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CHAPTER 25
Standard Costs and Balanced Scorecard
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives Questions
Brief Exercises Exercises
A Problems
B Problems
- Distinguish between a standard and a budget.
1, 2 1 1
- Identify the advantages of standard costs.
3 1
- Describe how companies set standards.
4, 5, 6, 7, 8, 9
2, 3 1, 2, 3, 4, 18
- State the formulas for determining direct materials and direct labor variances.
10, 11, 19 4, 5 4, 5, 6, 7, 8, 9, 11, 15, 20
1A, 2A, 3A, 4A, 5A, 6A
1B, 2B, 3B, 4B, 5B, 6B
- State the formulas for determining manufacturing overhead variances.
12, 13, 14, 15, 16, 17
6, 7, 8 10, 12, 13, 14, 20
1A, 2A, 3A, 4A, 5A, 6A
1B, 2B, 3B, 4B, 5B, 6B
- Discuss the reporting of variances.
18, 19 9, 15, 16 3A 3B
- Prepare an income statement for management under a standard costing system.
23 17 2A, 5A, 6A 2B, 5B, 6B
- Describe the balanced scorecard approach to performance evaluation.
20, 21, 22 9 18
*9. Identify the features of a standard cost accounting system.
24 10, 11 19, 20, 21, 22
6A 6B
ASSIGNMENT CHARACTERISTICS TABLE
Problem Number Description
Difficulty Level
Time Allotted (min.)
1A Compute variances. Simple 20–
2A Compute variances, and prepare income statement. Simple 30 – 40
3A Compute and identify significant variances. Moderate 20 – 30
4A Answer questions about variances. Complex 30 –4 0
5A Compute variances, prepare an income statement, and explain unfavorable variances.
Moderate 30 – 40
*6A Journalize and post standard cost entries, and prepare income statement.
Moderate 40 – 50
1B Compute variances. Simple 20 – 30
2B Compute variances, and prepare income statement. Simple 30 – 40
3B Compute and identify significant variances. Moderate 30 – 40
4B Answer questions about variances. Complex 30 – 40
5B Compute variances, prepare an income statement, and explain unfavorable variances.
Moderate 30 – 40
*6B Journalize and post standard cost entries, and prepare income statement.
Moderate 40 – 50
ANSWERS TO QUESTIONS
- (a) This is incorrect. Standard costs are predetermined unit costs. (b) Agree. Examples of governmental regulations that establish standards for a business are the Fair Labor Standards Act, the Equal Employment Opportunity Act, and a multitude of environmental laws.
- (a) Standards and budgets are similar in that both are predetermined costs and both contribute significantly to management planning and control. The two terms differ in that a standard is a unit amount and a budget is a total amount. (b) There are important accounting differences between budgets and standards. Except in the application of manufacturing overhead to jobs and processes, budget data are not journalized in cost accounting systems. In contrast, standard costs may be incorporated into cost accounting systems. It is possible for a company to report inventories at standard costs in its financial statements, but it is not possible to report inventories at budgeted costs.
- In addition to facilitating management planning, standard costs offer the following advantages to an organization: (1) They promote greater economy by making employees more “cost-conscious.” (2) They may be useful in setting selling prices. (3) They contribute to management control by providing a basis for evaluating cost control. (4) They are useful in highlighting variances in “management by exception.” (5) They simplify the costing of inventories and reduce clerical costs.
- The management accountant provides input to the setting of standards through the accumulation of historical cost data and knowledge of the behavior of costs in response to changes in activity levels. Management has the responsibility for setting the standards.
- Ideal standards represent the optimum level of performance under perfect operating conditions. Normal standards represent an efficient level of performance that is attainable under expected operating conditions.
- (a) The direct materials price standard should be based on the purchasing department’s best estimate of the cost of raw materials and an amount for related costs such as receiving, storing, and handling. (b) The direct materials quantity standard should be based on both quality and quantity requirements plus allowances for unavoidable waste and normal spoilage.
- Agree. The direct labor quantity standard should include allowances for rest periods, cleanup, machine setup, and machine downtime.
- With standard costs, the predetermined overhead rate is determined by dividing budgeted overhead costs by an expected standard activity index.
- A favorable cost variance has a positive connotation. It suggests efficiencies in incurring manufacturing costs and in using direct materials, direct labor, and manufacturing overhead. An unfavorable cost variance has a negative connotation. It suggests that too much was paid for one or more of the manufacturing cost elements or that the elements were used inefficiently.
Questions Chapter 25 (Continued)
- (a) (1) actual price. (2) standard price. (b) (3) actual quantity. (4) standard price. (c) (5) standard price. (6) standard quantity.
- (1) – (3) = total labor variance; (1) – (2) = labor price variance; and (2) – (3) = labor quantity variance.
