Dr. Bob’s 256 Notes, 11-1
CHAPTER 11
STANDARD COSTS AND OPERATING PERFORMANCE MEASURES
I.



OBJECTIVES
Overview of how standard costing systems are established and used
Standard cost variance analysis for materials and labor
Overview of how operating performance measures are used
II.
OVERVIEW OF STANDARD COSTS:
A. Standard Costs are …
 Based on carefully predetermined amounts
 Used for planning labor, material, and overhead requirements
 The expected level of performance
 Benchmarks for measuring performance
B.
Focus is on quantities and costs that exceed established standards, a practice
known as…
C.
Advantages
 Possible reductions in production costs
 Better information for planning and
decision making
Disadvantages
 Emphasis on negative exceptions may
impact morale, lead to cover ups
 Focus on big variances may obscure early
stages of trends
D. Setting Standard Costs
 In General…
 _______________ Standards


based on perfect conditions (e.g., machines never break down)
really not attainable
 _______________ Standards

levels that are currently attainable, but high enough to encourage efficient and
effective operations
Dr. Bob’s 256 Notes, 11-2
 Specific Standard-Setting
 Materials Standards
 Price – Use competitive bids for the quality and quantity desired
 Quantity – Use product design specifications
 So, the standard material cost for one unit of product is:
 Labor Standards
 Rate – Use wage surveys and labor contracts
 Time – Use time and motion studies for each labor operation
 So, the standard labor cost for one unit of product is:
 Variable Overhead Standards
 We’re not covering Overhead Variance in this course; however it’s not really different
from the above discussion (just more involved in the calculations).
 Standard Cost Card might look something like this:
Inputs
Direct Materials
Direct Labor
Variable Mfg. Overhead
Total Standard Unit Cost
Standard
Quantity
or Hours
3.0 lbs.
2.5 hrs.
2.5 hrs.
Standard
Price
or Rate
$ 4.00 per lb.
14.00 per hr.
3.00 per hr.
 What’s the difference between a Standard and a Budget
___________________ is the expected cost for one unit.
___________________ is the expected cost for all units.
Standard Cost
$12.00
35.00
.50
$54.50
Dr. Bob’s 256 Notes, 11-3
III.
Standard Cost Variance Analysis
Standard Cost Variances
Price Variance
Quantity Variance
 A General Model for Variance Analysis
Actual Quantity
x
Actual Price
Actual Quantity
x
Standard Price
Standard Quantity
x
Standard Price
Dr. Bob’s 256 Notes, 11-4
Demo Problem: Let’s use the General Model to compute the Materials and Labor Variances for
Hansen Company.
 Materials Variances:
 Hanson Inc. has the following direct material standard to manufacture one Zippy:
 1.5 pounds per Zippy at $4.00 per pound
 Last week, 1,700 pounds of material were purchased and used to make 1,000 Zippies.
The material cost a total of $6,630.
 What is the actual price per pound paid for the material?
 What is the standard quantity of material that should have been used to produce 1,000
Zippies?
Actual Quantity
x
Actual Price
Actual Quantity
x
Standard Price
Standard Quantity
x
Standard Price
 An Issue Regarding Standard Cost Variance Analysis for Materials:
Suppose in the Demo Problem that Hanson had purchased 2,800 pounds of material for a total
cost of $10,920; but used only 1,700 pounds in making the 1,000 Zippies. How do the Variances
change?
 Price Variance
 Quantity Variance
Dr. Bob’s 256 Notes, 11-5
 Info for Labor Variances:
 Hanson has the following direct labor standard to manufacture one Zippy:
 1.5 standard hours per Zippy at $6.00 per direct labor hour
 Last week 1,550 direct labor hours were worked at a total labor cost of $9,610 to make
1,000 Zippies.
 What was Hanson’s actual rate for labor for the week?
 What is the amount of standard labor hours that should have been worked to produce 1,000
Zippies?
Actual Hours
x
Actual Rate
Actual Hours
x
Standard Rate
Standard Hours
x
Standard Rate
Dr. Bob’s 256 Notes, 11-6
IV. OPERATIONAL PERFORMANCE MEASURES
Demo Problem – Delivery Performance Measures: Smith Company recorded the following
average times for each order received and processed:
Wait time to start production
6.0 days
Inspection time
0.5 days
Process time
2.0 days
Move time
0.2 days
Queue time
4.0 days
Delivery Cycle and Throughput Time:
Customer’s
Order
Received
Production
Started
Wait Time
Goods
Shipped
Process Time
+ Inspection Time + Move Time + Queue Time
Throughput Time
(Manufacturing Cycle Time)
Delivery Cycle Time
 Value-Added Time
 Non-Value-Added Time
 Key Measures of Delivery Performance:
 Percentage of on-time deliveries
 Throughput time (aka manufacturing cycle time, or the velocity of production)
 Measured by the Manufacturing Cycle Efficiency (MCE):
MCE = Value-Added Time = Process Time
Throughput Time
Throughput Time
 Delivery cycle time
= Wait Time + Throughput Time