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Q
P
SP
AP
SQ AQ
[(AP − SP) × (AQ − SQ)]
SQ × (AP – SP)
SP × (AQ SQ)
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and The Role of
Nonfinancial Performance Measures
14-45 (continued)
Legend:
AP = actual price per ton of raw material
SP = standard price per ton of raw material
AQ = actual tons of raw material used in production
SQ = standard # of tons allowed for the output achieved
SQ × (AP − SP) = “pure” price variance
SP × (AQ − SP) = “pure” quantity variance
(AP − SP) × (AQ − SQ) = “joint” price-quantity variance
Note that in practice the joint price-quantity variance is usually included as part of the
price variance under the assumption that price paid is less controllable than quantity
consumed in the production process. That is, there is a desire to keep the efficiency
variance as “pure” as possible.
14-51
Education.
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and The Role of
Nonfinancial Performance Measures
14-46Standard Cost Sheet and Use of Variance Data (45 minutes)
1. Standard cost for each 10-gallon batch of raspberry sherbet:
(a) (b)
Standard Standard
Quantity Rate
Direct materials:
Raspberries 7.5 qts.* × $5.00 = $37.50
Other ingredients 10 gal. × $2.50 = 25.00 $62.50
Direct labor:
obtain 6 acceptable quarts of inputs/batch
**4 quarts per gallon × 10 gallons = 40 quarts.
2. a. In general, the purchasing manager is held responsible for unfavorable
materials purchase price variances. Causes of these variances include the
following:
Failure to correctly forecast price increases.
In some situations, however, someone other than the purchasing manager may
be responsible for the price variance. For example, an expedited shipment of
14-46 (Continued)
As a small producer, Tastyfreeze’s competitive strategy is likely to be
differentiation through brand recognition, just as the firm has apparently
been doing. The success of the competitive strategy requires that the firm
b. In general, the production manager or foreman is held responsible for
unfavorable labor efficiency variances. Causes of these variances include
the following:
Poorly trained labor
Unfavorable efficiency variances increase costs, decrease profits, and may
affect the quality of the firm’s products. Continuous unfavorable efficiency
variances jeopardize the competitive position of the firm and threaten the
success of the firm’s strategy.
Note: One issue to raise with students at this point is the danger of too much
focus on the labor-efficiency variance. For example, in many cases today,
labor is a short-term fixed cost. Thus, a principal cause of an unfavorable
labor efficiency variance is lack of sales orders/production demand, not
worker efficiency! The only way a manager in this situation can avoid an
unfavorable labor efficiency variance is to produce excess inventory, which
would be counter to the JIT philosophy that many organizations are
pursuing today. The moral here is that when the workforce is basically fixed
in the short run, labor efficiency variances have to be interpreted with
caution. For this reason, some writers have advocated doing away with the
reporting of labor efficiency variances for control purposes when the labor
force is essentially fixed in the short run.
14-53
Education.
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and The Role of
Nonfinancial Performance Measures
14-47 Standard Cost Systems—Behavioral Considerations (45-50minutes)
1. a. The major advantages of using a standard cost system include:
Budgeting. Standard costs can be the building blocks for budget preparation
and allow the development of flexible-budgets.
Performance evaluation. Comparisons of actual costs to standard costs
quantities only).
b. The disadvantages/challenges that can result from using a standard cost system
include the following:
Cost standards that are too tight can cause the employees to ignore the
standards, or worse, have negative behavioral implications leading to
undesirable actions.
Standards may ignore qualitative characteristics and jeopardize product
costs).
2.A standard cost system must be supported by top management to be successful.
However, the parties that should participate in the standard-setting processes
14-54
Education.
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and The Role of
Nonfinancial Performance Measures
14-47 (Continued)
3. The general features and characteristics associated with the introduction and
operation of a standard cost system that make it an effective tool for cost control
include the following.
Standard-setting can be a participative process with those individuals most
familiar with the variables associated with standard-setting available to provide
4. The consequences of having the standards set by an outside consulting firm are the
following:
There could be negative employee reaction as the employees did not participate
14-55
Education.
