Standard Costing, Operational Performance Measures

CHAPTER 10 warning COSTING, OPERATIONAL PERFORMANCE MEASURES 1. MANAGING cost 1. Standard- hail systems atomic number 18 used to help managing directors ope come in on the cost of operations. The system has three components step be (i. e. , predetermined be), developed be, and the difference between the two figures (termed a strain). 2. A standard cost for to each one fruit cost category (materials, labor, and overhead) is calculated on a per- unit of measurement basis. ? This calculation considers the planned quantity of each input factor allowed (pounds, hours, and so on and the planned price for each input factor (price per pound, rate per hour, and so forthtera ). The total planned cost is a mini, per-unit budgeted add. After the unquestionable costs ar k instantaneouslyn, a report is generated that shows actual costs, planned costs, and related magnetic variations. A passenger car tush examine the variance column quickly to regain which exceptions require attention. ? Following up on significant variances is called management by exception. Managers focalise their efforts where they atomic number 18 most needed in the limited cadence available. 2. SETTING regularS . Managers set standards by analyzing historical data. However, past data moldiness be adjusted for expected changes in technology, the business process, inflation, and early(a) alike(p) factors. ? Managers also use task analysis to focus on how oft a product should cost. Knowledgeable people such as engineers, buy agents, output signal supervisory programs, and accountants should be brought into the standard-setting process. Cross-functional teams are very useful here. 4. Two types of standards may be used perfection standards and practicable standards. Perfection (ideal) standards assume that production takes place in the ideal world employees al focusings work at peak performance, materials are never defective, and machines never break down. ? Although some managers heart that ideal standards depart employees a goal to shoot for, many behavioural scientists believe that setting unattainable goals has a demotivating effect, as employees simply give up trying to reach the standard. ? Practical (attainable) standards are set gritty enough to encourage efficient and effective operations notwithstanding not so high as to seem im achievable. Behavioral scientists feel that practical standards have a more positive effect on the productiveness of employees. ? Unlike variances computed with perfection standards, variances calculated when practical standards are employed move to be more meaningful as they represent deviations from a practical(prenominal) goal. Service firms also use standards. For example, McDonalds restaurants are noted for using standards, not only for quantities of material (amount of beef per burger) but also for the measure allowed to swear out guests at the drive-in window or counter. . partitioning ANALYSIS 5. disagreement analysis involves calculating the actual amount of input used and compare it to the budgeted amount of input that should have been used (i. e. , the standard cost allowed for actual output). The variance is then analyzed into its component parts. 6. Standards are established for ? The amount of material required to produce a sunk product (the standard material quantity). ? The anticipated delivered cost of materials (the standard material price). The number of hours ordinarily needed to manufacture one unit of product (the standard direct-labor quantity). ? The estimated periodic cost of compensation (the standard labor rate). The by-line model can be used to calculate variances for direct materials (DM) and direct labor (DL) DM Price = (AQ Purchased x AP) (AQ Purchased x SP) DM Quantity = (AQ Used x SP) (SQ Used* x SP) DL Rate = (AQ x AP) (AQ x SP) DL Efficiency = (AQ x SP) (SQ* x SP) * Standard quantity for the actual production levelNotice that the price a nd rate variances use a similar approach, and the quantity and susceptibility variances use a similar approach, with efficiency be another way to say quantity of hours allowed. Unfavorable variances arise when the actual cost per unit of input (e. g. , gallons, hours, etc. ) exceeds standard cost and when actual quantities used (e. g. , gallons, hours, etc. ) exceed standard quantities. The opposite situation gives rise to favorable variances. 4. VARIANCE INVESTIGATION 1.A manager does not have time to examine each variance therefore, he or she must consider selected factors in decision making when an investigation should take place. The factors include one or more of the following ? Size of the variance (in absolute and/or relative terms, such as $5,000 or 10% of standard cost) ? Frequency of occurrence ? An otherwise itsy-bitsy variance may require investigation if it consistently occurs, as it may indicate an ongoing problem or an outdated standard. ? Trends ? Controllabilit y (there is little time period to ask items over which managers have no control). Favorable variances ? A manager should investigate both favorable and bad variances. A favorable variance with advertising expense, for instance, could lead to the conclusion that an insufficient amount is being pass on promotion, which could lead to a loss of customers. ? woos and benefits (the decision to investigate involves a cost-benefit analysis, as a number of investigative costs are incurred). Some companies use a statistical approach to variance investigation by preparing a statistical control chart. These charts help to pinpoint hit-or-miss and nonrandom variances, with a statistically determined critical value being compared to a variance to determine whether an investigation is warranted. 5. BEHAVIORAL IMPACT OF STANDARD COSTING 1. Variances may be used to evaluate personnel, often with construe to salary increases, bonuses, and promotions. ? Such incentives can have positive and neg ative effects, as a bonus plan may prompt a manager to pursue actions that are not in the best interests of the organization. ? An example of hurtful behavior A purchasing manager may purchase forte material to create a favorable price variance.That material could be of poor quality, which might result in excess usage and problems with the finished product. 6. CONTROLLABILITY OF VARIANCES 2. It is rare that one person controls any event however, it is often possible to identify the manager who is most able to influence a picky variance. These managers are often the following ? Direct-material price variancePurchasing manager ? Direct-material quantity varianceProduction supervisor and/or production engineers ? Direct-labor rate varianceProduction supervisor ? Direct-labor efficiency varianceProduction supervisor . Variances often interact, making investigation and controllability difficult. For example, a labor efficiency variance may be caused by problems not only with labor but by problems with machinery and/or material. ? Managers sometimes trade-off variances, purposely incurring an unfavorable variance that is more than offset by favorable variances. 7. STANDARD COSTS AND PRODUCT COSTING 4. In a standard-cost system, costs flow with the same accounts in the general ledger as shown earlier in the text however, they flow through at standard cost.In other words, Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold are carried at standard cost. 8. ADVANTAGES OF STANDARD COSTS 2. A standard-cost system has several advantages, as follows ? Managers have a sensible semblance method at their disposal, one that looks at budgeted costs vs. actual costs at the actual level of output. ? Managers can practice management by exception. ? Variances provide a benchmark for performance evaluation and employee rewards. ? Standard costs provide a stable product cost.Actual costs may flutter erratically, whereas standard costs are changed only per iodically. 9. CRITICISMS OF STANDARD COSTING IN TODAYS MANUFACTURING ENVIRONMENT 3. Criticisms of standard costing in advanced manufacturing settings include ? Variances are overly aggregated and arrive too late to be useful. Variances should focus on activities, specific product lines, or production batches. ? Variances focus too oftentimes on the cost and efficiency of labor, which is becoming a relatively unimportant factor of production. Standard costs rely on a stable production environment, and flexible manufacturing systems have reduced this stability, with frequent chemise among a variety of products on the same manufacturing line. ? Standards focus too much on cost minimization and not enough on product quality, customer service, and other contemporary issues. 10. OPERATIONAL CONTROL MEASURES 5. Many companies now focus on an increased number of performance measures, many of which are nonfinancial in nature. Examples often include ? Customer-acceptance measures such as customer complaints, warranty claims, and product returns. Delivery motorcycle time, or the average time between the receipt of a customer order and the delivery of goods. ? Manufacturing cycle time, or the total production time per unit. ? Manufacturing cycle efficiency, or treat time divided by the sum of processing time, inspection time, time lag time, and move time. To judge how well or poorly a social club is performing, many firms use benchmarking, which involves comparing existing performance levels against those of either other organizations or other units within the same organization.