- Overhead applied = $8 X 27,000 = $216,000.
- Overhead controllable variance = actual overhead costs ($218,000) – overhead budgeted. Overhead budgeted is based on standard hours allowed as follows: variable costs (27,000 X $5 = $135,000) + fixed costs (28,000 X $3 = $84,000) = total budgeted ($219,000). Thus, the controllable variance is $1,000 favorable.
- The overhead volume variance is the fixed overhead rate ($3) X [normal capacity hours – standard hours allowed (28,000 – 27,000)] = $3,000 unfavorable.
- The purpose of computing the overhead volume variance is to determine whether plant facilities were efficiently used during the period. The basic formula is fixed overhead rate X (normal capacity – standard hours allowed).
- Fixed costs remain the same at every level of activity within the relevant range. Since the prede- termined overhead rate is based on normal capacity, it follows that if standard hours allowed are less than standard hours at normal capacity, fixed overhead costs will be underapplied. The reverse is true when production exceeds normal capacity.
- Nick should include the following points about overhead variances: (1) Standard hours allowed are used in each of the variances. (2) Budgeted costs for the controllable variance are derived from the flexible budget. (3) The controllable variance generally pertains to variable costs. (4) The volume variance pertains solely to fixed costs.
- Variances should be reported to appropriate levels of management as soon as possible. The principle of “management by exception” may be used with variance reports.
- The purchasing department would be responsible for an unfavorable materials price variance when it paid more than the standard price for the materials. The purchasing department would also be responsible for an unfavorable materials quantity variance if it purchased materials of inferior quality which caused an excess use of materials.
- The four perspectives of the balanced scorecard are: financial, customer, internal process, and learning and growth. The financial perspective employs financial measures of performance used by most firms. The customer perspective evaluates how well the company is performing from the viewpoint of those people who buy and use its product in terms of price, quality, product innovation, customer service, and other dimensions. The internal process perspective evaluates the value chain—product development, production, delivery and after-sale service—to ensure that the company is operating effectively and efficiently. The learning and growth perspective evaluates how well the company develops and retains its employees. The four perspectives are linked in that the results in one perspective influence the results in the next.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 25-
(a) Standards are stated as a per unit amount. Thus, the standards are materials $2.40 ($1,200,000 ÷ 500,000) and labor $3.20 ($1,600,000 ÷ 500,000).
(b) Budgets are stated as a total amount. Thus, the budgeted costs for the year are materials $1,200,000 and labor $1,600,000.
BRIEF EXERCISE 25-
(a) Standard materials price per gallon = $2.50 ($2.20 + $.20 + $.10). (b) Standard materials quantity per gallon = 3 pounds (2.6 + .4). (c) Standard materials cost per gallon = $7.50 ($2.50 X 3).
BRIEF EXERCISE 25-
(a) Standard direct labor rate per hour = $14.00 ($12.00 + $.80 + $1.20). (b) Standard direct labor hours per gallon = 1.6 hours (1.2 + .25 + .15). (c) Standard labor cost per gallon = $22.40 ($14.00 X 1.6).
BRIEF EXERCISE 25-
Total materials variance = $1,160 U (3,200 X $5.05) – (3,000* X $5.00). Materials price variance = $160 U (3,200 X $5.05) – (3,200 X $5.00). Materials quantity variance = $1,000 U (3,200 X $5.00) – (3,000 X $5.00).
*$16,160 ÷ 3,200 **1,500 X 2
BRIEF EXERCISE 25-
Total labor variance = $2,050 U (2,100 X $10.50) – (2,000 X $10.00). Labor price variance = $1,050 U (2,100 X $10.50) – (2,100 X $10.00). Labor quantity variance = $1,000 U (2,100 X $10.00) – (2,000 X $10.00).
BRIEF EXERCISE 25-
The formula is: Actual Overhead $115,
Overhead Applied $120,000
= Total Overhead Variance $5,000 F
*20,000 X $6 = $120,
BRIEF EXERCISE 25-
The formula is: Actual Overhead $115,
Overhead Budgeted $130,000
Overhead Controllable Variance $15,000 F
*(20,000 X $4) + $50,000 = $130,
BRIEF EXERCISE 25-
The formula is: Fixed Overhead Rate
X (Normal Capacity Hours – Standard Hours Allowed) =
Overhead Volume Variance
$2.00*/hr. X (25,000 – 20,000) = $10,000 U
*($50,000 ÷ 25,000 hrs.)
BRIEF EXERCISE 25-
(1) (2) (3) (4)
financial customer internal process learning and growth
(c) (d) (a) (b)
return on assets brand recognition plant capacity utilization employee work days missed due to injury
SOLUTIONS TO EXERCISES
EXERCISE 25-
(a) Direct materials: (2,000 X 3) X $6 = $36, Direct labor: (2,000 X 1/2) X $14 = $14, Overhead: $14,000 X 70% = $ 9,
(b) Direct materials: 3 X $6 = $18. Direct labor: 1/2 X $14 = 7. Overhead: $7 X 70% = 4. Standard cost: $29.
