Standard Costing, Operational Performance Measures

CHAPTER 10 STANDARD COSTING, operating(a) PERFORMANCE MEASURES 1. MANAGING be 1. bar- make up systems ar apply to care film directors control the salute of operations. The system has three components type cost (i. e. , predetermined cost), echt cost, and the difference betwixt the two figures (termed a discrepancy). 2. A quantity cost for each production cost category (materials, tire, and overhead) is reckon on a per-unit basis. ? This calculation considers the aforethought(ip) meter of each input compute allowed (pounds, hours, etc. and the computer programmened determine for each input factor (price per pound, set up per hour, etc. ). The total planned cost is a mini, per-unit budgeted centre. After the tangible costs are known, a report is gene castd that shows actual costs, planned costs, and related partitions. A manager can examine the variance tower quickly to ascertain which exceptions require attention. ? Following up on significant variances is c alled management by exception. Managers counsel their efforts where they are most infallible in the expressage period available. 2. SETTING STANDARDS . Managers set touchstones by analyzing historical data. However, past data must be alter for expected changes in technology, the ware process, inflation, and another(prenominal) equal factors. ? Managers to a fault use task synopsis to focalisation on how much a product should cost. inner people much(prenominal) as engineers, purchasing agents, production supervisors, and accountants should be brought into the standard-setting process. Cross-functional teams are very useful here. 4. 2 types of standards may be utilize perfection standards and hardheaded standards. Perfection (ideal) standards assume that production takes place in the ideal world employees al trends work at peak performance, materials are never defective, and machines never defect down. ? Although some managers feel that ideal standards give employ ees a goal to shoot for, many behavioral scientists desire that setting unattainable goals has a demotivating effect, as employees simply give up trying to reach the standard. ? realistic (attainable) standards are set high enough to support efficient and effective operations but non so high as to seem impossible. behavioural scientists feel that practical standards behave a more(prenominal) than lordly effect on the productivity of employees. ? unconnected variances computed with perfection standards, variances calculated when practical standards are sedulous tend to be more meaningful as they represent deviations from a realistic goal. Service firms withal 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 time allowed to serve customers at the drive-in window or counter. . VARIANCE ANALYSIS 5. Variance analysis involves calculating the actual amount of inpu t utilise and canvas 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(prenominal) analyzed into its component parts. 6. Standards are established for ? The amount of material required to produce a spotless product (the standard material quantity). ? The anticipated delivered cost of materials (the standard material price). The number of hours normally needed to manufacture one unit of product (the standard direct- tote quantity). ? The estimated hourly cost of compensation (the standard labor rate). The following 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 standard = (AQ Used x SP) (SQ Used* x SP) DL Rate = (AQ x AP) (AQ x SP) DL skill = (AQ x SP) (SQ* x SP) * Standard quantity for the actual production levelNotice that the price and rate variances use a similar memory access, and the q uantity and susceptibility variances use a similar approach, with efficiency universe another way to say quantity of hours allowed. Un gold variances arise when the actual cost per unit of input (e. g. , gallons, hours, etc. ) go throughs standard cost and when actual quantities used (e. g. , gallons, hours, etc. ) exceed standard quantities. The opposite situation gives rise to complimentary variances. 4. VARIANCE INVESTIGATION 1.A manager does not have time to examine each variance therefore, he or she must consider selected factors in deciding when an investigating should take place. The factors include one or more of the following ? Size of the variance (in rank(a) and/or relative terms, such as $5,000 or 10% of standard cost) ? Frequency of occurrence ? An differently small variance may require investigation if it consistently occurs, as it may indicate an ongoing problem or an outdated standard. ? Trends ? Controllability (there is little orchestrate to investigate it ems over which managers have no control). approving variances ? A manager should investigate both favorable and unfavorable variances. A favorable variance with advertize expense, for instance, could lead to the conclusion that an insufficient amount is being spent on promotion, which could lead to a sacking of customers. ? Costs 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 random and purposive variances, with a statistically determined critical entertain 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 soulnel, often with determine to salary increases, bonuses, and promotions. ? Such incentives can have positive and negative effects, as a bonus plan may prompt a manager to track actions that are not in the best interests of the organization. ? An example of detrimental behavior A purchasing manager may purchase cheap material to make water a favorable price variance.That material could be of poor quality, which might result in overmuchness 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 signalize the manager who is most able to influence a particular 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 problem s with machinery and/or material. ? Managers sometimes tradeoff 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 through the same accounts in the public ledger as shown earlier in the schoolbook 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 some(prenominal) advantages, as follows ? Managers have a sensible analogy 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 raise a benchmark for performance evaluation and employee rewards. ? Standard costs provide a stable product cost.Actual costs may fluctuate erratically, whereas standard costs are changed onl y periodically. 9. CRITICISMS OF STANDARD COSTING IN TODAYS MANUFACTURING ENVIRONMENT 3. Criticisms of standard costing in mod manufacturing settings include ? Variances are too aggregated and occur too late to be useful. Variances should localise on activities, specific product lines, or production batches. ? Variances focus too much 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 trim down this stability, with frequent switching 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. practicable 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 cu stomer complaints, warranty claims, and product returns. bringing cycle time, or the average time mingled with the receipt of a customer order and the rake of goods. ? Manufacturing cycle time, or the total production time per unit. ? Manufacturing cycle efficiency, or processing time change integrity by the sum of processing time, inspection time, wait time, and move time. To judge how well or gravely a company 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.