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and The Role of
Nonfinancial Performance Measures
14-48 Standard Cost in Process Costing; Variances, and Journal Entries (45-60
minutes)
1. Equivalent units of production in November:
Direct Direct
Materials Labor
Units completed 5,600 5,600
Equivalent units in ending WIP inventory + 800 + 600
Equivalent units of production 6,400 6,200
a. Direct labor efficiency variance = SP × (AQ − SQ)
= $18.20/hr. × (36,500 − 37,200) hrs. = $12,740F
$ 12,740F
b. Direct labor rate variance = (AP × AQ) − (SP × AQ)
c. Actual kgs. of material used in November = standard quantity allowed +/– efficiency
variance = 51,200 kg. + ($1,500 $5/kg.) = 51,500 kg.
d. Materials purchase price variance = Total materials variance − Materials usage
variance = $750U − $1,500U = $750F
e. Total amount of prime costs transferred to the finished goods account in November
14-56
Education.
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and The Role of
Nonfinancial Performance Measures
14-48 (Continued)
f. Materials Labor Total
Equivalent units in ending WIP inventory 800 600
2. Materials Inventory ($5 × 50,000 kg.) 250,000
Materials Purchase-Price Variance (see (d) above) 750
Work-in-Process Inventory (6,400 eq. units × $40) 256,000
Direct Materials Usage Variance (plug) 1,500
Work-in-Process Inventory (6,200 eq. units × $109.20/unit) 677,040
Labor Rate Variance (see 1b above) 64,300
Labor Efficiency Variance (see 1a above) 12,740
14-57
Education.
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and The Role of
Nonfinancial Performance Measures
14-49 Flexible Budget and Operating-Profit Variances (60 minutes)
1. Flexible- Sales Master
Actual Budget Flexible Volume (Static)
Results Variances Budget Variance Budget
Units sold 90 -0- 90 10U 100
Revenues $36,000 $4,500F $31,500 $3,500U $35,000
Professional labor $9,500 $1,400U $8,100 $900F $9,000
Total Master (Static) Budget Variance
$50F
Total
Flexible-Budget Sales Volume
Detailed Calculations:
Master budget:
Number of apartments rented 100
Revenue per apartment rented $700 2 = $ 350
Total revenue $35,000
Less: Variable costs:
Professional labor:
(1.5 hr./application × $20/hr.) × 300 applicants = $ 9,000
Credit check: $50/appl. × 300 applicants = 15,000 24,000
Operating income $8,000
Flexible Budget
Total revenue 90 rentals × $350/rental = $31,500
Less: Variable costs:
Professional labor (1.5 × $20) × 270 applications = $ 8,100
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and The Role of
Nonfinancial Performance Measures
14-49 (continued)
Operating Income:
Total revenue 90 rentals × $800/rental × 0.5 = $36,000
Less: Variable costs:
Professional labor $ 9,500
2.
Actual Quantity Flexible Budget (FB)
Actual Labor Cost at Standard Price Based on Outputs
(AQ) × (AP) (AQ) × (SP) (SQ) × (SP)
3. Among factors to be considered in evaluating the effectiveness of professional labor
are:
Number of units successfully rented
14-59
Education.
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and The Role of
Nonfinancial Performance Measures
14-50 Standard Costing, Variance Analysis, and Strategic Considerations (60 Minutes)
1. The term “engineered labor standards” refers to the use of engineering (i.e., input-
output) analysis regarding labor-hour consumption associated with the production of a
good or a service. This method of establishing the quantity component of labor-hour
standard costs can be contrasted to the use of historical observations as the basis for
efficient effort on the part of employees.
2. An organization, for any given operating period, can determine for each class of labor
the difference between the actual labor cost incurred (given the output of the period)
and the standard labor cost for that period (based on the actual output). This latter
amount should be viewed as “the labor cost that should have been incurred, given
actual output for the period just ended.” This difference, in dollar terms, is referred to
the total flexible-budget variance for direct labor (or, in short, the total labor cost
variance). This variance, as with any variable cost, is a function of two factors: price
3. As noted above in (2), the process of using time-and-motion studies to establish
standards for labor-hour consumption was developed and refined (many years ago!)
in a manufacturing environment. At that time (~1920s), assembly-line methods
dominated the manufacturing landscape. (Today, we refer to this production method
clerks.
14-60
Education.
