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UNKNOWNFORNOW
ch15_Standard_costs_Balanced_scorecard.pdf
15-1 15-2
Standard Costs and Balanced
Scorecard
15 WILEY
Kimmel ● Weygandt
Survey of Accounting, First Edition
15-3
Determine direct materials variances.
CHAPTER OUTLINE
Describe standard costs.1
2
LEARNING OBJECTIVES
Determine direct labor and total manufacturing
overhead variances.3
Prepare variance reports and balanced scorecards.4
15-4
Both standards and budgets are predetermined costs, and
both contribute to management planning and control.
There is a difference:
A standard is a unit amount.
A budget is a total amount.
DISTINGUISHING BETWEEN STANDARDS AND
BUDGETS
LO 1
LEARNING
OBJECTIVE Describe standard costs.1
15-5
ILLUSTRATION 15-1
Advantages of standard
costs
Advantages
LO 1 15-6
Setting standard costs requires input from all persons who
have responsibility for costs and quantities.
Standards should change whenever managers determine
that the existing standard is not a good measure of
performance.
SETTING STANDARD COSTS
LO 1
15-7
Ideal versus Normal Standards
Companies set standards at one of two levels:
Ideal standards represent optimum levels of performance
under perfect operating conditions.
Normal standards represent efficient levels of performance
that are attainable under expected operating conditions.
Properly set, normal standards
should be rigorous but attainable.
SETTING STANDARD COSTS
LO 1 15-8
Most companies that use standards set them at a(n):
a. optimum level.
b. ideal level.
c. normal level.
d. practical level.
SETTING STANDARD COSTS
Question
LO 1
15-9
How Do Standards Help a Business?
A number of organizations, including corporations, consultants,
and governmental agencies, share information regarding
performance standards in an effort to create a standard set of
measures for thousands of business processes. The group,
referred to as the Open Standards Benchmarking Collaborative,
includes IBM, Procter and Gamble, the U.S. Navy, and the
World Bank. Companies that are interested in participating can
go to the group’s website and enter their information.
Source: Becky Partida, “Benchmark Your Manufacturing Performance,”
Control Engineering (February 4, 2013).
Accounting Across the Organization U.S.
Navy
LO 1 15-10
A Case Study
To establish the standard cost of producing a product, it is
necessary to establish standards for each manufacturing cost
element—
direct materials,
direct labor, and
manufacturing overhead.
The standard for each element is derived from the standard
price to be paid and the standard quantity to be used.
SETTING STANDARD COSTS
LO 1
15-11
The direct materials price standard is the cost per unit of
direct materials that should be incurred.
DIRECT MATERIALS
SETTING STANDARD COSTS
ILLUSTRATION 15-2
Setting direct materials price standard
LO 1 15-12
The direct materials quantity standard is the quantity of
direct materials that should be used per unit of finished goods.
Standard direct materials cost is $12.00
($3.00 x 4.0 pounds).
SETTING STANDARD COSTS
ILLUSTRATION 15-3
Setting direct materials
quantity standard
LO 1
DIRECT MATERIALS
15-13
The direct materials price standard should include an
amount for all of the following except:
a. receiving costs.
b. storing costs.
c. handling costs.
d. normal spoilage costs.
SETTING STANDARD COSTS
Question
LO 1 15-14
The direct labor price standard is the rate per hour that
should be incurred for direct labor.
DIRECT LABOR
SETTING STANDARD COSTS
ILLUSTRATION 15-4
Setting direct labor price standard
LO 1
ALTERNATIVE TERMINOLOGY
The direct labor price standard is also
called the direct labor rate standard.
15-15
The direct labor quantity standard is the time that should be
required to make one unit of the product.
The standard direct labor cost is
$30 ($15.00 x 2.0 hours).
DIRECT LABOR
SETTING STANDARD COSTS
ILLUSTRATION 15-5
Setting direct labor
quantity standard
LO 1
ALTERNATIVE TERMINOLOGY
The direct labor quantity standard is also
called the direct labor efficiency standard.
