Chapter 10
Standard Costs and
the Balanced
Scorecard
Standard Costs
Predetermined.
Standard
Costs are
Used for planning labor, material
and overhead requirements.
Benchmarks for
measuring performance.
Used to simplify the
accounting system.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Standard Costs
Amount
Managers focus on quantities and costs
that exceed standards, a practice known as
management by exception.
Standard
Direct
Labor
Direct
Material
Manufacturing
Overhead
Type of Product Cost
McGraw-Hill/Irwin
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Setting Standard Costs
Accountants, engineers, personnel
administrators, and production managers
combine efforts to set standards based on
experience and expectations.
McGraw-Hill/Irwin
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Setting Standard Costs
Should we use
practical standards
or ideal standards?
Engineer
McGraw-Hill/Irwin
Managerial
Accountant
© The McGraw-Hill Companies, Inc., 2003
Setting Standard Costs
Practical standards should be
set at levels that are currently
attainable with reasonable and
efficient effort.
McGraw-Hill/Irwin
Production
manager
© The McGraw-Hill Companies, Inc., 2003
Setting Standard Costs
I agree. Ideal standards,
based on perfection,
are unattainable and
discourage most
employees.
McGraw-Hill/Irwin
Human Resources
Manager© The McGraw-Hill Companies, Inc., 2003
Note
The argument that ideal standards are
discouraging has been persuasive for many
years. So “normal” defects and waste were
built into the standards.
In recent years, TQM and other initiatives
have sought to eliminate all defects and
waste.

Ideal standards, that allow for no waste, have
become more popular.

