CHAPTER 11
Standard Costs and Balanced Scorecard
LEARNING OBJECTIVES
1. DESCRIBE STANDARD COSTS.
2. DETERMINE DIRECT MATERIALS VARIANCES.
3. DETERMINE DIRECT LABOR AND TOTAL
MANUFACTURING OVERHEAD VARIANCES.
4. PREPARE VARIANCE REPORTS AND BALANCED
SCORECARDS.
*5. IDENTIFY THE FEATURES OF A STANDARD COST
ACCOUNTING SYSTEM.
*6. COMPUTE OVERHEAD CONTROLLABLE AND VOLUME
VARIANCE.
CHAPTER REVIEW
Standard Costs
1. (L.O. 1) In concept, standards and budgets are essentially the same. Both are predetermined
costs and both contribute significantly to management planning and control.
2. Standard costs offer the following advantages to an organization:
a. They facilitate management planning.
b. They promote greater economy by making employees more “cost conscious.”
c. They are useful in setting selling prices.
Setting Standard Costs
3. Setting standards requires input from all persons who have responsibility for costs and quantities.
Standards may be set at one of two levels. Ideal standards represent optimum levels of
performance under perfect operating conditions. Normal standards represent efficient levels of
performance that are attainable under expected operating conditions.
Direct Materials
5. The direct materials price standard is the cost per unit of direct materials that should be
incurred.
a. This standard is based on the purchasing department’s best estimate of the cost of raw
materials.
b. This standard should include an amount for related costs such as receiving, storing, and
handling.
Direct Labor
8. The direct labor price standard is the rate per hour that should be incurred for direct labor.
a. This standard is based on current wage rates adjusted for anticipated changes, such as cost
of living adjustments included in many union contracts.
b. This standard generally includes employer payroll taxes and fringe benefits.
Manufacturing Overhead
11. The manufacturing overhead standard is based on a standard predetermined overhead rate.
a. This overhead rate is determined by dividing budgeted overhead costs by an expected
standard activity index.
b. The standard manufacturing overhead rate per unit is the predetermined overhead rate
times the activity index quantity standard.
Variances
12. A variance is the difference between total actual costs and total standard costs. An unfavorable
variance suggests that too much was paid for materials, labor, and manufacturing overhead or
that there were inefficiencies in using materials, labor, and manufacturing overhead. Favorable
variances indicate efficiencies in incurring costs and in using materials, labor, and manufacturing
overhead.
Direct Materials Variances
14. (L.O. 2) The formulas for the direct materials variances are:
Actual Quantity Standard Quantity Total Materials
X Actual Price – X Standard Price = Variance
(AQ) X (AP) (SQ) X (SP) (TMV)
15. A variance matrix can be used in analyzing variances. In such cases, the formulas for each cost
element are computed first and then the variances.
Direct Labor Variances
17. (L.O. 3) The formulas for the direct labor variances are:
Actual Hours Standard Hours Total Labor
X Actual Rate – X Standard Rate = Variance
(AH) X (AR) (SH) X (SR) (TLV)
18. Labor price variances usually result from paying workers higher wages than expected and/or
misallocation of workers. Labor quantity variances relate to the efficiency of the workers and are
generally the responsibility of the production department.
Manufacturing Overhead Variances
19. The total overhead variance is the difference between the actual overhead costs and overhead
costs applied based on standard hours allowed for the amount of goods produced.
20. To find the total overhead variance in a standard costing system, we determine the overhead
costs applied based on standard hours allowed. Standard hours allowed are the hours that
should have been worked for the units produced. The total overhead variance formula is as
follows:
Reporting of Variances
22. (L.O. 4) All variances should be reported to appropriate levels of management as soon as
possible. Variance reports facilitate the principle of “management by exception.” Rather than
analyze every variance, top management will normally look for significant variances.
Income Statement Presentation of Variances
23. In income statements prepared for management under a standard cost accounting system, cost of
goods sold is stated at standard cost and the variances are separately disclosed. In financial
statements prepared for stockholders and other external users, standard costs may be used.
Balanced Scorecard
25. Many companies use both financial and nonfinancial measures to evaluate performance. This
approach is known as the balanced scorecard. The four most commonly employed perspectives
are as follows:
a. The financial perspective employs financial measures of performance used by most firms.
b. The customer perspective evaluates how well the company is performing from the viewpoint
of those people who buy and use its products or services.