15-16
MANUFACTURING OVERHEAD
For manufacturing overhead, companies use a standard
predetermined overhead rate in setting the standard.
SETTING STANDARD COSTS
This overhead rate is determined
by dividing budgeted overhead
costs by an expected standard
activity index, such as standard
direct labor hours or standard
machine hours.
LO 1
15-17
The company expects to produce 13,200 gallons during the
year at normal capacity. It takes 2 direct labor hours for each
gallon.
Standard manufacturing overhead rate
per gallon is $10 ($5 x 2 hours).
MANUFACTURING OVERHEAD
ILLUSTRATION 15-6
Computing predetermined
overhead rates
LO 1
SETTING STANDARD COSTS
15-18
The total standard cost per unit is the sum of the standard costs
of direct materials, direct labor, and manufacturing overhead.
TOTAL STANDARD COST PER UNIT
The total standard cost per gallon
ILLUSTRATION 15-7
Standard cost per gallon
of Xonic Tonic
LO 1
SETTING STANDARD COSTS
15-19
Ridette Inc. accumulated the following standard cost data concerning
product Cty31.
Materials per unit: 1.5 pounds at $4 per pound.
Labor per unit: 0.25 hours at $13 per hour.
Manufacturing overhead: allocated based on direct labor hours at a
predetermined rate of $15.60 per direct labor hour.
Compute the standard cost of one unit of product Cty31.
LO 1
DO IT! Standard Costs1
15-20
Variances are the differences between total actual costs and
total standard costs.
Actual costs < Standard costs = Favorable variance.
Actual costs > Standard costs = Unfavorable variance.
Variance must be analyzed to determine the underlying
factors.
Analyzing variances begins by determining the cost elements
that comprise the variance.
ANALYZING AND REPORTING VARIANCES
LO 2
LEARNING
OBJECTIVE
Determine direct materials
variances.2
15-21
A variance is favorable if actual costs are:
a. less than budgeted costs.
b. less than standard costs.
c. greater than budgeted costs.
d. greater than standard costs
Question
ANALYZING AND REPORTING VARIANCES
LO 2 15-22
Illustration: Assume that
in producing 1,000
gallons of Xonic Tonic in
the month of June, Xonic
incurred the costs shown
on the right.
The total standard cost of
Xonic Tonic is $52,000
(1,000 gallons x $52).
ILLUSTRATION 15-8
Actual production costs
ILLUSTRATION 15-9
Computation of total variance LO 2
ANALYZING AND REPORTING VARIANCES
15-23
DIRECT MATERIALS VARIANCES
In completing the order for 1,000 gallons of Xonic Tonic, Xonic
used 4,200 pounds of direct materials. These were purchased
at a cost of $3.10 per unit. Standard price is $3.
ILLUSTRATION 15-12
Formula for total materials variance
$13,020
(4,200 x $3.10)
$12,000
(4,000 x $3.00) $1,020 U
Total Materials
Variance
(TMV)
Actual Quantity
x Actual Price
(AQ) x (AP)
Standard Quantity
x Standard Price
(SQ) x (SP)
- =
- =
LO 2
ANALYZING AND REPORTING VARIANCES
15-24
Next, the company analyzes the total variance to determine the
amount attributable to price (costs) and to quantity (use). The
materials price variance is computed from the following formula.
DIRECT MATERIALS VARIANCES
$13,020
(4,200 x $3.10)
$12,600
(4,200 x $3.00) $420 U
Materials Price
Variance
(MPV)
Actual Quantity
x Actual Price
(AQ) x (AP)
Actual Quantity
x Standard Price
(AQ) x (SP)
- =
- =
ILLUSTRATION 15-14
Formula for materials price variance
LO 2
ANALYZING AND REPORTING VARIANCES
15-25
The materials quantity variance is determined
from the following formula.
