Manerial accounting 11e garrison noreen brewer chap010

11th Edition
Chapter 10

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Standard Costs and
the Balanced Scorecard
Chapter Ten

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Standard Costs
Standards are benchmarks or “norms”
for measuring performance. Two types
of standards are commonly used.
Quantity standards
specify how much of an
input should be used to
make a product or
provide a service.

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Cost (price)
standards specify

how much should be
paid for each unit
of the input.

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Standard Costs

Amount

Deviations from standard deemed significant
are brought to the attention of management, a
practice known as management by exception.

Standard

Direct
Labor

Direct
Material

Manufacturing
Overhead

Type of Product Cost
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Variance Analysis Cycle

Identify
questions

Receive
explanations

Take
corrective
actions

Conduct next
period’s
operations

Analyze
variances
Prepare standard
cost performance
report
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Exh.
10-1

Begin

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Setting Standard Costs
Accountants, engineers, purchasing
agents, and production managers
combine efforts to set standards that encourage
efficient future production.

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Setting Standard Costs
Should we use
ideal standards that
require employees to
work at 100 percent
peak efficiency?

Engineer
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I recommend using practical
standards that are currently
attainable with reasonable and
efficient effort.

Managerial

Accountant
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Setting Direct Material Standards
Price
Standards

Quantity
Standards

Final, delivered
cost of materials,
net of discounts.

Summarized in
a Bill of Materials.

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Setting Standards
In
In recent
recent years,
years, TQM
TQM advocates
advocates have

have sought
sought
to
to eliminate
eliminate all
all defects
defects and
and waste,
waste, rather
rather than
than
continually
continually build
build them
them into
into standards.
standards.
As
As aa result
result allowances
allowances for
for waste
waste and
and
spoilage
spoilage that
that are
are built
built into
into standards

standards
should
should be
be reduced
reduced over
over time.
time.

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Setting Direct Labor Standards
Rate
Standards

Time
Standards

Often a single
rate is used that reflects
the mix of wages earned.

Use time and
motion studies for
each labor operation.

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Setting Variable Overhead Standards
Rate
Standards

Activity
Standards

The rate is the
variable portion of the
predetermined overhead
rate.

The activity is the
base used to calculate
the predetermined
overhead.

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Standard Cost Card – Variable
Production Cost
A standard cost card for one unit
of product might look like this:

Inputs
Direct materials
Direct labor
Variable mfg. overhead
Total standard unit cost
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A

B

AxB

Standard
Quantity
or Hours

Standard
Price
or Rate

Standard
Cost
per Unit

3.0 lbs.
2.5 hours
2.5 hours

$ 4.00 per lb.

$
14.00 per hour
3.00 per hour
$

12.00
35.00
7.50
54.50

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Standards vs. Budgets

Are standards the
same as budgets?
A budget is set for
total costs.

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A standard is a per
unit cost.
Standards are often
used when
preparing budgets.
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Price and Quantity Standards
Price and and quantity standards are
determined separately for two reasons:

 The
The purchasing
purchasing manager
manager is
is responsible
responsible for
for raw
raw
material
material purchase
purchase prices
prices and
and the
the production
production manager
manager
is
is responsible
responsible for
for the
the quantity
quantity of
of raw
raw material
material used.
used.


 The
The buying
buying and
and using
using activities
activities occur
occur at
at different
different times.
times.
Raw
Raw material
material purchases
purchases may
may be
be held
held in
in inventory
inventory for
for aa
period
period of
of time
time before
before being
being used
used in
in production.
production.

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A General Model for Variance Analysis

Variance Analysis

Price Variance

Quantity Variance

Difference between
actual price and
standard price

Difference between
actual quantity and
standard quantity

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A General Model for Variance Analysis

Variance Analysis

Price Variance

Quantity Variance

Materials price variance
Labor rate variance
VOH spending variance

Materials quantity variance
Labor efficiency variance
VOH efficiency variance

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A General Model for Variance Analysis

Actual Quantity
×
Actual Price

Actual Quantity
×
Standard Price

Price Variance

McGraw-Hill/Irwin

Standard Quantity
×
Standard Price

Quantity Variance

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A General Model for Variance Analysis

Actual Quantity
×
Actual Price

Actual Quantity
×
Standard Price

Price Variance

Standard Quantity
×
Standard Price

Quantity Variance

Actual quantity is the amount of direct
materials, direct labor, and variable

manufacturing overhead actually used.
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A General Model for Variance Analysis

Actual Quantity
×
Actual Price

Actual Quantity
×
Standard Price

Price Variance

Standard Quantity
×
Standard Price

Quantity Variance

Standard quantity is the standard quantity
allowed for the actual output for the period.

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A General Model for Variance Analysis

Actual Quantity
×
Actual Price

Actual Quantity
×
Standard Price

Price Variance

Standard Quantity
×
Standard Price

Quantity Variance

Actual price is the amount actually
paid for the for the input used.

McGraw-Hill/Irwin

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A General Model for Variance Analysis

Actual Quantity
×
Actual Price

Actual Quantity
×
Standard Price

Price Variance

Standard Quantity
×
Standard Price

Quantity Variance

Standard price is the amount that should
have been paid for the input used.

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A General Model for Variance Analysis

Actual Quantity
×
Actual Price

Actual Quantity
×
Standard Price

Price Variance

Standard Quantity
×
Standard Price

Quantity Variance

(AQ × AP) – (AQ × SP)

(AQ × SP) – (SQ × SP)

AQ = Actual Quantity
AP = Actual Price

SP = Standard Price
SQ = Standard Quantity

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Material Variances Example

Glacier Peak Outfitters has the following direct

material standard for the fiberfill in its mountain
parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.

Last month 210 kgs of fiberfill were purchased
and used to make 2,000 parkas. The material
cost a total of $1,029.

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Material Variances Summary
Actual Quantity
×
Actual Price

Actual Quantity
×
Standard Price

210 kgs.
×
$4.90 per kg.

210 kgs.
×
$5.00 per kg.

= $1,029

Price variance
$21 favorable

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= $1,050

Standard Quantity
×
Standard Price
200 kgs.
×
$5.00 per kg.
= $1,000

Quantity variance
$50 unfavorable

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Material Variances Summary
Actual Quantity
×
Actual Price
210 kgs.
×
$4.90 per kg.

Actual Quantity
×
Standard Price
210 kgs.
× kgs
$1,029 ÷ 210
$5.00per
perkg
kg.
= $4.90

= $1,029

Price variance
$21 favorable

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= $1,050

Standard Quantity
×
Standard Price
200 kgs.
×
$5.00 per kg.
= $1,000

Quantity variance

$50 unfavorable

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