Standard Costs and the

Balanced Scorecard
 Standard Costs
Standards are benchmarks or “norms”
for measuring performance. Two types
of standards are commonly used.

Quantity standards Cost (price)

specify how much of an standards specify
input should be used to how much should be
make a product or paid for each unit
provide a service. of the input.
 Standard Costs
Deviations from standards deemed significant
are brought to the attention of management, a
practice known as management by exception.

Standard
Amount

Direct
Material
Direct Manufacturing
Labor Overhead

Type of Product Cost

 Exhibit
9-1

Variance Analysis Cycle

Take
Identify Receive corrective
questions explanations actions

Conduct next
Analyze period’s
variances operations

Prepare standard
Begin
cost performance
report
 Setting Standard Costs

Accountants, engineers, purchasing

agents, and production managers
combine efforts to set standards that encourage efficient
future production.
 Setting Standard Costs
Should we use I recommend using practical
ideal standards that standards that are currently
require employees to attainable with reasonable and
work at 100 percent efficient effort.
peak efficiency?

Engineer Managerial
Accountant
Learning Objective 1

Explain how direct

materials standards
and direct labor
standards are set.
 Setting Direct Material
Standards
Price Quantity
Standards Standards

Final, delivered Summarized in

cost of materials, a Bill of Materials.
net of discounts.
 Setting Standards
Six
Six Sigma
Sigma 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 bebe reduced
reduced overover time.
time.
 Setting Direct Labor Standards
Rate Time
Standards Standards

Often a single Use time and

rate is used that reflects motion studies for
the mix of wages earned. each labor operation.
 Setting Variable Overhead
Standards
Rate Activity
Standards Standards

The rate is the The activity is the

variable portion of the base used to calculate
predetermined overhead the predetermined
rate. overhead.
 Standard Cost Card – Variable
Production Cost
A standard cost card for one unit
of product might look like this:
A B AxB
Standard Standard Standard
Quantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. $ 4.00 per lb. $ 12.00
Direct labor 2.5 hours 14.00 per hour 35.00
Variable mfg. overhead 2.5 hours 3.00 per hour 7.50
Total standard unit cost $ 54.50
 Standards vs. Budgets

Are standards the A standard is a per

same as budgets? unit cost.
A budget is set for Standards are often
used when
total costs. preparing budgets.
 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 ofof raw
raw material
material used.
used.

 The
 The buying
buying and
and using
using activities
activities occur
occur atat different
different times.
times.
Raw
Raw material
material purchases
purchases may
may be be held
held inin inventory
inventory for
for aa
period
period of
of time
time before
before being
being used
used inin production.
production.
A General Model for Variance
Analysis
Variance Analysis

Price Variance Quantity Variance

Difference between Difference between

actual price and actual quantity and
standard price standard quantity
 A General Model for Variance
Analysis
Variance Analysis

Price Variance Quantity Variance

Materials price variance Materials quantity variance

Labor rate variance Labor efficiency variance
VOH spending variance VOH efficiency variance
 A General Model for Variance
Analysis
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

 A General Model for Variance
Analysis
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Actual quantity is the amount of direct

materials, direct labor, and variable
manufacturing overhead actually used.
 A General Model for Variance
Analysis
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Standard quantity is the standard quantity

allowed for the actual output of the period.
 A General Model for Variance
Analysis
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Actual price is the amount actually

paid for the input used.
 A General Model for Variance
Analysis
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Standard price is the amount that should

have been paid for the input used.
 A General Model for Variance
Analysis
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)

AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity
Learning Objective 2

Compute the direct

materials price and
quantity variances and
explain their significance.
 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.
 Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
× × ×
$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favorable $50 unfavorable
 Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
× $1,029 ÷× 210 ×
$4.90 per kg. kgs $5.00 perper
= $4.90 kg. $5.00 per kg.
= $1,029 =kg
$1,050 = $1,000

