Standard Costing, Operational Performance Measures, and The Balanced Scorecard
Standard Costing, Operational Performance Measures, and The Balanced Scorecard
Standard Costing, Operational Performance Measures, and The Balanced Scorecard
Any control system has three basic parts: a predetermined or standard performance
level, a measure of actual performance, and a comparison between standard and
actual performance. The system works by making the comparison between actual
and standard performance and then taking action to bring about a desired
consequence.
10-2
10-3
One method of setting standards is the analysis of historical data. Historical cost
data provide an indicator of future costs. The methods for analyzing cost behavior
described in Chapter 7 are used to predict future costs on the basis of historical
costs. These predictions then form the basis for setting standards. Another method
for setting standards is task analysis, which is the analysis of a production process
to determine what it should cost to produce a product or service. The emphasis
shifts from what the product did cost in the past to what it should cost in the future.
An example of task analysis is a time-and-motion study conducted to determine how
long each step performed by direct laborers should require.
10-4
A perfection (or ideal) standard is the cost expected under perfect or ideal operating
conditions. A practical (or attainable) standard is the cost expected under normal
operating conditions. Many behavioral scientists question the effectiveness of
perfection standards. They feel that employees are more likely to perform well when
they strive to achieve an attainable standard than when they strive, often
unsuccessfully, to achieve a perfection standard.
10-5
A bank could use standards to specify the required amount of time to process a loan
application or process a bank transaction.
10-6
Standard material prices include the purchase price of the material and any
transportation costs incurred to obtain the material. The standard quantity of
material is the amount required to be included in the finished product plus an
allowance for normal waste expected in the production process.
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10-7
An unfavorable direct-material price variance means that a higher price was paid for
the material than was expected when the standard was set. A favorable variance has
the opposite interpretation.
10-8
The manager in the best position to influence the direct-material price variance is the
purchasing manager.
10-9
10-10 The manager in the best position to influence the direct-material quantity variance
usually is the production manager.
10-11 The direct-material price variance is based on the quantity purchased (PQ).
Deviations between the actual and standard price, which are highlighted by the price
variance, relate to the purchasing function in the firm. Timely action to follow up a
significant price variance is facilitated by calculating this variance as soon as
possible after the material is purchased.
The direct-material quantity variance is based on the amount of material used in
production (AQ). The quantity variance highlights deviations between the quantity of
material actually used (AQ) and the standard quantity allowed (SQ). Therefore, it
makes sense to compute this variance at the time the material is used in production.
10-12 An unfavorable direct-labor rate variance means that a higher labor rate was paid
than was anticipated when the standard was set. One possible cause is that labor
rate raises granted were above those anticipated in setting the standards. Another
possible cause is that more highly skilled workers were used to perform tasks than
were required or were anticipated at the time the standards were set. A favorable
variance has the opposite interpretation.
10-13 In some cases, the manager in the best position to influence the direct-labor rate
variance is the production manager. In other cases, the personnel manager or union
negotiator would have greater influence.
10-14 The interpretation of an unfavorable direct-labor efficiency variance is that more
labor was used to accomplish a given task than was required in accordance with the
standards. A favorable variance has the opposite interpretation.
10-15 The manager in the best position to influence the direct-labor efficiency variance
usually is the production manager.
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10-2
10-16 The issue of quantity purchased versus quantity used does not arise in the context
of direct labor, because direct labor is purchased and used at the same time. Unlike
direct material, direct labor cannot be purchased and inventoried for later use.
10-17 Several factors that managers often consider when determining the significance of a
variance are as follows: size of variance, extent to which the variances are recurring,
trends in the variances, controllability of the variances, and the perceived costs and
benefits of investigating the variances.
10-18 Several ways in which standard-costing should be adapted in the new manufacturing
environment are as follows:
(a) Reduced importance of labor standards and variances: As direct labor occupies
a diminished role in the new manufacturing environment, the standards and
variances used to control labor costs also decline in importance.
(b) Emphasis on material and overhead costs: As labor diminishes in its importance,
material and overhead costs take on greater significance.
(c) Cost drivers: Identification of the factors that drive production costs takes on
greater importance in the cost management system.
(d) Shifting cost structure: Advanced manufacturing systems require large outlays
for production equipment, which entail a shift in the cost structure from variable
costs toward fixed costs. Overhead cost control becomes especially critical.