DIRECT MATERIALS VARIANCES
ILLUSTRATION 15-15
Formula for materials
quantity variance
$12,600
(4,200 x $3.00)
$12,000
(4,000 x $3.00) $600 U
Materials Quantity
Variance
(MQV)
Actual Quantity
x Standard Price
(AQ) x (SP)
Standard Quantity
x Standard Price
(SQ) x (SP)
- =
- =
ILLUSTRATION 15-16
Summary of materials
variances
LO 2
ANALYZING AND REPORTING VARIANCES
15-26
Price Variance
$13,020 – $12,600 = $420 U
Quantity Variance
$12,600 – $12,000 = $600 U
Total Materials Variance
$13,020 – $12,000 = $1,020 U
1 2 3
1 2- 2 3-
1 3-
Actual Quantity
× Actual Price
(AQ) × (AP)
4,200 x $3.10 = $13,020
Standard Quantity
× Standard Price
(SQ) × (SP)
4,000 x $3.00 = $12,000
Actual Quantity
× Standard Price
(AQ) × (SP)
4,200 x $3.00 = $12,600
ILLUSTRATION 15-17
Matrix for direct materials
variances
LO 2
ANALYZING AND REPORTING VARIANCES
15-27
Materials price variance – factors that affect the price paid
for raw materials include the
► availability of quantity and cash
discounts
► quality of the materials requested
► delivery method used.
To the extent that these factors are considered in setting the
price standard, the purchasing department is responsible.
Causes of Materials Variances
LO 2
ANALYZING AND REPORTING VARIANCES
15-28
Materials quantity variance – if the variance is due to
inexperienced workers, faulty machinery, or carelessness,
the production department is responsible.
LO 2
ANALYZING AND REPORTING VARIANCES
Causes of Materials Variances
15-29
Standard quantity = 10,000 × 2
Substituting amounts into the formulas, the variances are:
Total materials variance =
(22,000 × $7.50) − (20,000 × $8.00) = $5,000 unfavorable
Materials price variance =
(22,000 × $7.50) − (22,000 × $8.00) = $11,000 favorable
Materials quantity variance =
(22,000 × $8.00) − (20,000 × $8.00) = $16,000 unfavorable
The standard cost of Wonder Walkers includes two units of direct
materials at $8.00 per unit. During July, the company buys 22,000
units of direct materials at $7.50 and uses those materials to
produce 10,000 units. Compute the total, price, and quantity
variances for materials.
LO 2
DO IT! Direct Materials Variances2
15-30
In completing the Xonic Tonic order, Xonic incurred 2,100 direct
labor hours at an average hourly rate of $14.80. The standard
hours allowed for the units produced were 2,000 hours (1,000
gallons x 2 hours). The standard labor rate was $15 per hour. The
total labor variance is computed as follows.
DIRECT LABOR VARIANCES
ILLUSTRATION 15-18
Formula for total labor variance
$31,080
(2,100 x $14.80)
$30,000
(2,000 x $15.00) $1,080 U
Total Labor
Variance
(TLV)
Actual Hours
x Actual Rate
(AH) x (AR)
Standard Hours
x Standard Rate
(SH) x (SR)
- =
- =
LO 3
LEARNING
OBJECTIVE
Determine direct labor and
manufacturing overhead variances.3
15-31
Next, the company analyzes the total variance to determine the
amount attributable to price (costs) and to quantity (use). The
labor price variance is computed from the following formula.
DIRECT LABOR VARIANCES
$31,080
(2,100 x $14.80)
$31,500
(2,100 x $15.00) $420 F
Labor Price
Variance
(LPV)
Actual Hours
x Actual Rate
(AH) x (AR)
Actual Hours
x Standard Rate
(AH) x (SR)
- =
- =
ILLUSTRATION 15-20
Formula for labor price variance
LO 3
ANALYZING AND REPORTING VARIANCES
15-32
The labor quantity variance is determined from the following
formula.