The emphasis is on improvement over time, not
attaining the ideal standards right now.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Setting Direct Material
Standards
Price
Standards
Final, delivered
cost of materials,
net of discounts.
McGraw-Hill/Irwin
Quantity
Standards
Use product
design specifications.
© The McGraw-Hill Companies, Inc., 2003
Setting Direct Labor
Standards
Rate
Standards
Time
Standards
Use wage
surveys and
labor contracts.
Use time and
motion studies for
each labor operation.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Setting Variable Overhead
Standards
Rate
Standards
Activity
Standards
The rate is the
variable portion of the
predetermined overhead
rate.
The activity is the
base used to calculate
the predetermined
overhead.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Standard Cost Card – Variable
Production Cost
A standard cost card for one unit of
product might look like this:
Inputs
Direct materials
Direct labor
Variable mfg. overhead
Total standard unit cost
McGraw-Hill/Irwin
A
B
AxB
Standard
Quantity
or Hours
Standard
Price
or Rate
Standard
Cost
per Unit
3.0 lbs.
2.5 hours
2.5 hours
$
$ 4.00 per lb.
14.00 per hour
3.00 per hour
$
12.00
35.00
7.50
54.50
© The McGraw-Hill Companies, Inc., 2003
Standards vs. Budgets
Are standards the
same as budgets?
A budget is set for
total costs.
McGraw-Hill/Irwin
A standard is a per
unit cost.
Standards are often
used when
preparing budgets.
© The McGraw-Hill Companies, Inc., 2003
Standard Cost Variances
A standard cost variance is the amount by which
an actual cost differs from the standard cost.
Cost
Standard
McGraw-Hill/Irwin
This variance is unfavorable
because the actual cost
exceeds the standard cost.
© The McGraw-Hill Companies, Inc., 2003
Standard Cost Variances
I see that there
is an unfavorable
variance.
But why are
variances
important to me?
McGraw-Hill/Irwin
First, they point to causes of
problems and directions
for improvement.
Second, they trigger
investigations in departments
having responsibility
for incurring the costs.
© The McGraw-Hill Companies, Inc., 2003
Variance Analysis Cycle
Identify
questions
Receive
explanations
Conduct next
period’s
operations
Analyze
variances
Begin
McGraw-Hill/Irwin
Take
corrective
actions
Prepare standard
cost performance
report
© The McGraw-Hill Companies, Inc., 2003
Standard Cost Variances
Standard Cost Variances
Price Variance
Quantity Variance
The difference between
the actual price and the
standard price
The difference between
the actual quantity and
the standard quantity
McGraw-Hill/Irwin
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A General Model for Variance
Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Standard price is the amount that should
have been paid for the resources acquired.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
A General Model for Variance
Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Standard Quantity
×
Standard Price
Price Variance
Quantity Variance
Standard quantity is the quantity allowed for
the actual good output.
Standard input per unit of output
times amount of good output.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
A General Model for Variance
Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Standard Quantity
×
Standard Price
Price Variance
Quantity Variance
AQ(AP - SP)
SP(AQ - SQ)
AQ = Actual Quantity
AP = Actual Price
McGraw-Hill/Irwin
SP = Standard Price
SQ = Standard Quantity
© The McGraw-Hill Companies, Inc., 2003
Standard Costs
Let’s use the general model
to calculate standard cost
variances for
direct material.
McGraw-Hill/Irwin
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Material Variances
Example
Glacier Peak Outfitters has the following
direct material standard for the fiberfill in its
mountain parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month 210 kgs of fiberfill were
purchased and used to make 2,000 parkas.
The material cost a total of $1,029.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Material Variances
Summary
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
210 kgs.
×
$4.90 per kg.
210 kgs.
×
$5.00 per kg.
= $1,029
Price variance
$21 favorable
McGraw-Hill/Irwin
= $1,050
Standard Quantity
×
Standard Price
200 kgs.
×
$5.00 per kg.
= $1,000
Quantity variance
$50 unfavorable
© The McGraw-Hill Companies, Inc., 2003
Material Variances
Summary
Actual Quantity
×
Actual Price
210 kgs.
×
$4.90 per kg.
Actual Quantity
×
Standard Price
210 kgs.
$1,029  ×
210 kgs
$5.00per
perkg
kg.
= $4.90
= $1,029
Price variance
$21 favorable
McGraw-Hill/Irwin
= $1,050
Standard Quantity
×
Standard Price
200 kgs.
×
$5.00 per kg.
= $1,000
Quantity variance
$50 unfavorable
© The McGraw-Hill Companies, Inc., 2003
Material Variances
Summary
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Standard Quantity
×
Standard Price
210 kgs.
210 kgs.
200 kgs.
×
×
0.1 kg per parka× 2,000 parkas
$4.90 per kg.
$5.00
$5.00 per kg.
= 200 per
kgs kg.
= $1,029
Price variance
$21 favorable
McGraw-Hill/Irwin
= $1,050
= $1,000
Quantity variance
$50 unfavorable
© The McGraw-Hill Companies, Inc., 2003
Note: Using the formulas
Materials price variance
MPV = AQ (AP - SP)
= 210 kgs ($4.90/kg - $5.00/kg)
= 210 kgs (-$0.10/kg)
= $21 F
Materials quantity variance
MQV = SP (AQ - SQ)
= $5.00/kg (210 kgs-(0.1 kg/parka 2,000 parkas))
= $5.00/kg (210 kgs - 200 kgs)
= $5.00/kg (10 kgs)
= $50 U
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Suppose only 190 kgs of fiberfill were used to
make 2,000 parkas. What is the materials