(e) High quality and no defects: Total quality control programs that typically
accompany a JIT approach strive for very high quality levels for both raw
materials and finished products. One result should be very low material price and
quantity variances and low costs of rework.
(f) Non-value-added costs: A key objective of a cost management system is the
elimination of non-value-added costs. As these costs are reduced or eliminated,
standards must be revised frequently to provide accurate benchmarks for cost
control.
(g) New measures and standards: In the new manufacturing environment, new
measures must be developed to control key aspects of the production process.
As new measures are developed, standards should be established as
benchmarks for performance. An example is the manufacturing cycle efficiency
measure, which is defined as processing time divided by the sum of processing
time, inspection time, waiting time, and move time.
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10-26 Responses will vary widely on this question. Here are some possibilities for a bank:
Internal operations: (a) number of transaction errors; (b) employee retention and
advancement.
Innovation and learning: (a) new financial products; (b) employee suggestions
received and implemented.
Lead measures, such as market share or new financial products, show how well the
bank is doing now in areas that will affect financial performance in the future. Lag
measures, such as the banks profits, measure the banks financial performance.
Lag measures are the result of previous efforts in the banks customer, internal
operations, and learning and innovation perspectives.
10-27 An airline could measure the frequency and cost of customer complaints about lost
or damaged luggage. After reducing the number of such incidents, the cost savings
could be shared with the relevant employees (e.g., front-counter ticket agents and
baggage-handling personnel).
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10-6
SOLUTIONS TO EXERCISES
EXERCISE 10-28 (15 MINUTES)
Direct-material price variance = PQ(AP SP)
= 6,500($7.40 $7.20)
= $1,300 Unfavorable
Direct-material quantity variance = SP(AQ SQ)
= $7.20(4,300* 4,000)
= $2,160 Unfavorable
*AQ = 4,300 pounds = $31,820 $7.40 per pound
SQ = 4,000 pounds = 2,000 units 2 pounds per unit
= AH(AR SR)
= 6,450*($18.30 $18.00)
= $1,935 Unfavorable
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Quantity
Price
6,500
$7.40
pounds
per
purchased
pound
Actual
Standard
Quantity
Price
6,500
$7.20
pounds
per
purchased
pound
allowed
pound
$48,100
$46,800
$28,800
$1,300 Unfavorable
Direct-material
price variance
4,300
pounds
used
$7.20
per
pound
$30,960
$2,160
Unfavorable
Direct-material
quantity variance
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10-8
Hours
Rate
6,450
$18.30
hours
per
used
hour
Actual
Hours
6,450
hours
used
$118,035
Standard
Rate
$18.00
per
hour
allowed
hour
$116,100
$1,935 Unfavorable
Direct-labor
rate variance
$108,000
$8,100 Unfavorable
Direct-labor
efficiency variance
$10,035 Unfavorable
Direct-labor variance
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7 board feet
1.5 board feet
8.5 board feet
$ 5.00
1.20
$ 6.20
8.5 board feet
$ 6.20
$52.70
Calculation of variances:
Direct-material price variance = PQ(AP SP)
= 240,000($.62 $.60)
= $4,800 Unfavorable
Actual
Standard
Quantity Price
240,000
$.60
kilograms
per
purchased
kilogram
200,000
$.60
kilograms
per
allowed
kilogram
$148,800
$144,000
$120,000
$4,800 Unfavorable
Direct-material
price variance
210,000
kilograms
used
$.60
per
kilogram
$126,000
$6,000
Unfavorable
Direct-material
quantity variance
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13,000
$12.20
hours
per
used
hour
Actual
Hours
13,000
hours
used
$158,600
12,500
$12.00
hours
per
allowed
hour
Standard
Rate
$12.00
per
hour
$156,000
$2,600 Unfavorable
Direct-labor
rate variance
$150,000
$6,000 Unfavorable
Direct-labor
efficiency variance
$8,600 Unfavorable
Direct-labor variance
EXERCISE 10-33 (30 MINUTES)
Answers will vary widely, depending on the company and the product. Typically, new
products present challenges in setting standards, particularly if they involve new
production processes or materials. Managerial accountants and engineers often look
to other similar products or other products manufactured using similar processes to
get an idea as to what the standard cost of a new product should be.