DIRECT LABOR VARIANCES
$31,500
(2,100 x $15.00)
$30,000
(2,000 x $15.00) $1,500 U
Labor Quantity
Variance
(LQV)
Actual Hours
x Standard Rate
(AH) x (SR)
Standard Hours
x Standard Rate
(SH) x (SR)
- =
- =
ILLUSTRATION 15-22
Summary of labor variances
ILLUSTRATION 15-21
Formula for labor quantity variance
LO 3
ANALYZING AND REPORTING VARIANCES
15-33
Price Variance
$31,080 – $31,500 = $420 F
Quantity Variance
$31,500 – $30,000 = $1,500 U
Total Labor Variance
$31,080 – $30,000 = $1,080 U
1 2 3
1 2- 2 3-
1 3-
Actual Hours
× Actual Rate
(AH) × (AR)
2,100 x $14.80 = $31,080
Standard Hours
× Standard Rate
(SH) × (SR)
2,000 x $15.00 = $30,000
Actual Hours
× Standard Rate
(AH) × (SR)
2,100 x $15.00 = $31,500
ILLUSTRATION 15-23
Matrix for direct labor
variances
LO 3
ANALYZING AND REPORTING VARIANCES
15-34
Labor price variance – usually results from two factors:
1. paying workers different wages than expected, and
2. misallocation of workers.
When workers are not unionized, the manager who authorized
the wage increase is responsible for the higher wages.
Causes of Labor Variances
Production department generally is
responsible for labor price variances
resulting from misallocation of the
workforce.
LO 3
ANALYZING AND REPORTING VARIANCES
15-35
Labor quantity variances
► Relates to the efficiency of workers.
► The cause of a quantity variance generally can be traced
to the production department.
LO 3
ANALYZING AND REPORTING VARIANCES
Causes of Labor Variances
15-36
Total overhead variance is the difference between actual
overhead costs and overhead costs applied to work done. The
computation of the actual overhead is comprised of a variable
and a fixed component.
ILLUSTRATION 15-24
Actual overhead costs
The predetermined overhead rate for Xonic Tonic is $5.
MANUFACTURING OVERHEAD VARIANCES
LO 3
ANALYZING AND REPORTING VARIANCES
15-37
The formula for the total overhead variance and the calculation
for Xonic, Inc. for the month of June.
Standard hours allowed are the hours that should
have been worked for the units produced.
ILLUSTRATION 15-25
Formula for total overhead variance
LO 3
ANALYZING AND REPORTING VARIANCES
*Based on standard hours allowed.
15-38
The overhead variance is generally analyzed through a
price variance and a quantity variance.
Overhead controllable variance (price variance) shows
whether overhead costs are effectively controlled.
Overhead volume variance (quantity variance) relates to
whether fixed costs were under- or over-applied during the
year.
LO 3
ANALYZING AND REPORTING VARIANCES
15-39
Over- or underspending on overhead items such as
indirect labor, electricity, etc.
Poor maintenance on machines.
Flow of materials through the production process is
impeded because of a lack of skilled labor to perform the
necessary production tasks, due to a lack of planning.
Lack of sales orders.
Causes of Manufacturing Overhead Variances
LO 3
ANALYZING AND REPORTING VARIANCES
15-40
What’s Brewing at Starbucks?
It’s easy for a company to say it’s committed to corporate social responsibility.
But Starbucks actually spells out measurable goals. Recently, the company
published its annual Global Responsibility Report in which it describes its goals,
achievements, and even its shortcomings related to corporate social
responsibility. For example, Starbucks achieved its goal of getting more than
50% of its electricity from renewable sources. It also has numerous goals
related to purchasing coffee from sources that are certified as responsibly
grown and ethically traded; providing funds for loans to coffee farmers; and
fostering partnerships with Conservation International to provide training to
farmers on ecologically friendly growing. The report also candidly explains that
the company did not meet its goal to cut energy consumption by 25%. It also fell
far short of its goal of getting customers to reuse their cups. In those instances
where it didn’t achieve its goals, Starbucks set new goals and described steps it
would take to achieve them. You can view the company’s Global Responsibility
Report at www.starbucks.com.