Standard Cost Accounting System
*26. (L.O. 5) A standard cost accounting system is a double-entry system of accounting in which
standard costs are used in making entries and variances are formally recognized in the accounts.
A standard cost system may be used with either job order or process costing.
*27. As an example, the purchase of raw materials inventory for $5,000 when the standard cost is
$6,000 would be recorded as follows:
Raw Materials Inventory ………………………………………………….. 6,000
Materials Price Variance ……………………………………………. 1,000
Overhead Variances
*28. (L.O. 6) The computation of the manufacturing overhead variances is conceptually the same
as the computation of the materials and labor variances. For manufacturing overhead, however,
both variable and fixed overhead must be considered. The formulas are:
Actual Overhead Total Overhead
Overhead – Applied* = Variance
*29. The overhead controllable variance shows whether overhead costs were effectively controlled.
a. Budgeted costs are determined from the flexible manufacturing overhead budget for
standard hours allowed.
b. Most controllable variances are associated with variable costs, which are controllable costs.
*30. The overhead volume variance indicates whether plant facilities were efficiently used during the
period.
LECTURE OUTLINE
A. The Need for Standards.
1. Standards are common in business; those imposed by government
agencies are often called regulations.
2. Both standards and budgets are predetermined costs, and both contribute
to management planning and control.
a. A standard is a unit amount.
b. A budget is a total amount.
3. A standard is the budgeted cost per unit of product.
4. Standard costs offer a number of advantages to an organization:
a. They facilitate management planning.
b. They promote greater economy by making employees more
“cost–conscious.”
B. Setting Standard Costs.
1. Companies set standards at one of two levels:
a. Ideal, or
b. Normal.
2. Ideal standards represent optimum levels of performance under perfect
operating conditions.
3. Normal standards represent efficient levels of performance that are attain-
ACCOUNTING ACROSS THE ORGANIZATION
Recently a number of organizations, including corporations, consultants, and
governmental agencies, agreed to share information regarding performance
standards in an effort to create a standard set of measures for thousands of
business processes. Companies that are interested in participating can go to the
group’s website and enter their information.
How will the creation of such standards help a business or organization?
Answer: A business or organization may use the data to compare its per-
formance relative to others with regard to common practices such as
5. The direct materials price standard should be based on the delivered
cost of raw materials plus an allowance for receiving, storing, and
handling.
6. The direct materials quantity standard should establish the required
quantity plus an allowance for unavoidable waste and normal spoilage.
9. For manufacturing overhead, a standard predetermined overhead rate is
used. It is based on an expected standard activity index such as standard
direct labor hours or standard machine hours.
10. The total standard cost per unit is the sum of the standard costs of direct
materials, direct labor, and manufacturing overhead.
C. Analyzing and Reporting Variances from Standards.
1. One of the major management uses of standard costs is to identify
variances from standards. Variances are the differences between total
actual costs and total standard costs.
a. Variances are expressed in total dollars and not on a per unit basis.
2. Direct materials variances.
a. (Actual Quantity X Actual Price) – (Standard Quantity X Standard
Price) = Total Materials Variance (TMV).
3. Causes of materials variances.
The investigation of a materials price variance usually begins in the pur–
4. Direct labor variances.
a. (Actual Hours X Actual Rate) – (Standard Hours X Standard Rate) =
Total Labor Variance (TLV).
5. Causes of labor variances.
a. Labor price variances usually result from two factors:
(1) Paying workers higher wages than expected,
6. Manufacturing overhead variance.
a. Actual Overhead – Overhead Applied = Total Overhead Variance.
(Overhead applied is based on standard hours allowed).
7. Causes of manufacturing overhead variance.
a. Higher than expected use of indirect materials, indirect labor, and
electricity, or
8. The overhead variance is the responsibility of the production department
if the cause is lack of skilled labor or machine breakdowns. When the
cause is a lack of sales orders, the responsibility rests outside the
production department.
CORPORATE SOCIAL RESPONSIBILITY INSIGHT
In its recently published Global Responsibility Report, Starbucks described its
goals, achievements and shortcomings related to corporate social responsibility.
What implications does Starbucks’ commitment to corporate social responsibility
have for the standard cost of a cup of coffee?
Answer: Starbucks’ Global Responsibility Report explicitly describes its goals
related to corporate social responsibility. By including measurable
objectives, it signals that it is committed to meeting these goals. As a
D. Reporting Variances.
1. All variances should be reported to appropriate levels of management as
soon as possible.
2. Variance reports facilitate the principle of “management by exception” by
highlighting significant differences.