quantity variance? Remember that the
standards call for 0.1 kg of fiberfill per parka at a
cost of $5 per kg of fiberfill.
a. $50 F
b. $50 U
c. $100 F
d. $100 U
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Suppose only 190 kgs of fiberfill were used to
make 2,000 parkas. What is the materials
quantity variance? Remember that the
standards call for 0.1 kg of fiberfill per parka at a
cost of $5 per kg of fiberfill.
a. $50 F
b.MQV
$50= U
SP (AQ - SQ)
= $5.00/kg (190 kgs-(0.1 kg/parka 2,000 parkas))
c. $100
F
= $5.00/kg (190 kgs - 200 kgs)
= $5.00/kg
(-10 kgs)
d. $100
U
= $50 F
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
If the material quantity standard specifies
exactly how much material should be in the final
product without any wastage, is a favorable (F)
materials quantity variance a good thing?
a. Yes
b. No
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
If the material quantity standard specifies
exactly how much material should be in the final
product without any wastage, is a favorable (F)
materials quantity variance a good thing?
a. Yes
b. No
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Standard Costs
Let’s use the general model
to calculate all standard cost
variances, starting with
direct material.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Material Variances
Example
Zippy
Hanson Inc. has the following direct material
standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week 1,700 pounds of material were
purchased and used to make 1,000 Zippies.
The material cost a total of $6,630.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
What is the actual price per pound
paid for the material?
a. $4.00 per pound.
b. $4.10 per pound.
c. $3.90 per pound.
d. $6.63 per pound.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
What is the actual price per pound
paid for the material?
a. $4.00 per pound.
b. $4.10 per pound.
AP = $6,630 ÷ 1,700 lbs.
c. $3.90 per pound. AP = $3.90 per lb.
d. $6.63 per pound.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
Hanson’s material price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
Hanson’s material price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
MPV = AQ(AP - SP)
MPV = 1,700 lbs. × ($3.90 - 4.00)
d. $800 favorable.
MPV = $170 Favorable
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
The standard quantity of material that
should have been used to produce
1,000 Zippies is:
a. 1,700 pounds.
b. 1,500 pounds.
c. 2,550 pounds.
d. 2,000 pounds.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
The standard quantity of material that
should have been used to produce
1,000 Zippies is:
a. 1,700 pounds.
b. 1,500 pounds.
c. 2,550 pounds.
SQ = 1,000 units × 1.5 lbs per unit
d. 2,000 pounds.
SQ = 1,500 lbs
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
Hanson’s material quantity variance (MQV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Material Variances
Summary
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Zippy
Standard Quantity
×
Standard Price
1,700 lbs.
×
$3.90 per lb.
1,700 lbs.
×
$4.00 per lb.
1,500 lbs.
×
$4.00 per lb.
= $6,630
= $ 6,800
= $6,000
Price variance
$170 favorable
McGraw-Hill/Irwin
Quantity variance
$800 unfavorable
© The McGraw-Hill Companies, Inc., 2003
Material Variances
Hanson purchased and
used 1,700 pounds.
How are the variances
computed if the amount
purchased differs from
the amount used?
McGraw-Hill/Irwin
The price variance is
computed on the entire
quantity purchased.
The quantity variance
is computed only on
the quantity used.
© The McGraw-Hill Companies, Inc., 2003
Material Variances
Continued
Zippy
Hanson Inc. has the following material
standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week 2,800 pounds of material were
purchased at a total cost of $10,920, and
1,700 pounds were used to make 1,000
Zippies.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Material Variances
Continued
Actual Quantity
Purchased
×
Actual Price
Actual Quantity
Purchased
×
Standard Price
2,800 lbs.
×
$3.90 per lb.
2,800 lbs.
×
$4.00 per lb.
= $10,920
= $11,200
Price variance
$280 favorable
McGraw-Hill/Irwin
Zippy
Price variance increases
because quantity
purchased increases.
© The McGraw-Hill Companies, Inc., 2003
Material Variances
Continued
Actual Quantity
Used
×
Standard Price
Standard Quantity
×
Standard Price
1,700 lbs.
×
$4.00 per lb.
1,500 lbs.
×
$4.00 per lb.
= $6,800
= $6,000
Quantity variance is
unchanged because
actual and standard
quantities are unchanged.
McGraw-Hill/Irwin
Zippy
Quantity variance
$800 unfavorable
© The McGraw-Hill Companies, Inc., 2003
Isolation of Material
Variances
I need the price variance
sooner so that I can better
identify purchasing problems.
You accountants just don’t
understand the problems that
purchasing managers have.
McGraw-Hill/Irwin
I’ll start computing
the price variance
when material is
purchased rather than
when it’s used.
© The McGraw-Hill Companies, Inc., 2003
Responsibility for Material
Variances
You used too much material
because of poorly trained
workers and poorly
maintained equipment.
I am not responsible for
this unfavorable material
quantity variance.
You purchased cheap
material, so my people
had to use more of it.
McGraw-Hill/Irwin
Also, your poor scheduling
sometimes requires me to
rush order material at a
higher price, causing
unfavorable price variances.
© The McGraw-Hill Companies, Inc., 2003
Standard Costs
Now let’s calculate
standard cost
variances for
direct labor.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Note
Materials variances:


