavorable variance may be poor training, worker fatigue, faulty machinery, or carelessness. These causes are the responsibility of the production department.
Total overhead variance.
- The difference between: actual overhead costs - overhead costs applied (for the standard hours allowed).
- The overhead variance is generally analyzed through a price variance and a quantity variance. The name usually given to the price variance is the overhead controllable variance, whereas the quantity variance is referred to as the overhead volume variance.
Standard hours allowed.
The hours that should have been worked for the units produced.
Overhead controllable variance.
Actual overhead costs incurred - budgeted overhead costs (for the standard hours allowed).
Overhead volume variance.
Fixed overhead rate * (normal capacity hours - standard capacity hours) = overhead volume variance.
In computing the overhead variences, it is important to remember the following:
- Standard hours allowed are used in each of the variences.
- Budgeted costs for the controllable variance are derived from the flexible budget.
- The controllable variance generally pertains to variable costs.
- The volume variance pertains solely to fixed costs.
Causes of Manufacturing Overhead Variances.
Since the controllable variance relates to variable manufacturing costs, the responsibility for the variance rests with the production department. The cause of an unfavorable variance may be: (1) higher than expected use of indirect materials, indirect labor, and factory supplies, or (2) increases in indirect manufacturing costs, such as fuel and maintenance costs.
The overhead volume variance is the responsibility of the production department if the cause is inefficient use of direct labor or machine breakdowns. When the cause is a lack of sales orders, the responsibility rests outside the production department.
Statement Presentation of Variances.
In income statements prepared for management under a standard cost accounting system, cost of goods sold is stated at standard cost and the variances are separately disclosed.
- Incorporates financial and nonfinancial measures in an integrated system that links performance measurement and a company's strategic goals.
- In summary, the balanced scorecard does the following:
- 1. Employs both financial and nonfinancial measures. (For example, ROI is a financial measure; employee turnover is a nonfinancial measure.)
- 2. Creates linkages so that high-level corporate goals can be communicated all the way down to the shop floor.
- 3. Provides measurable objectives for such nonfinancial measures as product quality, rather than vague statements such as “We would like to improve quality.”
- 4. Integrates all of the company's goals into a single performance measurement system, so that an inappropriate amount of weight will not be placed on any single goal.
The financial perspective.
- Is the most traditional view of the company. It employs financial measures of performance used by most firms.
- Return on assets.
- Net income.
- Credit rating.
- Share price.
- Profit per employee.
The customer perspective.
- Evaluates how well the company is performing from the viewpoint of those people who buy and use its products or services. This view measures how well the company compares to competitors in terms of price, quality, product innovation, customer service, and other dimensions.
- Percentage of customers who would recommend product to a friend.
- Customer retention.
- Response time per customer request.
- Brand recongnition.
- Customer service expense per customer.
The internal process perspective.
- Evaluates the internal operating processes critical to success. All critical aspects of the value chain—including product development, production, delivery and after-sale service—are evaluated to ensure that the company is operating effectively and efficiently.
- Percentage of defect free products.
- Labor utilization rates.
- Waste reduction.
- Planning accuracy.
The learning and growth perspective.
- Evaluates how well the company develops and retains its employees. This would include an evaluation of such things as employee skills, employee satisfaction, training programs, and information dissemination.
- Percentage of employees leaving in less than one year.
- Number of cross trained employees.
- Ethical violations.
- Training hours.
- Reportable accidents.
Standard cost accounting system.
Is a double-entry system of accounting. In this system, standard costs are used in making entries, and variances are formally recognized in the accounts. A standard cost system may be used with either job order or process costing. At this point, we will explain and illustrate a standard cost, job order cost accounting system. The system is based on two important assumptions: (1) Variances from standards are recognized at the earliest opportunity. (2) The Work in Process account is maintained exclusively on the basis of standard costs.