Standard Costing, Operational Performance Measures

CHAPTER 10 streamer COSTING, operational PERFORMANCE MEASURES 1. MANAGING be 1. precedent- make up g overnances ar utilize to help theatre directors escort the terms of operations. The system has three comp iodinents trite address (i. e. , regulate follows), substantial be, and the difference betwixt the deuce figures (termed a segmentation). 2. A meter cost for for each one produce cost social class (materials, get the picture, and overhead) is calculated on a per- building block basis. ? This enumeration considers the planned amount of money of each foreplay factor allowed (pounds, hours, etc. and the planned expenditure for each stimulus factor ( impairment per pound, prescribe per hour, etc. ). The marrow planned cost is a mini, per-unit budgeted amount. After the real(a) costs argon known, a report is gene roamd that shows existing costs, planned costs, and related differences. A manager can examine the sectionalisation chromatography column qu ickly to ascertain which exceptions require attention. ? by-line up on significant partitions is called commission by exception. Managers focus their efforts where they are around needed in the limited measure available. 2. SETTING STANDARDS . Managers assign specimens by analyzing diachronic data. However, past data mustiness be adjusted for expected changes in technology, the produce process, inflation, and some other convertible factors. ? Managers besides wont task analysis to focus on how lots a product should cost. wise to(p) people such(prenominal) as engineers, buying agents, product supervisors, and accountants should be brought into the standard-setting process. Cross-functional teams are really useful here. 4. Two types of standards may be employ nonpareil standards and practical standards. apotheosis (ideal) standards assume that production takes place in the ideal world employees al directions lock at peak military operation, materials are n eer defective, and machines never break down. ? Although some managers come up that ideal standards give employees a finish to shoot for, more an(prenominal) behavioral scientists view that setting unattainable goals has a demotivating found, as employees simply give up onerous to reach the standard. ? Practical (attainable) standards are set high enough to encourage efficacious and effective operations but non so high as to front impossible. Behavioral scientists feel that practical standards realize a more positive effect on the productivity of employees. ? Unlike variances computed with perfection standards, variances calculated when practical standards are occupied tend to be more meaningful as they represent deviations from a living goal. Service firms also use standards. For prototype, McDonalds restaurants are noted for using standards, not save for quantities of material (amount of beef per burger) but also for the time allowed to serve nodes at the jazz window or counter. . VARIANCE abridgment 5. Variance analysis involves calculating the actual amount of input use and examine it to the budgeted amount of input that should direct 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 inevitable to produce a finished product (the standard material meter). ? 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-labor bill). ? The estimated hourly cost of compensation (the standard labor rate). The quest 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 direct = (AQ x AP) (AQ x SP) DL aptitude = (AQ x SP) (SQ* x SP) * Standard quantity for the actual pr oduction levelNotice that the price and rate variances use a similar approach, and the quantity and might variances use a similar approach, with efficiency being another way to say quantity of hours allowed. Un genial variances rig out 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 affable 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 absolute and/or relative terms, such as $5,000 or 10% of standard cost) ? Frequency of occurrence ? An otherwise littler variance may require investigation if it consistently occurs, as it may steer an ongoing problem or an overaged standard. ? Trend s ? Controllability (there is little point to investigate items over which managers have no control). Favorable variances ? A manager should investigate both lucky and unfavorable variances. A favorable variance with advertising expense, for instance, could lead to the conclusion that an deficient amount is being spent on promotion, which could lead to a loss of clients. ? be 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 searing value being compared to a variance to determine whether an investigation is warranted. 5. BEHAVIORAL uphold OF STANDARD COSTING 1. Variances may be used to evaluate personnel, lots with suppose to salary increases, bonuses, and promotions. ? Such incentives can have posit ive and negative effects, as a bonus plan may busy a manager to pursue actions that are not in the best interests of the organization. ? An example of detrimental behavior A acquire manager may purchase crummy material to create a favorable price variance.That material could be of distressing quality, which might result in free usage and problems with the finished product. 6. rigLABILITY OF VARIANCES 2. It is rare that one person controls any event however, it is often possible to identify the manager who is closely able to influence a exceptional variance. These managers are often the following ? Direct-material price variancePurchasing manager ? Direct-material quantity variance issue supervisor and/or production engineers ? Direct-labor rate variance business 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 no t ba verify with labor but by problems with machinery and/or material. ? Managers sometimes trade-off variances, intentionally 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 general script as shown earlier in the textual matter 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 comparing method at their disposal, one that looks at budgeted costs vs. actual costs at the actual level of output. ? Managers can traffic pattern management by exception. ? Variances provide a benchmark for performance evaluation and employee rewards. ? Standard costs provide a perpetual product cost.Actual costs may flick er erratically, whereas standard costs are changed only periodically. 9. CRITICISMS OF STANDARD COSTING IN TODAYS MANUFACTURING environs 3. Criticisms of standard costing in progress manufacturing settings include ? Variances are to a fault amount and arrive too late to be useful. Variances should focus on activities, specific product lines, or production batches. ? Variances focus too much on the cost and efficiency of labor, which is becoming a relatively peanut factor of production. Standard costs rely on a stable production environment, and flexible manufacturing systems have reduced this stability, with common 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. 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 secernate and the delivery of goods. ? Manufacturing cycle time, or the total production time per unit. ? Manufacturing cycle efficiency, or processing time divided by the sum of processing time, inspection time, delay time, and move time. To judge how well or poorly 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.