10- # Chapter 10 Objectives. Standard costs & the Variance Analysis Cycle. A General Model for Variance Analysis. Quantity Variance.

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1 Chapter 10 Objectives Understand the difference between ideal & practical standards (You)( 2. Calculate variances for direct labour, direct materials and variable overhead (Us)( 3. Calculate mix and yield variances for labour and materials (Us)( 4. Understand and apply the models used in deciding whether or not to investigate variances (Us)( 5. Recognize the limitations of standard costing (You)( 6. Understand the role of the balance scorecard as a performance measurement tool (Us( Us) Standard costs & the Variance Analysis Cycle 10-2 Identify questions. Receive explanations. Take corrective actions. Analyze variances. What s the problem with this approach? Begin Prepare monthly standard cost performance report. Conduct next month s operations. A General Model for Variance Analysis 10-3 Actual Quantity Actual Quantity Standard Quantity _ Actual Price Standard Price Standard Price Price Variance AQ(AP - SP) AQ = Actual Quantity AP = Actual Price Materials price variance Labor rate variance Variable OH spending variance Quantity Variance SP(AQ - SQ) SP = Standard Price SQ = Standard Quantity Materials quantity variance Labor efficiency variance Variable OH efficiency variance

2 Problem Production Mix and Yield Variances 10-5 Where managers have discretion to make substitutions among types of materials or labour, the efficiency variance can be broken into yield and mix variances. The material yield variance is the difference between actual and budgeted total quantity of inputs for actual output achieved, multiplied by budgeted prices (budgeted mix is held constant). Think of this as the pure quantity portion of the efficiency variance. The material mix variance is the difference between actual and budgeted mix for the total quantity of inputs used, multipled by budgeted prices (the total quantity of inputs used is held constant) Yield & Mix Variances: Formulas Yield: (M a SQ a )SP a This is computed for each type of input and the amounts summed to calculate the total yield variance. Where: M a = total input quantity (A + B + ) + ) x Budgeted Mix a SQ a = standard quantity of A for output achieved SP a = standard price of A 10-6 Or: (AQ total SQ total ) x SP average AQ total = Actual total quantity of all inputs (A + B + ) + SQ total = Standard total quantity of all inputs (A + B + ) + SP average = weighted average standard price of inputs given budgeted mix [(SP a x Mix a ) +(SP b x Mix b )..]

3 Yield & Mix Variances: Formulas Mix: (AQ a M a )SP a This is computed for each type of input and the amounts summed to calculate the total mix variance. Where: M a = actual total input quantity (A + B + ) + ) x Budgeted Mix a AQ a = actual quantity of material used for input A SP a = standard price of input A 10-7 Problem Size of variance Dollar amount Percentage of standard Advantages? Disadvantages? Statistical approach Is the variance statistically significant? Past variation is incorporated in the method Advantages? Disadvantages? 10-9 To Investigate or Not to Investigate? How to Decide

4 10-10 The Statistical Approach: Variance Investigation Requires a mean and standard deviation be calculated for past levels of performance. Statistically evaluate if current level of performance is significantly different from past levels of performance. Example Assume the mean of material X used is 0.74 kg per unit.. This was determined by averaging observations over the past 48 months. Suppose this month.80 kg per unit of material X was used. Solution to the Statistical Approach The standard deviation of the amount of material X used per unit was calculated by your staff using the formula below. s = 2 ( Xi X ) = ( n 1) Given a standard deviation of 2.7, should the variance of.06 kg per unit ( ) be investigated, assuming we use a 95% confidence interval in making investigation decisions? Criticisms of Standard Costing Standard costing may be inappropriate in some modern manufacturing environments. Undue concern for variances and cost minimization may lead to lower quality. Automation reduces labor costs and the significance of labor variances. Standard costing may not be applicable in flexible manufacturing operations with short life-cycle products. Operational measures at least as important to monitor and manage

5 Balanced Scorecard: Key Characteristics Measures are selected on the basis that they are linked to the strategic objectives of the firm Measures tend to categorized: Learning & growth Internal business processes Customer Financial Mix of financial and non-financial measures Mix of leading and lag indicators: causal linkages Rolled down through all levels of the company & Production and Delivery Performance Measures Order Received Production Starts Goods Shipped Wait Time Process Time + Inspection Time + Move Time + Waiting Time Manufacturing Cycle Time Delivery Cycle Time Manufacturing Cycle Efficiency = Process Time Manufacturing Cycle Time

6 Problem