Chapter 11-1 CHAPTER 11 STANDARD COSTS AND BALANCED SCORECARD Managerial Accounting, Fourth Edition Chapter 11-2 Study Study Objectives Objectives Distinguish between a standard and a budget Identify the advantages of standard costs Describe how companies set standards State the formulas for determining direct materials and direct labor variances State the formulas for determining manufacturing overhead variances Discuss the reporting of variances Prepare an income statement for management under a standard costing system Describe the balanced scorecard approach to performance evaluation Chapter 11-3 Standard Standard Costs Costs and and Balanced Balanced Scorecard Scorecard The TheNeed Needfor for Standards Standards Setting Setting Standard StandardCosts Costs Standards vs budgets Ideal vs normal Why standard costs? Case study Analyzing Analyzingand and Reporting Reporting Variances Variancesfrom from Standards Standards Direct materials variances Direct labor variances Manufacturing overhead variances Reporting variances Chapter 11-4 Statement presentation Balanced Balanced Scorecard Scorecard Financial perspective Customer perspective Internal process perspective Learning and growth perspective The The Need Need for for Standards Standards Distinguishing between Standards and Budgets 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 Chapter 11-5 SO Distinguish between a standard and a budget The The Need Need for for Standards Standards Advantages of Standard Costs Facilitate management planning Promote greater economy by making employees more “cost-conscious” Useful in setting selling prices Contribute to management control by providing basis for evaluation of cost control Useful in highlighting variances in management by exception Simplify costing of inventories and reduce clerical costs Chapter 11-6 Illustration 11-1 SO Identify the advantages of standard costs Setting Setting Standard Standard Costs—A Costs—A Difficult Difficult Task Task 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 Chapter 11-7 SO Describe how companies set standards Setting Setting Standard Standard Costs—A Costs—A Difficult Difficult Task Task 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 Normal standards allow for rest periods, machine breakdowns and other “normal” contingencies” Properly set, normal standards should be rigorous but attainable Chapter 11-8 SO Describe how companies set standards Setting Setting Standard Standard Costs—A Costs—A Difficult Difficult Task Task Review Question Most companies that use standards set them at a(n): a Optimum level b Ideal level c Normal level d Practical level Chapter 11-9 SO Describe how companies set standards Setting Setting Standard Standard Costs—A Costs—A Difficult Difficult Task Task 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 Chapter 11-10 SO Describe how companies set standards Analyzing Analyzing and and Reporting Reporting Variances Variances Manufacturing Overhead Variances Manufacturing overhead variances involves total overhead variance, overhead controllable variance, and overhead volume variance Manufacturing overhead costs are applied to work in process on the basis of the standard hours allowed for the work done Chapter 11-35 SO State the formulas for determining manufacturing overhead variances Analyzing Analyzing and and Reporting Reporting Variances Variances Total Overhead Variance The total overhead variance is the difference between actual overhead costs and overhead costs applied to work done Total Overhead Costs: Variable overhead Fixed overhead $ 88,990 44,000 $ 132,990 Overhead Applied: Standard hours allowed Rate per direct labor hour Total Overhead Variance 15,200 $ 9* $ 136,800 $ 3,810 F * Standard per unit overhead cost $18 ÷ direct labor hours per unit Chapter 11-36 SO State the formulas for determining manufacturing overhead variances Analyzing Analyzing and and Reporting Reporting Variances Variances Total Overhead Variance 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 Chapter 11-37 SO State the formulas for determining manufacturing overhead variances Analyzing Analyzing and and Reporting Reporting Variances Variances Overhead Controllable Variance Compare actual overhead costs incurred with budgeted costs for the standard hours allowed $136,200 Budgeted Overhead: Monthly budgeted fixed overhead ($540,000/12 months) $ Standard hours allowed Variable overhead rate ($12/2) Actual Overhead Costs: Variable overhead Fixed overhead Overhead Controllable Variance Chapter 11-38 45,000 15,200 $ 91,200 $ 88,990 44,000 132,990 $ 3,210 F SO State the formulas for determining manufacturing overhead variances Analyzing Analyzing and and Reporting Reporting Variances Variances Overhead Volume Variance Difference between normal capacity hours and standard hours allowed times the fixed overhead rate Budgeted Overhead: Normal capacity (in hours) 15,000 Less: Standard hours allowed 15,200 Fixed overhead rate ($6/2) Overhead volume variance Chapter 11-39 $ 200 600 F SO State the formulas for determining manufacturing overhead variances Analyzing Analyzing and and Reporting Reporting Variances Variances In computing the overhead variances, it is important to remember the following Standard hours allowed are used in each of the variances 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 Chapter 11-40 SO State the formulas for determining manufacturing overhead variances Analyzing Analyzing and and Reporting Reporting Variances Variances Causes Of Manufacturing Overhead Variances Controllable Variance - variance rests with the production department Cause of an unfavorable variance may be: Higher than expected use of indirect materials, indirect labor, and factory supplies, or Increases in indirect manufacturing costs Overhead Volume Variance – variance can rest with the production department, if the cause is inefficient use of direct labor or machine breakdowns Chapter 11-41 SO State the formulas for determining manufacturing overhead variances Analyzing Analyzing and and Reporting Reporting Variances Variances 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 Chapter 11-42 SO Discuss the reporting of variances Analyzing Analyzing and and Reporting Reporting Variances Variances 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 Chapter 11-43 Illustration 11-23 SO Prepare an income statement for management under a standard costing system Analyzing Analyzing and and Reporting Reporting Variances Variances Review Question 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 Chapter 11-44 SO Prepare an income statement for management under a standard costing system Balanced Balanced Scorecard Scorecard 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: Chapter 11-45 SO Describe the balanced scorecard approach to performance evaluation Balanced Balanced Scorecard Scorecard Review Question 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 Chapter 11-46 SO Describe the balanced scorecard approach to performance evaluation Balanced Balanced Scorecard Scorecard In summary, the balanced scorecard does the following: Employs both financial and nonfinancial measures Creates linkages so that high-level corporate goals can be communicated all the way down to the shop floor Provides measurable objectives for such nonfinancial measures as product quality, rather than vague statements such as “We would like to improve quality.” 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 Chapter 11-47 SO Describe the balanced scorecard approach to performance evaluation All About YOU: Balancing Costs and Quality in Health Care Think About It • Doctors and medical staff are under pressure to see more patients each day • With insurance companies pushing for reduced medical costs, every facet of medicine has been standardized and analyzed • What are the potential implications of the quality of health care? • Medical costs for a family of four hit $13,383 in 2006 • The United States spends more on a per person basis, and as a percentage of GDP than most other countries Chapter 11-48 • Yet more than 40 million Americans have no health coverage Copyright Copyright “Copyright © 2010 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” Chapter 11-49 .. .CHAPTER 11 STANDARD COSTS AND BALANCED SCORECARD Managerial Accounting, Fourth Edition Chapter 11- 2 Study Study Objectives Objectives Distinguish... sometimes use a matrix to analyze a variance Chapter 11- 27 SO State the formulas for determining direct materials and direct labor variances Matrix Matrix for for Direct Direct Materials Materials... to be used in production each month Raw materials inventories, therefore, can be ignored Chapter 11- 24 SO State the formulas for determining direct materials and direct labor variances Analyzing