Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-37 Standard Costing and Journal Entries (40 minutes)
1. Materials Inventory (6,000 gals. × $10.00/gal.) 60,000
Materials Purchase-Price Variance 2,700
2. WIP Inventory (2,500 × 2 gals. × $10/gal.) 50,000
Materials Usage Variance (100 gals. × $10/gal.) 1,000
3. WIP Inventory (2,500 units × 2 hrs./unit × $25/hr.) 125,000
Labor Rate Variance ($5.50/hr. × 4,900 hrs.) 26,950
4. Finished Goods Inventory ($70/unit × 2,500 units) 175,000
5. CGS ($70/unit × 2,000 units) 140,000
6. Accounts Receivable ($150/unit × 2,000 units) 300,000
Sales Revenue 300,000
To record sales revenue and associated accounts receivable for the period.
Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-38 Direct Materials Variances—Journal Entries (30 minutes)
1. Determination of variances for March:
Actual Purchases Actual Purchases
at Actual Cost at Standard Cost
(AQ) × (AP) (AQ) × (SP)
(AQ) × $7.50/lb. (AQ) × $7.25/lb.
= ? = ?
Purchase-Price Variance = ?
Actual Usage at Flexible-Budget
Standard Cost Amount
(AQ) × (SP) (SQ) × (SP)
2,300 lbs. × $7.25/lb. 2,100 lbs. × $7.25/lb.
= $16,675 = $15,225
Usage Variance = ?
2. Journal entries:
Materials Inventory 15,950
Materials Purchase-Price Variance 550
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Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
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14-38 (Continued)
WIP Inventory 15,225
Materials Usage Variance 1,450
To record the standard direct materials cost for this period’s production.
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Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-39 Financial versus Nonfinancial Performance Indicators for Operational Control
(15 minutes)
Repetitive operations, such as consumption of power (or direct materials) in an
automated manufacturing facility, require constant feedback and data to ensure that
the underlying process is “in control.” That is, the managers of such operations
cannot wait for financial reports in order to correct (put back into control) a
malfunctioning process. In this context, real-time nonfinancial performance indicators
On the other hand, managers are likely to be more interested in financial operating
results, for several reasons. One, the performance of managers is often judged on
the basis of financial results. Two, financial metrics provide decision-makers with a
common unit that can be used to evaluate the economic effects of different courses
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Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-40 Behavioral Considerations (40-45 minutes)
1. Managerial time can be considered a scare resource. Time spent in terms of
securing operational control detracts from time spent dealing with issues of a more
strategic (or long-term) nature. For this reason, many managers embrace a
managerial philosophy known as “management by exception.” When variances
(e.g., labor cost variances) are considered immaterial, no intervention on the part
of management is required: the underlying system is considered to be “in control.”
2. A standard cost system can have a negative impact on worker motivation if the
standards are too “loose” (i.e., too easily attainable) or too “tight” (i.e., too difficult
to attain). In the former case, the standards tend to reduce productivity; in the latter
case, in the extreme, employees simply ignore the standards—that is, they do not
3. The purpose of this question is to get students to think about the strategic role of
standard costs and flexible budgets in a comprehensive management accounting
and control system. In this regard, students should think about both the costs and
benefits of using these elements of a traditional financial control mechanism.
Criticisms/Limitations of Conventional Standard Cost Variance Analysis
1. Variances are too aggregated and concentrate on consequences rather than
2. Traditional standard cost variance reports are too late to be useful. In order to
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Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-40 (Continued-1)
real time the consumption of resources (e.g., labor and materials). Traditional
standard cost systems provide variance information only infrequently, e.g., at
the end of each month. Thus, the relevance of this information can be called
into question.
3. Standard costing systems tend to focus too heavily on cost minimization. For
companies competing on the basis of cost (i.e., those pursuing a cost–
4. Standard costing systems take a departmental perspective rather than a
process perspective. The point here is that traditional standard costing systems
are not “integrated.” As such, each department or cost center tends to focus on
5. Too much emphasis is placed on the cost and efficiency of direct labor.
Traditional systems focus on the analysis of labor and material cost variances,
in spite of the fact that labor, as a percentage of total manufacturing cost, is
6. JIT Manufacturing: JIT is a strategy that requires continuous working to improve
quality and reduce costs. Some question whether traditional standard cost
systems motivate continuous improvement that is at the heart of a JIT system.
7. Standard costs become out-dated quickly due to shorter product life cycles.
8. Some critics maintain that the use of standard costs and variances (via flexible
budgets) is misplaced in terms of securing operational control. These critics
maintain that operating personnel perform or participate in one or more
Benefits/Advantages of Using a Standard Cost System
1. Provides a good basis for cost comparisons. To the extent that “cost” is a
critical variable on which the organization competes, a standard cost system
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Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-40 (Continued-2)
2. Enables managers to use management by exception. As noted above, a
3. Provides a basis for performance evaluation and determining bonuses. Again,
the key here is that managers who decide to use standard costs and variances
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Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-41 Control of Operating Processes/Non-financial Performance Indicators (45
minutes)
1. Organizations engage in a variety of processes in order to deliver the stated value
proposition to its targeted customers and in order to achieve its stated financial
objectives. These processes, for expository purposes, might be grouped into the
Operating processes might be defined as what the organization does, on a day-to-
day basis, to produce and deliver to customers its outputs (services and/or products).
Thus, operating processes include activities such as: acquiring raw materials from
supplier firms; producing finished goods and services; and, distributing the finished
product to customers. Customer-management processes relate to activities designed to
strengthen and expand relationships with the organization’s targeted customers. More
specifically, customer-management processes included the following activities:
customer selection (i.e., specification of targeted customers), customer acquisition
(everything from generate leads to closing the sale), customer retention (e.g., through
the use of customer-service units and call centers), and customer growth (e.g., through
cross-selling activities). Growth and innovation processes relate to the development of
new products, services, and processes that allow the firm to penetrate new markets or
market segments. (Without growth and innovation the firm risks losing its competitive
employment practices, and investment in the community.
2. The following are examples of possible objectives and associated performance
indicators for two operating processes: production, and distribution.
Production Process
(1) Achieve Reduction in the Cost of Outputs (Products and/or Services)
(2) Achieve Continuous Improvement in Key Processes
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Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
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Total Cost of Quality (COQ), over time
Ratio of Prevention + Appraisal Costs to Internal + External Failure Costs
(3) Increase the Responsiveness of the Manufacturing Process
Process Cycle Efficiency (PCE) (i.e., ratio of value-added time to total
up time)
(4) Improve the Utilization of Capital (Fixed) Assets
Number and % of machine breakdowns
Distribution Process
(1) Reduce Cost of Servicing Customers
Activity-based costs associated with key activities (e.g., storage and
(2) Improve Delivery Process:
% of on-time deliveries
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Chapter 14 – Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-41 (Continued-2)
Enhance Quality of the Distribution Process
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