Standard Costs and the Balanced Scorecard Learning Objectives Show
Lecture Notes A.Standard Costs-Management by Exception. A standard is a benchmark or "norm" for measuring performance. In managerial accounting, standards relate to the cost and quantity of inputs used in manufacturing goods or providing services. 1.Quantity standards. Quantity standards indicate how much of an input, such as labor time or raw materials, should be used in manufacturing a unit of product or in providing a unit of service. To measure performance, actual quantities used are compared to standard quantities allowed. B. Setting Standard Costs. Standards should be set so that they encourage efficient operations. 1. Ideal versus practical standard. Standards tend to fall into one of two categories-either ideal or practical. C. A General Model for Variance Analysis. A variance is the difference between standard prices and quantities on the one hand and actual prices and quantities on the other hand. A general model can be used to describe the variable cost variances. This model, which isolates variances into price variances and quantity variances, is found in Exhibit 10-3. 1. Price variance. The price variance is the difference between the actual quantity of inputs at the actual price and the actual quantity of inputs at the standard price. As discussed later, the "actual quantity of inputs" ordinarily refers to the actual quantity of inputs purchased, which may differ from the actual quantity of inputs used. D. Computation and Interpretation of Standard Cost Variances. Since direct material, direct labor, and variable overhead are all variable manufacturing costs, the process of computing price and quantity variances for each cost category is the same. The general model can be used in each case to compute the variances. The only complication is deciding in each case whether the actual quantity of inputs refers to the actual quantity purchased or the actual quantity used. 1. Direct material variances.a. The materials price variance is the difference between what is paid for a given quantity of materials and what should have been paid according to the standard. Most firms compute the material price variance when materials are purchased rather than when the materials are placed into production. Generally speaking, the purchasing manager has control over the price to be paid for goods and is therefore responsible for any price variance. E. Variance Analysis and Management by Exception. Management by exception means that the manager's attention should be directed towards areas where things are not proceeding according to plans. Standard cost variances signal performance different from what was expected. Since not all variations require the attention of management, some method of identifying those variations that do require attention is required. Statistical analysis can be useful in this task and the basics of this approach are sketched in the text. F. Potential Problems with Using Standard Costs. Some of the potential disadvantages of standard costs have been mentioned in passing above. A more complete list follows: 1. Standard cost variance reports are usually prepared on a monthly basis and are released long after the end of the month. As a consequence, the information in the reports may be so stale that it is almost useless. It is better to have timely, frequent reports that are approximately correct than to have untimely, infrequent reports that are very precise but too old to be of much use. Some companies are now reporting variances and other key operating data daily or even more frequently. G. Balanced Scorecard. A balanced scorecard consists of an integrated set of performance measures that are derived from the company's strategy and that support the company's strategy throughout the organization. Since each company's strategy and operating environment is different, each company's balanced scorecard will be unique. However, they will have some common characteristics. 1. Common characteristics of balanced scorecards.a. It should be possible, by examining a company's balanced scorecard, to infer its strategy and the assumptions underlying that strategy. (See Exhibit 10-13 for an example.) What two variances make up the direct labor variance?Answer: Similar to direct materials variances, direct labor variance analysis involves two separate variances: the labor rate variance and labor efficiency variance.
What is the difference between the actual labor rate and the standard labor cost called?The labor rate variance is equivalent to the difference between the standard rate and actual rate, multiplied times the actual hours worked. For calculating the labor rate variance, the measurement of cost of labor is based on actual hours worked rather than standard hours.
What is the difference between Labour cost variance?Direct labour cost variance is the difference between the standard cost for actual production and the actual cost in production. There are two kinds of labour variances. Labour Rate Variance is the difference between the standard cost and the actual cost paid for the actual number of hours.
What two variances make up the direct labor variance chegg?Overview of Direct Labor Rate Variance
Labor variance is divided into two variances: labor rate variance and labor efficiency variance. Labor rate variance is defined as the difference between standard cost and actual cost, which is paid for the actual number of hours.
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