EXERCISE 10-34 (5 MINUTES)
Good output
Good output
.75
6,000 pounds
=
.75
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10-12
Direct
Material
$16 per lb
2.75 lbs per unitc
3 lbs per unita
$14 per lb
20,000 units
$120,000 F
$80,000 Ub
$40,000 F
Direct
Labor
$20 per hre
4 hrs per unitf
3.5 hrs
$21 per hr
20,000 units
$ 70,000 Ud
$200,000 F
$130,000 F
Explanatory notes:
a.
Actual quantity per unit of output = 20,000 units 3 lbs per unit
b.
c.
Standard quantity per unit = 20,000 units 2.75 lbs per unit
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e.
f.
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10-14
Favorable variances
1 standard deviation
$2,000
$1,000
Time
January
February
March
April
May
June
$1,000
$2,000
Unfavorable variances
(b)
1 standard deviation
Only the variances in May and June would be investigated, since they are the only
ones that exceed 1 standard deviation, $1,900.
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Rule of thumb:
Standard cost...............................................................................................
Cutoff percentage.........................................................................................
Cutoff value for investigation......................................................................
$38,000
6%
$ 2,280
Only the June variance, $2,400 U, is equal to or greater than the cutoff value. Thus,
only June's variance would be investigated. (U denotes unfavorable.)
3.
This is a judgment call, and there is no right or wrong answer. It would be reasonable
to conclude that the consistent stream of relatively large unfavorable variances
should be investigated before May. The three variances for February, March, and April
would be cause for concern.
total output
total input
$11,000,000
= $10,000,000 1.1
2.
This summary financial measure does not convey much information to management
or other users of the data. A preferable approach would be to record multiple physical
measures that capture the most important determinants of the bank's productivity.
Examples include the following:
a.
b.
c.
d.
e.
f.
g.
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10-16
2.
processing time
processing time inspection time waiting time move time
6 days
6/28 21.4% (rounded)
6 days 3 days 14 days 5 days
Delivery cycle time is the average time between receipt of the customer's order until
delivery of the goods. In this case the delivery cycle time is 44 days.
processing time
processing time inspection time
waiting time move time
4.25 hours
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Raw-Material Inventory...............................................
Direct-Material Price Variance...................................
Accounts Payable..............................................
144,000
4,800
120,000
6,000
Work-in-Process Inventory........................................
Direct-Labor Rate Variance.......................................
Direct-Labor Efficiency Variance..............................
Wages Payable..................................................
150,000
2,600
6,000
19,400
4.
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10-18
148,800
126,000
158,600
4,800
6,000
2,600
6,000
Direct-Material
Price Variance
4,800 4,800
Work-in-Process Inventory
120,000
150,000
Direct-Material
Quantity Variance
6,000 6,000
Accounts Payable
148,800
Direct-Labor
Rate Variance
2,600 2,600
Wages Payable
158,600
Direct-Labor
Efficiency Variance
6,000 6,000
Cost of Goods Sold
19,400
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SOLUTIONS TO PROBLEMS
PROBLEM 10-43 (25 MINUTES)
1.
2.
4.
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10-20
2.
= SP(AQ SQ)
= $1.75(285,000 304,000*)
= $33,250 Favorable
*Standard quantity allowed = 38,000 units 8 kilograms per unit = 304,000 kilograms
3.
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Initial
Mix
12 kg
Unit
Cost
4.35real
Salex.......................................................................
9.6 ltr
5.40real
Protet......................................................................
5 kg
7.20real
Standard
Material
Cost
52.20real
51.84real
36.00real
140.04real
Type I fertilizer:
Price variance:
Actual quantity purchased x actual price
5,000 pounds x $ .53 $2,650
Actual quantity purchased x standard price
5,000 pounds x $ .50 2,500
Direct-material price variance. $ 150 Unfavorable
Quantity variance:
Actual quantity used x standard price
3,700 pounds x $ .50 $1,850
Standard quantity allowed x standard price
4,400 pounds* x $ .50.. 2,200
Direct-material quantity variance $ 350 Favorable
* 40 pounds x 55 clients x 2 applications
Type II fertilizer:
Price variance:
Actual quantity purchased x actual price
10,000 pounds x $ .40.
Actual quantity purchased x standard price
10,000 pounds x $ .42.
Direct-material price variance.
McGraw-Hill/Irwin
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10-22
$4,000
4,200
$ 200 Favorable
Direct-labor variances:
Rate variance:
Actual hours used x actual rate
165 hours x $11.50..