Price variance Quantity variance

$21 favorable $50 unfavorable
 Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
× × × 2,000
0.1 kg per parka ×
$4.90 per kg. $5.00
parkas per kgs
= 200 kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favorable $50 unfavorable
 Material Variances:
Using the Factored Equations
Materials price variance
MPV = AQ (AP - SP)
= 210 kgs ($4.90/kg - $5.00/kg)
= 210 kgs (-$0.10/kg)
= $21 F
Materials quantity variance
MQV = SP (AQ - SQ)
= $5.00/kg (210 kgs-(0.1 kg/parka× 2,000 parkas))
= $5.00/kg (210 kgs - 200 kgs)
= $5.00/kg (10 kgs)
= $50 U
Isolation of Material Variances
I’ll start computing
I need the price variance the price variance
sooner so that I can better
when material is
identify purchasing problems.
purchased rather than
You accountants just don’t when it’s used.
understand the problems that
purchasing managers have.
 Material Variances

The price variance is

Hanson purchased and
computed on the entire
used 1,700 pounds.
quantity purchased.
How are the variances
computed if the amount The quantity variance
purchased differs from is computed only on
the amount used? the quantity used.
 Responsibility for Material Variances

Materials Quantity Variance Materials Price Variance

Production Manager Purchasing Manager

The
The standard
standard price
price is
is used
used to
to compute
compute the
the quantity
quantity variance
variance
so
so that
that the
the production
production manager
manager isis not
not held
held responsible
responsible for
for
the
the purchasing
purchasing manager’s
manager’s performance.
performance.
Responsibility for Material Variances

Your poor scheduling

I am not responsible for sometimes requires me to
this unfavorable material rush order material at a
quantity variance. higher price, causing
unfavorable price variances.
You purchased cheap
material, so my people
had to use more of it.
 Zippy
Quick Check 

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.
 Zippy
Quick Check 

Hanson’s
Hanson’s material
material price
price variance
variance (MPV)
(MPV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
d.
d. $800
$800 favorable.
favorable.
 Zippy
Quick Check 

Hanson’s
Hanson’s material
material price
price variance
variance
(MPV)
(MPV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavorable.
unfavorable.
MPV = AQ(AP - SP)
b.
b. $170
$170 favorable.
favorable.
MPV = 1,700 lbs. × ($3.90 - 4.00)
c. $800 unfavorable.
MPV = $170 Favorable
c. $800 unfavorable.
d.
d. $800
$800 favorable.
favorable.
 Zippy
Quick Check 

Hanson’s
Hanson’s material
material quantity
quantity variance
variance
(MQV)
(MQV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
d.
d. $800
$800 favorable.
favorable.
 Zippy
Quick Check 

Hanson’s
Hanson’s material
material quantity
quantity variance
variance
(MQV)
(MQV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
MQV = SP(AQ - SQ)
unfavorable.
MQV = $4.00(1,700 lbs - 1,500 lbs)
d.
d. $800
$800 favorable.
favorable.
MQV = $800 unfavorable
 Zippy
Quick Check 

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price
1,700 lbs. 1,700 lbs. 1,500 lbs.
× × ×
$3.90 per lb. $4.00 per lb. $4.00 per lb.
= $6,630 = $ 6,800 = $6,000

Price variance Quantity variance

$170 favorable $800 unfavorable
 Zippy
Quick Check  Continued

Hanson Inc. has the following material standard

to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound

Last week, 2,800 pounds of material were

purchased at a total cost of $10,920, and 1,700
pounds were used to make 1,000 Zippies.
 Zippy
Quick Check  Continued
Actual Quantity Actual Quantity
Purchased Purchased
× ×
Actual
2,800Price
lbs. Standard Price
2,800 lbs.
× ×
$3.90 per lb. $4.00 per lb.
= $10,920 = $11,200

Price variance increases

Price variance because quantity
$280 favorable purchased increases.
 Zippy
Quick Check  Continued
Actual Quantity
Used Standard
Quantity
× ×
Standard Price Standard Price
1,700 lbs. 1,500 lbs.
× ×
$4.00 per lb. $4.00 per lb.
= $6,800 = $6,000
Quantity variance is
unchanged because
actual and standard Quantity variance
quantities are unchanged. $800 unfavorable