E. Statement Presentation of Variances.
1. In income statements prepared for management under a standard cost
accounting system, cost of goods sold is stated at standard cost and the
variances are disclosed separately.
2. In financial statements prepared for stockholders and other external
users, companies may report their inventories at standard costs when
there are no significant differences between actual costs and standard
costs.
F. Balanced Scorecard.
1. The balanced scorecard incorporates financial and nonfinancial measures
in an integrated system that links performance measurement and a
company’s strategic goals.
2. The balanced scorecard evaluates company performance from four
perspectives:
a. Financial perspective—employs financial measures of performance
used by most firms.
3. Within each perspective, the balanced scorecard identifies objectives
that will contribute to attainment of strategic goals. The objectives are
linked across perspectives in order to tie performance measurement to
company goals.
4. The balanced scorecard provides measurable objectives for nonfinancial
measures such as product quality.
ACCOUNTING ACROSS THE ORGANIZATION
Many of the benefits of a balanced scorecard approach are evident in the
improved operations at United Airlines. When Glenn Tilton took over as United’s
Chief Executive Officer he implemented an incentive program that allowed all
employees to earn a bonus if the company “exceeded its goals for on-time flight
departures and for customer intent to fly United again.”
Which of the perspectives of a balanced scorecard were the focus of United’s
CEO?
Answer: Improving on-time flight departures is an objective within the internal
*G. Standard Cost Accounting System.
1. A standard cost accounting system is a double-entry system of accounting.
In this system, companies use standard costs in making entries, and
they formally recognize variances in the accounts.
2. The system is based on two important assumptions:
a. Variances from standards are recognized at the earliest
*H. Overhead Controllable and Volume Variances.
1. The total overhead variance is generally analyzed through a price
variance (controllable variance) and a quantity variance (volume
variance).
20 MINUTE QUIZ
Circle the correct answer.
True/False
1. The primary difference between standards and budgets is that a standard is a unit
amount, whereas a budget is a total amount.
True False
2. An advantage of standard costs is that standard costs facilitate management planning by
establishing expected future costs.
True False
3. Ideal standards represent an efficient level of performance that is attainable under
expected operating conditions.
True False
4. The direct labor price standard generally includes employer payroll taxes and fringe
benefits, such as paid holidays and vacations.
True False
5. (Actual Quantity X Standard Price) – (Standard Quantity X Actual Price) = Materials Price
Variance.
True False
6. (Actual Hours X Actual Rate) – (Actual Hours X Standard Rate) = Labor Price Variance.
True False
7. Standard hours allowed are the hours that should have been worked for the units produced.
True False
8. Variance reports facilitate the principle of “management by exception.”
True False
9. In income statements prepared under a standard cost accounting system, cost of goods
sold is stated at standard cost.
True False
*10. The overhead controllable variance is the difference between the actual overhead costs
incurred and the overhead applied.
True False
Multiple Choice
1. Which of the following is an advantage of standard costs?
a. Contribution to management control.
b. Promotion of greater economy and efficiency.
c. Simplification of the costing of inventories and reduction of clerical costs.
d. All of the above.
2. If the predetermined overhead rate per hour is $6 for variable and $2 for fixed overhead,
standard direct labor hours per unit is 2 hours and actual direct labor hours per unit was
1.5 hours, then the overhead standard cost per unit is
a. $4 per unit.
b. $8 per unit.
c. $16 per unit.
d. $12 per unit.
3. The formula for the labor quantity (or efficiency) variance is
a. (Actual Hours X Actual Rate) – (Actual Hours X Standard Rate).
b. (Actual Hours X Standard Rate) – (Standard Hours X Standard Rate).
c. (Standard Hours X Actual Rate) – (Standard Hours X Standard Rate).
d. none of the above.
*4. If actual overhead is $70,000, overhead applied is $67,000 and overhead budgeted for
the standard hours allowed is $78,000, then the overhead controllable variance is
a. $3,000 F.
b. $11,000 U.
c. $8,000 F.
d. $8,000 U.
*5. In a standard cost accounting system, a company purchased raw materials on account
for $46,500 when the standard cost was $44,000. The journal entry would not include a
a. debit to Raw Materials Inventory for $44,000.
b. debit to Materials Price Variance for $2,500.
c. credit to Materials Price Variance for $2,500.
d. credit to Accounts Payable for $46,500.
ANSWERS TO QUIZ
True/False
1. True 6. True
Multiple Choice
1. d.