Actual hours used x standard rate
165 hours x $9.00
Direct-labor rate variance
$1,897.50
1,485.00
$ 412.50 Unfavorable
Efficiency variance:
Actual hours used x standard rate
165 hours x $9.00. $1,485.00
Standard hours allowed x standard rate
220 hours* x $9.00... 1,980.00
Direct-labor efficiency variance. $ 495.00 Favorable
* 2/3 hours x 55 clients x 6 applications
3.
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(a)
Yes, the service was a success. Overall costs were controlled as indicated by
a total favorable variance of $902.50. In addition, each of the three cost
components (Type I fertilizer, Type II fertilizer, and direct labor) produced a net
favorable variance. Wolfe did have a sizable unfavorable labor-rate variance
as a result of his having to pay $11.50 per hour when a more typical wage rate
would have been $9.00 per hour. This inflated rate is attributable to the tight
labor market, which is beyond his control. Note: Part of the variance may
have been caused by a standard rate that was set too low, especially given
the fact that this is a new service.
Type I fertilizer:
Price variance.. $150.00 Unfavorable
Quantity variance 350.00 Favorable
Type II fertilizer:
Price variance..
200.00 Favorable
Quantity variance 420.00 Favorable
Direct labor:
Rate variance 412.50 Unfavorable
Efficiency variance
495.00 Favorable
Total material and labor variances
$902.50 Favorable
(b)
5.
In this case, several of the favorable variances may have come back to haunt
Wolfe. The favorable labor efficiency variance means that less time is being
spent on the job than originally anticipated. This may indicate that the parttime employee is rushing and doing sloppy work. Also, less fertilizer used
than budgeted (i.e., favorable quantity variances for both Type I and Type II)
would likely give rise to an increased occurrence of weeds as well as a lack of
greening in the lawn.
This is a management judgment for Wolfe to make. If the service is continued, Wolfe
should consider hiring a full-time employee and insisting on the standard amount of
fertilizer being applied to each lawn.
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10-24
2.
a. Standard
Direct-Labor
Cost*
January.............................................................
February...........................................................
March................................................................
April..................................................................
May....................................................................
June..................................................................
July...................................................................
August..............................................................
September........................................................
October.............................................................
$ 9,983
6,050
33,297
43,056
9,651
13,994
6,273
5,791
5,791
4,343
b. 20% of the
Standard DirectLabor Cost*
$1,997
1,210
6,659
8,611
1,930
2,799
1,255
1,158
1,158
869
*Rounded.
3.
The variances for all of the months except August and September exceed 20% of the
standard direct-labor cost and would therefore be investigated.
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10-26
The variances for March, April, and June will be investigated, since they exceed one
standard deviation.
6.
The production volume was much greater in March, April, and June.
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Standard
Costs
$ 234,000
877,500
$1,111,500
Variances:
a.
b.
c.
d.
No. The variances are favorable and small, with each being less than 2% of
budgeted cost amounts ($350,000). However, by simply reporting total variances for
material and labor, one cannot get a totally clear picture of performance. Price,
quantity, rate, and efficiency variances should be calculated for further insight.
2.
Direct-material variances:
Price variance:
Actual quantity purchased x actual price
45,000 pounds x $7.70. $346,500
Actual quantity purchased x standard price
45,000 pounds x $8.80. 396,000
Direct-material price variance. $ 49,500 Favorable
Quantity variance:
Actual quantity used x standard price
45,000 pounds x $8.80 $396,000
Standard quantity allowed x standard price
39,900 pounds* x $8.80..
351,120
Direct-material quantity variance $ 44,880 Unfavorable
* 9,500 units x 4.2 pounds
Total direct-material variance:
$49,500F + $44,880U = $4,620F
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Yes. Although the combined variances are small, a more detailed analysis reveals
the presence of sizable, offsetting variances (all in excess of 12% of budgeted cost
amounts). A variance investigation should be undertaken if the likely benefits of the
investigation appear to exceed the costs.
4.
No, things are not going as smoothly as the vice president believes. With regard to
the new supplier, SolarPrime is paying less than expected for direct materials.
However, the quality may be poor, as indicated by the unfavorable quantity variance
and increased usage.
Turning to direct labor, the favorable efficiency variance means that the company is
producing units by consuming fewer hours than expected. This may be the result of
the team-building/morale-boosting exercises, as a contented, well-trained work force
tends to be more efficient. However, another plausible explanation could be that
Solar Prime is paying premium wages (as indicated by the unfavorable rate variance)
to hire laborers with above-average skill levels.
