Standard Costs and the Balanced Scorecard

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Standard Costs and the Balanced Scorecard

• Chapter 11

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Standard cost

• Predetermined unit cost
• Amount that should be incurred
• Standard quantity
• How much of the resource should be used?
• Designs, engineering studies, etc.
• Standard cost
• How much should each unit of the resource cost?
• Normal supplier, normal quantity, normal quality,
  delivered in normal manner, etc.

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Standard cost

• Uses
• Budgeting
• Evaluation of results
• Comparison of actual results to standards
• Promotes efficiency
• Standard may be viewed as a goal to achieve
• Setting prices
• Cost is predetermined
• Simplifies accounting
• No need to determine actual costs on a timely
  basis

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Material standards

• Price standard includes price (less discounts),
  freight-in, receiving, etc. incurred to get the
  materials ready for use
• Quantity standard includes amount required and
  allowances for normal waste, spoilage, etc.

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Labor standards

• Price standard includes normal wage rates, fringe
  benefits, employer payroll taxes, etc.
• Quantity standard includes time required to
  produce a unit of the product, allowances for
  normal non-productive activities (setups, etc.)

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Material and labor variances

• Any deviation from the standard cost is due to
• Using more or less than the standard amount of
  the resource
• Paying more or less than the standard price for a
  unit of the resource
• Total variance can be separated into those two
  components

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Material and labor variances

• General formulas
• Price variance
• Actual quantity (actual standard price per
  unit)
• Quantity variance
• Standard price (actual standard quantity per
  unit)
• Variance is favorable if actual is less then
  standard
• Unfavorable if actual is greater than standard

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Material and labor variances
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Material and labor variances

• What causes material variances?
• Price
• Different quality, rush order, alternate
  supplier, different delivery method, small
  volume, etc.
• Quantity
• Abnormal waste or spoilage, poor quality

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Material and labor variances

• What causes labor variances?
• Price
• Different mix of workers, higher or lower than
  expected wages, change in fringe benefits,
  overtime, etc.
• Quantity
• Worker efficiency or inefficiency, problems with
  machines and/or materials, more or less downtime
  than expected, etc.

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Overhead variances

• Total variance
• Actual overhead standard overhead
• Standard overhead
• Predetermined rate standard hours allowed

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Overhead variances
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Variances on the income statement

• Cost of goods sold is calculated at standard cost
• Sales CoGS _at_ standard gross margin _at_ standard
• Gross margin _at_ standard cost is adjusted for
  variances
• Gross margin _at_ standard /- variances gross
  margin _at_ actual

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Variances on the income statement
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Balanced scorecard

• Performance measurement/guidance system
• Not all activities can be measured in dollars
• Much important information is non-financial
• Based on leading and lagging measures
• Leading measures give guidance
• Lagging measures give feedback

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Balanced scorecard

• Four perspectives of company performance
• Financial
• How well are we performing financially?
• Customer
• How well are we performing for the customers?
• Internal processes
• How well are we conducting our operating
  processes?
• Learning and growth
• How well are we doing things to create future
  growth?

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