Material price variance
 MPV = AQ (AP - SP)
Material quantity variance
 MQV = SP (AQ - SQ)
Actual hours
Actual rate
Labor variances:


Labor rate variance
 LRV = AH (AR - SR)
Labor efficiency variance
 LEV = SR (AH - SH)
McGraw-Hill/Irwin
Standard rate
Standard hours allowed
for the actual good output
© The McGraw-Hill Companies, Inc., 2003
Labor Variances Example
Zippy
Hanson Inc. has the following direct labor
standard to manufacture one Zippy:
1.5 standard hours per Zippy at $12.00 per
direct labor hour
Last week 1,550 direct labor hours were
worked at a total labor cost of $18,910
to make 1,000 Zippies.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
What was Hanson’s actual rate (AR)
for labor for the week?
a. $12.20 per hour.
b. $12.00 per hour.
c. $11.80 per hour.
d. $11.60 per hour.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
What was Hanson’s actual rate (AR)
for labor for the week?
AR = $18,910 ÷ 1,550 hours
a. $12.20 per hour.
AR = $12.20 per hour
b. $12.00 per hour.
c. $11.80 per hour.
d. $11.60 per hour.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
Hanson’s labor rate variance (LRV) for
the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
Hanson’s labor rate variance (LRV) for
the week was:
a. $310 unfavorable.
b. $310 favorable.
LRV = AH(AR - SR)
c. $300 unfavorable.
LRV = 1,550 hrs($12.20 - $12.00)
d. $300 favorable.
LRV = $310 unfavorable
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
The standard hours (SH) of labor that
should have been worked to produce
1,000 Zippies is:
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
The standard hours (SH) of labor that
should have been worked to produce
1,000 Zippies is:
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
SH = 1,000 units × 1.5 hours per unit
d. 1,800 hours.
SH = 1,500 hours
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
Hanson’s labor efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
Hanson’s labor efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Labor Variances
Summary
Zippy
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
Standard Hours
×
Standard Rate
1,550 hours
×
$12.20 per hour
1,550 hours
×
$12.00 per hour
1,500 hours
×
$12.00 per hour
= $18,910
= $18,600
Rate variance
$310 unfavorable
McGraw-Hill/Irwin
= $18,000
Efficiency variance
$600 unfavorable
© The McGraw-Hill Companies, Inc., 2003
Labor Rate Variance –
A Closer Look
Using highly paid skilled workers to
perform unskilled tasks results in an
unfavorable rate variance.
High skill,
high rate
Low skill,
low rate
Production managers who make work assignments
are generally responsible for rate variances.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Labor Efficiency Variance –
A Closer Look
Poorly
trained
workers
Insufficient
demand
Poor
quality
materials
Unfavorable
Efficiency
Variance
Poor
supervision
of workers
McGraw-Hill/Irwin
Poorly
maintained
equipment
© The McGraw-Hill Companies, Inc., 2003
Responsibility for
Labor Variances
I am not responsible for
the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
time to process it.
McGraw-Hill/Irwin
You used too much
time because of poorly
trained workers and
poor supervision.
© The McGraw-Hill Companies, Inc., 2003
Responsibility for
Labor Variances
Maybe I can attribute the labor
and material variances to personnel
for hiring the wrong people
and training them poorly.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Standard Costs
Now let’s calculate
standard cost
variances for the
last of the variable
production costs –
variable
manufacturing
overhead.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Note
Labor variances:


Labor rate variance
 LRV = AH (AR - SR)
Labor efficiency variance
 LEV = SR (AH - SH)
Actual hours of
the allocation
base
Actual variable
overhead rate
Variable overhead variances:


Standard
variable
overhead rate
Variable overhead spending variance
 VOSV = AH (AR - SR)
Variable overhead efficiency variance
 VOEV = SR (AH - SH)
Standard hours allowed
for the actual good output
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Variable Manufacturing Zippy
Overhead Variances Example
Hanson Inc. has the following variable
manufacturing overhead standard to
manufacture one Zippy:
1.5 standard hours per Zippy at $3.00 per
direct labor hour
Last week 1,550 hours were worked to make
1,000 Zippies, and $5,115 was spent for
variable manufacturing overhead.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
What was Hanson’s actual rate (AR) for
variable manufacturing overhead rate
for the week?
a. $3.00 per hour.
b. $3.19 per hour.
c. $3.30 per hour.
d. $4.50 per hour.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
What was Hanson’s actual rate (AR) for
variable manufacturing overhead rate
for the week?
a. $3.00 per hour.
b. $3.19 per hour.
AR = $5,115 ÷ 1,550 hours
c. $3.30 per hour.
AR = $3.30 per hour
d. $4.50 per hour.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
Hanson’s spending variance (VOSV) for
variable manufacturing overhead for
the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
Hanson’s spending variance (VOSV) for
variable manufacturing overhead for
the week was:
a. $465 unfavorable.
b. $400 favorable.
SV = AH(AR - SR)
c. $335 unfavorable.
SV = 1,550 hrs($3.30 - $3.00)
d. $300 favorable. SV = $465 unfavorable
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
Hanson’s efficiency variance (VOEV) for
variable manufacturing overhead for the
week was:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Zippy
Hanson’s efficiency variance (VOEV) for
variable manufacturing overhead for the
week was:
a. $435 unfavorable.
b. $435 favorable. 1,000 units × 1.5 hrs per unit
c. $150 unfavorable.
d. $150 favorable.
EV = SR(AH - SH)
EV = $3.00(1,550 hrs - 1,500 hrs)
EV = $150 unfavorable
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Variable Manufacturing
Overhead Variances
Zippy
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
Standard Hours
×
Standard Rate
1,550 hours
×
$3.30 per hour
1,550 hours
×
$3.00 per hour
1,500 hours
×
$3.00 per hour
= $5,115
= $4,650
Spending variance
$465 unfavorable
McGraw-Hill/Irwin
= $4,500
Efficiency variance
$150 unfavorable
© The McGraw-Hill Companies, Inc., 2003
Variable Manufacturing Overhead
Variances – A Closer Look
If variable overhead is applied on the basis
of direct labor hours, the labor efficiency
and variable overhead efficiency variances
will move in tandem.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Variance Analysis and
Management by Exception
How do I know which
variances to
investigate?
McGraw-Hill/Irwin
Larger variances, in
dollar amount or as
a percentage of the
standard, are
investigated first.
© The McGraw-Hill Companies, Inc., 2003
Advantages of Standard Costs
Possible reductions
in production costs
Management by
exception
Advantages
Improved cost control
and performance
evaluation
McGraw-Hill/Irwin
Better Information
for planning and
decision making
© The McGraw-Hill Companies, Inc., 2003
Disadvantages of
Standard Costs
Emphasis on
negative may
impact morale.
Standard cost
reports may
not be timely.
Incentives to build
inventories.
McGraw-Hill/Irwin
Potential
Problems
Favorable variances
may be
misinterpreted.
Continuous
improvement
may be more
important than
meeting standards.
Emphasizing standards
may exclude other
important objectives.
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The Balanced Scorecard
Management translates its strategy into
performance measures that employees
understand and accept.
Customers
Financial
Performance
measures
Internal
business
processes
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Learning
and growth
© The McGraw-Hill Companies, Inc., 2003
The Balanced Scorecard
How do we look
to the owners?
In which internal
business processes
must we excel?
How can we
continually learn,
grow, and improve?
How do we look
to customers?
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© The McGraw-Hill Companies, Inc., 2003
The Balanced Scorecard
Learning improves
business processes.
Improved business
processes improve
customer satisfaction.
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Improving customer
satisfaction improves
financial results.
© The McGraw-Hill Companies, Inc., 2003
Benefits of Balance Scorecard
If implemented well:

Forces management to articulate a coherent
strategy.

Strategy is communicated throughout
organization.

Performance measures are more likely to be
consistent with strategy and actionable.

Portfolio of measures reduces gaming
problems.

Feedback loop makes strategy dynamic.
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Some Possible Problems
Cultural/behavioral

Program fatigue.

Culture shock/resistance.

Every existing performance measure
has a champion.

Gaming still possible.
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Delivery Performance
Measures
Order
Received
Wait Time
Goods
Shipped
Production
Started
Process Time + Inspection Time
+ Move Time + Queue Time
Throughput Time
Delivery Cycle Time
Process time is the only value-added time.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Delivery Performance
Measures
Order
Received
Wait Time
Goods
Shipped
Production
Started
Process Time + Inspection Time
+ Move Time + Queue Time
Throughput Time
Delivery Cycle Time
Manufacturing
Cycle
=
Efficiency
McGraw-Hill/Irwin
Value-added time
Manufacturing cycle time
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
Move 0.5 days
Queue 9.3 days
What is the throughput time?
a. 10.4 days
b. 0.2 days
c. 4.1 days
d. 13.4 days
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
Move 0.5 days
Queue 9.3 days
What is the throughput time?
a. 10.4 days
b. 0.2 days
Throughput time = Process + Inspection + Move + Queue
c. 4.1 days= 0.2 days + 0.4 days + 0.5 days + 9.3 days
d. 13.4 days= 10.4 days
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
Move 0.5 days
Queue 9.3 days
What is the MCE?
a. 50.0%
b. 1.9%
c. 52.0%
d. 5.1%
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
Move 0.5 days
Queue 9.3 days
What is the MCE?
a. 50.0%
MCE = Value-added time ÷ Throughput time
b. 1.9%
= Process time ÷ Throughput time
c. 52.0%
= 0.2 days ÷ 10.4 days
d. 5.1%
= 1.9%
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
Move 0.5 days
Queue 9.3 days
What is the delivery cycle time?
a. 0.5 days
b. 0.7 days
c. 13.4 days
d. 10.4 days
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Delivery cycle time = Wait time + Throughput time
= 3.0 days + 10.4 days
= 13.4 days
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
Move 0.5 days
Queue 9.3 days
What is the delivery cycle time?
a. 0.5 days
b. 0.7 days
c. 13.4 days
d. 10.4 days
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
End of Chapter 10
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003