McGraw-Hill/Irwin
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10-30
Yes. Hoctor is the production supervisor. The prices paid for materials and the
quality of material acquired are normally the responsibility of the purchasing
manager. The change to the new supplier may introduce problems of dealing with
the unknownthe suppliers reliability, ability to deliver quality goods, etc. Finally,
direct-labor wage rates are often a function of market conditions, which would likely
be uncontrollable from Hoctors perspective.
Labor
Class
III
II
I
Total
b.
Actual
Rate
$25.80
22.50
16.20
Standard
Rate
$24.00
21.00
15.00
Difference
in Rates
$1.80
1.50
1.20
Actual
Hours
1,100
1,300
750
Rate
Variance
$1,980 U
1,950 U
900 U
$4,830 U
Actual
Hours
1,100
1,300
750
Standard
Hours*
1,000
1,000
1,000
Difference
in Hours
100
300
(250)
Standard
Rate
$24.00
21.00
15.00
Efficiency
Variance
$2,400 U
6,300 U
(3,750) F
$4,950 U
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The advantages of not changing the labor rate would include (1) comparison of actual
operating results to a fixed base which was previously approved by management, and
(2) the clerical or computer cost savings of not implementing the change. If labor
standards are not changed during the year to incorporate significant changes in labor
costs, a noncontrollable variance is created. This variance may mask actual operating
variances. In addition, when reporting operating variances that contain a significant
noncontrollable variance, a credibility gap may be created.
3.
a.
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10-32
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Managerial Accounting, 8/e
The standard cost per 10-gallon batch of strawberry jam is determined as follows:
Strawberries (7.5 qts.* $1.60)...........................................
Other ingredients (10 gal. $.90).......................................
Sorting labor (3/60 hr. 6 qt. $18.00)..............................
Blending labor (12/60 hr. $18.00).....................................
Packaging (40 qt. $.76)....................................................
Total standard cost per 10-gallon batch.............................
$12.00
9.00
5.40
3.60
30.40
$60.40
2.
3.
a.
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10-34
2.
Percentage of
Month
Amount
Standard Cost
August................. 76,000 U...................
7.60%
September........... 74,000 U...................
7.40%
October............... 84,000 U...................
8.40%
November............ 120,000 U................... 12.00%
December............ 104,000 U................... 10.40%
3.
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Favorable variances
1 standard deviation
$12,000
$6,000
Time
$6,000
$12,000
1 standard deviation
Unfavorable variances
Jan
McGraw-Hill/Irwin
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10-36
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec
At California Housewares Merced Division, the standard cost per cutting board is
calculated as follows:
Direct material:
Lumber (1.5 board ft.* $4.00 per board ft.)...............
Footpads (4 pads $.10 per pad)................................
$6.00
.40
$6.40
Direct labor:
Prepare and cut (14.4/60 hr. $8.00 per hr.)..............
Assemble and finish (15/60 hr. $8.00 per hr.)...........
$1.92
2.00
3.92
2.
$10.32
(5 1)
1.5 board ft.
5
(5 1)
14.4 min.
5
a.
b.
c.
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a.
b.
The standard costing system can have a negative impact on the motivation of
employees if the standards are too easily attainable or too difficult to reach. If the
standards are too easy, employees may tend to reduce productivity. If they are
too difficult, production workers may become frustrated and ignore the
standards. Also, standards that are set without production employee input may
not be accepted as realistic by those employees.
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10-38
Categories of measures:
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Area of Manufacturing
Performance
a
b
a
b,c
c
b,c
b,c
d
a,e
a,e
f
f
g,h
i
i
a,e
a
Memorandum
Date:
Today
To:
From:
I. M. Student
Subject:
Production processing:
Cycle time, manufacturing-cycle efficiency, and productivity measures all
point to consistency and high-level performance throughout the measurement
period. Both cycle time and manufacturing-cycle efficiency exhibit slight,
favorable trends.
b.
Product quality:
The number of defective finished products, number of products returned, and
warranty claims all show improvement over the period. All three measures
suggest excellent performance in quality control.
c.
Customer acceptance:
Customer complaints are steady with an average of 5.5 complaints during a
two-week period. The number of unresolved complaints improved during the
period from 2 to 0. Performance in this area is very high, but there is a little
room for improvement.
d.