(c) The advantages of standard costs which are carefully established and prudently used are:
- Management planning is facilitated.
- Greater economy is promoted by making employees more cost- conscious.
- Setting prices is facilitated.
- Management control is enhanced by having a basis for evaluation of cost control.
- Variances are highlighted in management by exception.
- Costing of inventories is simplified and clerical cost are reduced.
EXERCISE 25-
Ingredient
Amount Per Gallon
Standard Waste
Standard Usage
Standard Price
Standard Cost Per Gallon Grape concentrate Sugar (54 ÷ 50) Lemons (60 ÷ 50) Yeast Nutrient Water (2,500 ÷ 50)
60* oz. 1.08 lb.
1 tablet 1 tablet 50 oz.
4% 10% 20% 0% 0% 0%
(a) (b) (c)
62.5 oz. 1.2 lb.
1 tablet 1 tablet 50 oz.
$. . . . . .
$2. . . . . . $4.
*3,000 ÷ 50
(a) .96X = 60 ounces; or X = (60 ounces)/.96. (b) .90X = 1.08 pounds; or X = (1.08 pounds)/.90. (c) .80X = 1.2 lemons; or X = (1.2 lemons)/.80.
EXERCISE 25-
Direct materials Cost per pound [$4 – (2% X $4) + $0.25] $4. Pounds per unit (4.5 + 0.5) X 5 $20.
Direct labor Cost per hour ($12 + $3) $ 15 Hours per unit (2 + .2) X 2.2 33.
Manufacturing overhead 2.2 hours X $6 13. Total standard cost per unit $67.
EXERCISE 25-
(a) Actual service time Setup and downtime Cleanup and rest periods Standard direct labor hours per oil change
1.0 hours 0.1 hours 0.3 hours 1.4 hours
(b) Hourly wage rate Payroll taxes ($10 X 10%) Fringe benefits ($10 X 25%) Standard direct labor hourly rate
(c) Standard direct labor cost per oil change =
1.40 hours X $13.50 per hour $18.
(d) Direct labor quantity variance =
=
(1.50 hours X $13.50) – (1.40 hours X $13.50) $20.25 – $18. $1.35 U
EXERCISE 25-
(a) Total labor variance: ( AH X AR ) (40,800 X $12.10) $493,
( SH X SR )
(40,000* X $12.00)
$480,000 = $13,680 U
*10,000 X 4
(b) Labor price variance: ( AH X AR ) (40,800 X $12.10) $493,
( AH X SR )
(40,800 X $12.00)
$489,600 = $4,080 U
Labor quantity variance: ( AH X SR ) (40,800 X $12.00) $489,
( SH X SR )
(40,000 X $12.00)
$480,000 = $9,600 U
(c) Labor price variance: ( AH X AR ) (40,800 X $12.10) $493,
( AH X SR )
(40,800 X $12.25)
$499,800 = $6,120 F
Labor quantity variance: ( AH X SR ) (40,800 X $12.25) $499,
( SH X SR )
(42,000 X $12.25)
$514,500 = $14,700 F
EXERCISE 25-
Total materials variance: ( AQ X AP ) (1,900 X $2.60*) $4,
( SQ X SP )
(1,840** X $2.50)
$4,600 = $340 U
Materials price variance: ( AQ X AP ) (1,900 X $2.60) $4,
( AQ X SP )
(1,900 X $2.50)
$4,750 = $190 U
*$4,940 ÷ 1,900 **230 X 8
EXERCISE 25-7 (Continued)
Materials quantity variance: ( AQ X SP ) (1,900 X $2.50) $4,
( SQ X SP )
(1,840 X $2.50)
$4,600 = $150 U
Total labor variance: ( AH X AR ) (700 X $11.60*) $8,
( SH X SR )
(690** X $12.00)
$8,280 = $160 F
*$8,120 ÷ 700 **230 X 3
Labor price variance: ( AH X AR ) (700 X $11.60) $8,
( AH X SR )
(700 X $12.00)
$8,400 = $280 F
Labor quantity variance: ( AH X SR ) (700 X $12.00) $8,
( SH X SR )
(690 X $12.00)
$8,280 = $120 U
EXERCISE 25-
(a) Total materials variance: ( AQ X AP ) (1,225 X $128) $156,
( SQ X SP )
(1,200 X $130)
$156,000 = $800 U
Materials price variance: ( AQ X AP ) (1,225 X $128) $156,
( AQ X SP )
(1,225 X $130)
$159,250 = $2,450 F
Materials quantity variance: ( AQ X SP ) (1,225 X $130) $159,
( SQ X SP )
(1,200 X $130)
$156,000 = $3,250 U
Total labor variance: ( AH X AR ) (4,200 X $13) $54,
( SH X SR )
(4,300 X $12)
$51,600 = $3,000 U
Labor price variance: ( AH X AR ) (4,200 X $13) $54,
( AH X SR )
(4,200 X $12)
$50,400 = $4,200 U
Labor quantity variance: ( AH X SR ) (4,200 X $12) $50,
( SH X SR )
(4,300 X $12)
$51,600 = $1,200 F
(b) The unfavorable materials quantity variance may be caused by the carelessness or inefficiency of production workers. Alternatively, the excess quantities may be caused by inferior quality materials acquired by the purchasing department. The unfavorable labor price variance may be caused by misallocation of the work force by the production department. In this case, more experienced workers may have been assigned to tasks normally done by inexperienced workers. An unfavorable labor variance may also occur when workers are paid higher wages than expected. The manager who authorized the wage increase is responsible for this variance.