Source: “Starbucks Launches 10th Global Responsibility Report,” Business Wire
(April 18, 2011).
PEOPLE, PLANET, AND PROFIT INSIGHT
LO 3
15-41
Substituting amounts into the formulas, the variances are:
Total labor variance =
(3,500 × $12.40) − (3,600 × $12.00) = $200 unfavorable
Labor price variance =
(3,500 × $12.40) − (3,500 × $12.00) = $1,400 unfavorable
Labor quantity variance =
(3,500 × $12.00) − (3,600 × $12.00) = $1,200 favorable
Total overhead variance = $71,300 − $72,000* = $700 favorable
*(1,200 × 3 hours) × $20.00
The standard cost of Product YY includes 3 hours of direct labor at $12.00
per hour. The predetermined overhead rate is $20.00 per direct labor hour.
During July, the company incurred 3,500 hours of direct labor at an
average rate of $12.40 per hour and $71,300 of manufacturing overhead
costs. It produced 1,200 units. (a) Compute the total, price, and quantity
variances for labor. (b) Compute the total overhead variance.
LO 3
DO IT! Labor and Manufacturing
Overhead Variances3
15-42
REPORTING VARIANCES
All variances should be reported to appropriate levels of
management as soon as possible.
The form, content, and frequency of variance reports vary
considerably among companies.
Facilitate the principle of “management by exception.”
Top management normally looks for significant
variances.
LO 4
LEARNING
OBJECTIVE
Prepare variance reports and
balanced scorecards.4
15-43
Materials price variance report for Xonic, Inc., with the
materials for the Xonic Tonic order listed first.
ILLUSTRATION 15-26
Materials price variance report
REPORTING VARIANCES
XONIC
Variance Report—Purchasing Department
For the Week Ended June 8, 2017
LO 4
ANALYZING AND REPORTING VARIANCES
15-44
Income 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
disclosed separately.
ILLUSTRATION 15-27
Variances in income statement for management
LO 4
ANALYZING AND REPORTING VARIANCES
15-45
Which of the following is incorrect about variance reports?
a. They facilitate “management by exception.”
b. They should only be sent to the top level of
management.
c. They should be prepared as soon as possible.
d. They may vary in form, content, and frequency among
companies.
Question
LO 4
ANALYZING AND REPORTING VARIANCES
15-46
The balanced scorecard incorporates financial and
nonfinancial measures in an integrated system that links
performance measurement and a company’s strategic goals.
The balanced scorecard evaluates company performance
from a series of “perspectives.” The four most commonly
employed perspectives are as follows.
BALANCED SCORECARD
ILLUSTRATION 15-30
Linked process across balanced
scorecard perspectives
LO 4
15-47
ILLUSTRATION 15-28
Nonfinancial measures used in various industries LO 4 15-48
ILLUSTRATION 15-29
Examples of objectives within the four perspectives of balanced scorecard LO 4
15-49
Which of the following would not be an objective used in the
customer perspective of the balanced scorecard approach?
a. Percentage of customers who would recommend
product to a friend.
b. Customer retention.
c. Brand recognition.
d. Earning per share.
Question
BALANCED SCORECARD
LO 4 15-50
In summary, the balanced scorecard does the following:
1. Employs both financial and nonfinancial measures.
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 such 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.