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10-40
Productivity:
Both the aggregate productivity measure and the number of units produced
per day per employee remained relatively steady throughout the period. The
latter of these two measures exhibited a slight, favorable trend.
f.
Delivery performance:
Both performance measures (percentages of on-time deliveries and orders
filled) were very high through the period, finishing at 100 percent in period 6.
Machine maintenance:
Machine downtime was low through the period (average of 84 minutes each
two-week period). Bottleneck machine downtime was low except in period 5.
The cause of that incident should be investigated.
Overall evaluation:
The Albany plant has performed at a very high level of efficiency in virtually every
phase of its operations during the 1st quarter.
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Today
To:
From:
I. M. Student
Subject:
1.
The Baton Rouge Plant's performance for the period January through June is
summarized as follows:
a.
b.
c.
Delivery performance:
Delivery performance is good, but could be improved. All orders were
filled, but only an average of 95 percent of the orders were filled on time in
May and June. This might reflect increased demand, as evidenced by the
increase in overtime hours.
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10-42
e.
Machine maintenance:
Machine downtime improved during the period from 30 hours to 10 hours
(average of 21.7 hours), but bottleneck machine downtime was too high,
particularly in May. Also, unscheduled machine maintenance calls were up
in May and June.
2.
Recommended actions:
a.
b.
c.
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a.
The semiannual installments and total bonus for the Charter Division are
calculated as follows:
COMMLINE EQUIPMENT CORPORATION: CHARTER DIVISION
GAIN-SHARING BONUS CALCULATION
FOR THE YEAR ENDED DECEMBER 31, 20X1
First installment, JanuaryJune:
Profitability (.02 $924,000).................................
Rework [(.02 $924,000) $23,000].....................
On-time delivery (no bonusunder 96%)............
Sales returns
{[(.015 $8,400,000) $168,000] 50%}......
Semiannual installment.........................................
First semiannual bonus awarded..............................
$18,480
(4,520)
-0(21,000)
$ (7,040)
$
$17,600
(4,400)
4,000
(4,000)
$13,200
13,200
$13,200
The employees of the Charter Division are likely to be frustrated by the new plan,
since the division bonus is more than $40,000 less than that of the previous
year, when sales and operating income were similar. However, both on-time
deliveries and sales returns improved in the second half of the year, while
rework costs were relatively even. If the division continues to improve at the
same rate, the Charter Division bonus will approximate or exceed what it was
under the old plan. The only open question is whether the employees have
sufficient motivation to effect improvement.
McGraw-Hill/Irwin
Inc.
10-44
a.
The semiannual installments and total bonus for the Mesa Division are
calculated as follows:
COMMLINE EQUIPMENT CORPORATION: MESA DIVISION
GAIN-SHARING BONUS CALCULATION
FOR THE YEAR ENDED DECEMBER 31, 20X1
First installment, JanuaryJune:
Profitability (.02 $684,000).................................
Rework [(.02 $684,000) $12,000].....................
On-time delivery (over 98%)..................................
Sales returns
{[(.015 $5,700,000) $89,500] 50%}........
Semiannual installment.........................................
First semiannual bonus awarded..............................
$13,680
-0-*
10,000
(2,000)
$21,680
$21,680
$16,240
-0-*
-0-
6,000
$22,240
22,240
$43,920
$6,000, since sales returns are less than 1.5 percent of sales.
b.
The employees of the Mesa Division should be as satisfied with the new plan as
with the old plan, because the bonus was almost equivalent. However, there is
no sign of improvements in this division; in fact, on-time deliveries declined
considerably in the second half of the year. Therefore, the bonus situation may
not be as favorable in the future. Decreased bonuses could motivate the
employees to improve, or they could frustrate employees and undermine their
motivation.
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 8/e
Harrington's revised bonus plan for the Charter Division fostered improvements
including the following:
Creating a reward structure for rework costs that are below 2 percent of operating
income that would encourage employees to drive costs lower.
Reviewing the whole year in total. The bonus plan should carry forward the
negative amounts for one six-month period into the next six-month period,
incorporating the entire year when calculating a bonus.
Developing benchmarks, and then giving rewards for improvements over prior
periods and encouraging continuous improvement.
McGraw-Hill/Irwin
Inc.
10-46
(a)
Product
Standard tent...................
Deluxe tent.......................
Direct-material
price variance..................................................................................