EXERCISE 25-
HINTON TOOL & DIE COMPANY
Direct Labor Variance Report For the Month Ended March 31, 2008
Job No.
Actual Hours
Standard Hours
Quantity Variance (a)
Actual Rate (1)
Standard Rate (2)
Price Variance (b)^ Explanation A A A
A
220 450 300
115
225 430 300
110
$100. (400.00) ( 0)
100.00)
F U
U
$20. $22. $20.
$18.
$20. $20. $20.
$20.
$ 0
U U
F
Repeat job Rush job Replacement worker New trainee Totals $ 400.00) U $820.00 U
(a) (^) LQV = SR X (AH – SH) (1) (^) Actual costs ÷ actual hours (b)LPV = AH X (AR – SR) (2) (^) Standard costs ÷ standard costs
EXERCISE 25-
Total overhead variance: Actual Overhead $213,
Overhead Applied $204, (51,000 X $4)
= $9,000 U
Overhead controllable variance: Actual Overhead $213,
Overhead Budgeted $207, [(51,000 X $3) + $54,000]
= $6,000 U
Overhead volume variance:
Fixed Overhead Rate $1.
X
X
Normal Capacity Hours (54,
Standard Hours Allowed 51,000) = $3,000 U
EXERCISE 25-12 (Continued)
(c) The overhead controllable variance is generally associated with variable overhead costs. Thus, this variance indicates the production manager’s inefficiency in controlling variable overhead costs. The overhead volume variance relates to fixed overhead costs. This variance indicates whether plant facilities were efficiently used. In this case 500 (16,500 – 16,000) hours of plant capacity were not utilized.
EXERCISE 25-
(a) (1)
Total actual overhead cost =
Overhead Budgeted +
Overhead Controllable Variance
= ($18,000 + $13,200) + $1, = $32,
(2) Actual variable overhead cost = Actual Overhead – Fixed Overhead = $32,700 – $13, = $19,
(3) Variable overhead cost applied = 2,000 hours X $9 = $18,
(4) Fixed overhead cost applied = 2,000 hours X $6 = $12,
(5) Overhead volume variance = Fixed Overhead Rate
X
Normal Standard Capacityy – Hours Hours Allowed
= $6 X (2,200* – 2,000) = $1,200 U
*$13,200 ÷ $6 per hour = 2,200 hours
(b) Number of loans processed = Standard hours allowed ÷ Standard hours per application = 2,000 ÷ 2 = 1,000 loans processed
EXERCISE 25-
(a) (Actual) ($18,800)
(Applied) (1,800 X $10)
Total Overhead Variance $800 U
(Actual) ($18,800)
(Budgeted) (17,600)
Overhead Controllable Variance $1,200 U
Fixed OH Rate $3*
Normal X Capacity (1,667**
Standard Hours Allowed 1,800)
Overhead Volume Variance $400 F
*($5,000 X 12)/20,0000 **20,000/
(b) The cause of an unfavorable controllable variance could be higher than expected use of indirect materials, indirect labor, and factory supplies, or increases in indirect manufacturing costs, such as fuel and maintenance costs. A favorable volume variance would be caused by production of more units than what is considered normal capacity.
EXERCISE 25-
(a) IMPERIAL LANDSCAPING Variance Report – Purchasing Department For the Current Month
Project
Actual Pounds Purchased
(1) Actual Price
(2) Standard Price
Price Variance (a) Explanation Ames Korman Stilles
500 400 500
$2.
$2.
$75 F 40 F 50 U
Purchased poor quality seeds Seeds on sale Price increased Total price variance $65 F
(a)MPV = AQ X (AP – SP) (1)Actual costs ÷ actual quantity (2) (^) Standard costs ÷ standard quantity.
