Standard Costs and Operating
Performance Measures
Chapter 11
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Standard Costs
Standards are benchmarks or “norms” for
measuring performance. In managerial accounting,
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.
Price standards
specify how much
should be paid for
each unit of the
input.
Examples: Firestone, Sears, McDonald’s, hospitals,
construction and manufacturing companies.
11-2
Standard Costs
Amount
Deviations from standards 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
11-3
Variance Analysis Cycle
Identify
questions
Receive
explanations
Take
corrective
actions
Conduct next
period’s
operations
Analyze
variances
Prepare standard
cost performance
report
Begin
11-4
Setting Standard Costs
Should we use
ideal standards that
require employees to
work at 100 percent
peak efficiency?
Engineer
I recommend using practical
standards that are currently
attainable with reasonable
and efficient effort.
Managerial Accountant
11-5
Setting Direct Material Standards
Price
Standards
Quantity
Standards
Final, delivered
cost of materials,
net of discounts.
Summarized in
a Bill of Materials.
11-6
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.
11-7
Setting Variable Manufacturing Overhead
Standards
Rate
Standards
Quantity
Standards
The rate is the
variable portion of the
predetermined overhead
rate.
The quantity is
the activity in the
allocation base for
predetermined overhead.
11-8
Price and Quantity Standards
Price and quantity standards are
determined separately for two reasons:
The purchasing manager is responsible for raw
material purchase prices and the production manager
is responsible for the quantity of raw material used.
The buying and using activities occur at different times.
Raw material purchases may be held in inventory for a
period of time before being used in production.
11-9
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
11-10
A General Model for Variance Analysis
Variance Analysis
Price Variance
Quantity Variance
Materials price variance
Labor rate variance
VOH rate variance
Materials quantity variance
Labor efficiency variance
VOH efficiency variance
11-11
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
11-12
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.
11-13
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 of the period.
11-14
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 input used.
11-15
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.
11-16
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
11-17
Responsibility for Material Variances
Materials Quantity Variance
Production Manager
Materials Price Variance
Purchasing Manager
The standard price is used to compute the quantity variance
so that the production manager is not held responsible for
the purchasing manager’s performance.
11-18
Responsibility for Labor Variances
Production managers are
usually held accountable
for labor variances
because they can
influence the:
Mix of skill levels
assigned to work tasks.
Level of employee
motivation.
Quality of production
supervision.
Production Manager
Quality of training
provided to employees.
11-19
Advantages of Standard Costs
Management by
exception
Promotes economy
and efficiency
Advantages
Simplified
bookkeeping
Enhances
responsibility
accounting
11-20
Potential Problems with Standard Costs
Emphasizing standards
may exclude other
important objectives.
Standard cost
reports may
not be timely.
Invalid assumptions
about the relationship
between labor
cost and output.
Potential
Problems
Favorable
variances may
be misinterpreted.
Emphasis on
negative may
impact morale.
Continuous
improvement may
be more important
than meeting standards.
11-21
Delivery Performance Measures
Order
Received
Wait Time
Production
Started
Goods
Shipped
Process Time + Inspection Time
+ Move Time + Queue Time
Throughput Time
Delivery Cycle Time
Process time is the only value-added time.
11-22
Delivery Performance Measures
Order
Received
Wait Time
Production
Started
Goods
Shipped
Process Time + Inspection Time
+ Move Time + Queue Time
Throughput Time
Delivery Cycle Time
Manufacturing
Cycle
=
Efficiency
Value-added time
Manufacturing cycle time
11-23
End of Chapter 11
11-24