BALANCED SCORECARD
LO 4
15-51
It May Be Time to Fly United Again
Many of the benefits of a balanced scorecard approach are evident in
the improved operations at United Airlines. At the time it filed for
bankruptcy, United had a reputation for some of the worst service in the
airline business. But when Glenn Tilton took over as United’s chief
executive officer, he recognized that things had to change. He
implemented an incentive program that allows all of United’s 63,000
employees to earn a bonus of 2.5% or more of their wages if the
company “exceeds its goals for on-time flight departures and for
customer intent to fly United again.” After instituting this program, the
company’s on-time departures were among the best, its customer
complaints were reduced considerably, and the number of customers
who said that they would fly United again was at its highest level ever.
Sources: Susan Carey, “Friendlier Skies: In Bankruptcy, United Airlines Forges a Path to
Better Service,” Wall Street Journal (June 15, 2004); and Emre Serpen, “More to
Maintain,” Airline Business (November 2012), pp. 38–40.
SERVICE COMPANY INSIGHT United
Airlines
LO 4 15-52
Polar Vortex Corporation experienced the following variances: materials
price $250 F, materials quantity $1,100 F, labor price $700 U, labor quantity
$300 F, and overhead $800 F. Sales revenue was $102,700, and cost of
goods sold (at standard) was $61,900. Determine the actual gross profit.
Sales revenue $102,700
Cost of goods sold (at standard) 61,900
Standard gross profit 40,800
Variances
Materials price $ 250 F
Materials quantity 1,100 F
Labor price 700 U
Labor quantity 300 F
Overhead 800 F
Total variance favorable 1,750
Gross profit (actual) $ 42,550
LO 4
DO IT! Reporting Variances4
15-53
The overhead variance is generally analyzed through a price
variance and a quantity variance.
Overhead controllable variance (price variance) shows
whether overhead costs are effectively controlled.
Overhead volume variance (quantity variance) relates to
whether fixed costs were under- or over-applied during the
year.
LO 5
LEARNING
OBJECTIVE
APPENDIX 15A: Compute overhead
controllable and volume variances.5
15-54
The overhead controllable variance shows whether
overhead costs are effectively controlled.
To compute this variance, the company compares actual
overhead costs incurred with budgeted costs for the
standard hours allowed.
The budgeted costs are determined from a flexible
manufacturing overhead budget.
OVERHEAD CONTROLLABLE VARIANCE
LO 5
15-55
For Xonic the budget formula for manufacturing overhead is
variable manufacturing overhead cost of $3 per hour of labor plus
fixed manufacturing overhead costs of $4,400.
ILLUSTRATION 15A-1
Flexible budget using
standard direct labor
hours
OVERHEAD CONTROLLABLE VARIANCE
LO 5 15-56
ILLUSTRATION 15A-2 shows the formula for the overhead
controllable variance and the calculation for Xonic, Inc.
OVERHEAD CONTROLLABLE VARIANCE
ILLUSTRATION 15A-2
Formula for overhead controllable variance
LO 5
15-57
Difference between normal capacity hours and standard hours
allowed times the fixed overhead rate.
ILLUSTRATION 15A-3
Formula for overhead volume variance
OVERHEAD VOLUME VARIANCE
LO 5 15-58
Illustration: Xonic Inc. budgeted fixed overhead cost for the
year of $52,800. At normal capacity, 26,400 standard direct
labor hours are required. Xonic produced 1,000 units of Xonic
Tonic in June. The standard hours allowed for the 1,000 gallons
produced in June is 2,000 (1,000 gallons x 2 hours). For Xonic,
standard direct labor hours for June at normal capacity is 2,200
(26,400 annual hours ÷ 12 months). The computation of the
overhead volume variance in this case is as follows.
OVERHEAD VOLUME VARIANCE
LO 5
ILLUSTRATION 15A-4
Computation of overhead volume variance for Xonic
15-59
In computing the overhead variances, it is important to
remember the following.
1. Standard hours allowed are used in each of the
variances.
2. Budgeted costs for the controllable variance are derived
from the flexible budget.
3. The controllable variance generally pertains to variable
costs.
4. The volume variance pertains solely to fixed costs.
OVERHEAD VOLUME VARIANCE
LO 5 15-60
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