10-‹#›
10-1
10-1
Chapter 10 Objectives
1. Understand the difference between ideal & practical
standards (You)
)
(
2. Calculate variances for direct labour, direct
materials and variable overhead (Us)
( )
3. Calculate mix and yield variances for labour and
materials (Us)
( )
4. Understand and apply the models used in deciding
whether or not to investigate variances (Us)
( )
5. Recognize the limitations of standard costing (You)
)
(
6. Understand the role of the balance scorecard as a
performance measurement tool (Us
(Us))
10-2
10-2
Standard costs & the Variance Analysis Cycle
Identify
questions.
Analyze
variances.
Receive
explanations.
What’s the problem
with this approach?
Begin
Take
corrective
actions.
Conduct next
month’s
operations.
Prepare monthly
standard cost
performance
report.
10-3
10-3
A General Model for Variance Analysis
Actual Quantity
_
Actual Price
Actual Quantity
_
Standard Price
Price Variance
AQ(AP - SP)
AQ = Actual Quantity
AP = Actual Price
Materials price variance
Labor rate variance
Variable OH
spending variance
Standard Quantity
_
Standard Price
Quantity Variance
SP(AQ - SQ)
SP = Standard Price
SQ = Standard Quantity
Materials quantity variance
Labor efficiency variance
Variable OH
efficiency variance
10-‹#›
10-4
10-4
Problem 10-11
10-5
10-5
Production Mix and Yield Variances
Where managers have discretion to make substitutions among
types of materials or labour, the efficiency variance can be
broken into yield and mix variances.
The material yield variance is the difference between actual
and budgeted total quantity of inputs for actual output achieved,
multiplied by budgeted prices (budgeted mix is held constant).
Think of this as the pure quantity portion of the efficiency variance.
The material mix variance is the difference between actual
and budgeted mix for the total quantity of inputs used, multipled by
budgeted prices (the total quantity of inputs used is held constant)
Yield & Mix Variances: Formulas
10-6
10-6
 Yield:
(Ma – SQa)SPa
This is computed for each type of input and the amounts
summed to calculate the total yield variance.
Where:
Ma = total input quantity (A + B +…
+…) x Budgeted Mixa
SQa = standard quantity of A for output achieved
SPa = standard price of A
Or: (AQtotal – SQtotal) x SPaverage
AQtotal = Actual total quantity of all inputs (A + B +…
+…)
SQtotal = Standard total quantity of all inputs (A + B +…
+…)
SPaverage = weighted average standard price of inputs given
budgeted mix [(SPa x Mixa) +(SPb x Mixb) …..]
10-‹#›
10-7
10-7
Yield & Mix Variances: Formulas
 Mix:
(AQa –Ma)SPa
This is computed for each type of input and the
amounts summed to calculate the total mix
variance.
Where:
Ma = actual total input quantity (A + B +…
+…) x
Budgeted Mixa
AQa = actual quantity of material used for input A
SPa = standard price of input A
10-8
10-8
Problem 10-21
10-9
10-9
To Investigate or Not to Investigate? How to Decide
 Size of variance



Dollar amount
Percentage of standard
Advantages? Disadvantages?
 Statistical approach

Is the variance statistically significant?
Past variation is incorporated in the method

Advantages? Disadvantages?

10-‹#›
10-10
10-10
The Statistical Approach: Variance Investigation
 Requires a mean and standard deviation be
calculated for past levels of performance.
 Statistically evaluate if current level of performance
is significantly different from past levels of
performance.
Example
Assume the mean of material X used is 0.74 kg per
unit.
unit. This was determined by averaging
observations over the past 48 months.
 Suppose this month .80 kg per unit of material X
was used.
Solution to the Statistical Approach
10-11
10-11
The standard deviation of the amount of
material X used per unit was calculated
by your staff using the formula below.
∑(X
i −
s=
X)
(n − 1)
2
= 0.027
Given a standard deviation of 2.7, should the variance of
.06 kg per unit (.80 - .74) be investigated, assuming we
use a 95% confidence interval in making investigation
decisions?
Criticisms of Standard Costing
Standard costing may be inappropriate in
some modern manufacturing environments.
Undue concern for variances and cost
minimization may lead to lower quality.
Automation reduces labor costs and
the significance of labor variances.
Standard costing may not be applicable
in flexible manufacturing operations
with short life-cycle products.
Operational measures at least as
important to monitor and manage
10-12
10-12
10-‹#›
10-13
10-13
Balanced Scorecard: Key Characteristics
 Measures are selected on the basis that they are
linked to the strategic objectives of the firm
 Measures tend to categorized:




Learning & growth
Internal business processes
Customer
Financial
 Mix of financial and non-financial measures
 Mix of leading and lag indicators: causal linkages
 “Rolled down”
down” through all levels of the company
10-14
10-14
10-32 & 10-35
Production and Delivery Performance
Measures
Order
Received
Wait Time
Production
Starts
Goods
Shipped
Process Time + Inspection Time
+ Move Time + Waiting Time
Manufacturing Cycle Time
Delivery Cycle Time
Manufacturing
Cycle
=
Efficiency
Process Time
Manufacturing Cycle Time
10-15
10-15
10-‹#›
10-16
10-16
Problem 10-14