*$6.40
= $26,880 4,200
= $12,640 1,600
$7.90
(b)
Price
Variance
$1,680 U
160 F
$1,520 U
Product
Standard tent.................
Deluxe tent.....................
Direct-material
quantity variance..............................................................................
Quantity
Variance
$600 U
-0$600 U
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 8/e
Raw-Material Inventory................................................
Direct-Material Price Variance.....................................
Accounts Payable..............................................
38,000*
1,520
39,520
25,920*
600
26,520
McGraw-Hill/Irwin
Inc.
10-48
a.
c.
33,600 hours
3,600 hours
37,200 hours
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 8/e
44,800 kilograms
6,400 kilograms
51,200 kilograms
e.
f.
$224,000
_275,520
$499,520
McGraw-Hill/Irwin
Inc.
10-50
$32,000
_29,520
$61,520
Raw-Material Inventory........................................................
Direct-Material Price Variance...................................
Accounts Payable......................................................
250,000
750*
249,250
256,000*
1,500
257,500
To add the direct-material cost to work in process and record the direct-material
quantity variance.
Work-in-Process Inventory..................................................
Direct-Labor Rate Variance.................................................
Direct-Labor Efficiency Variance..............................
Wages Payable...........................................................
305,040*
1,460
5,740
300,760
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 8/e
Finishing
Department
7 lbs
1 lb
8 lbs
1 set
1 set
$12 per lb
8 lbs
$12 per lb
$96 per guitar
750 guitars
1 set
$15 per set
$15 per guitar
750 guitars
$72,000
$11,250
Construction
Department
Finishing
Department
6 hrs
$20
$120
750 guitars
3 hrs
$15
$45
750 guitars
$90,000
$33,750
Standard quantity
Direct material and parts in finished product:
Veneered wood.......................................
Bridge and strings..................................
Allowance for normal waste.......................
Total standard quantity per guitar.................
Standard price:
Direct material and parts:
Veneered wood.......................................
Bridge and strings..................................
Standard direct-material cost:
Standard quantity........................................
Standard price.............................................
Standard cost per guitar.............................
Actual output in July...................................
Total standard cost of direct material
in July...........................................................
DIRECT LABOR
McGraw-Hill/Irwin
Inc.
10-52
(a)
Construction Department:3
DIRECT-MATERIAL PRICE AND QUANTITY VARIANCES
purchased
pound
Actual
Standard
Quantity Price
9,000
$12.00
pounds
per
purchased
pound
3
6,000
$12.00
pounds
per
allowed
pound
$112,500
$108,000
$72,000
$4,500 Unfavorable
Direct-material
price variance
1.
6,750
pounds
used
$12.00
per
pound
$81,000
2
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 8/e
$9,000
Unfavorable
Direct-material
quantity variance
4,275
$19
hours
per
used
hour
Actual
Hours
1 4,275
hours
used
$81,225
Standard
Rate
$20
per
hour
4,500
$20
hours
per
allowed
hour
$85,500
$4,275 Favorable
Direct-labor
rate variance
$90,000
$4,500 Favorable
Direct-labor
efficiency variance
$8,775 Favorable
Direct-labor variance
(b)
Finishing Department:
DIRECT-LABOR RATE AND EFFICIENCY VARIANCES
2,355
$16
hours
per
used
hour
Actual
Hours
2,355
hours
used
$37,680
Standard
Rate
$15
per
hour
2,250
$15
hours
per
allowed
hour
$35,325
$2,355 Unfavorable
Direct-labor
rate variance
$33,750
$1,575 Unfavorable
Direct-labor
efficiency variance
Krn>standar
$3,930 Unfavorable
Direct-labor variance
McGraw-Hill/Irwin
Inc.
10-54
Direct material:
Standard cost, given
actual output...............
Direct-material price
variance.......................
Direct-material quantity
variance.......................
Direct labor:
Standard cost, given
actual output...............
Direct-labor rate variance
Direct-labor efficiency
variance.......................
Construction Department
Percentage of
Amount
Standard Cost
Finishing Department
Percentage of
Amount Standard Cost
$72,000
$11,250
4,500 U
6.25%
-0-
-0-
9,000 U
12.50%
-0-
-0-
$90,000
4,275 F
4.75%
$33,750
2,355 U
6.98%
4,500 F
5.00%
1,575 U
4.67%
6.25%= 4500/72000
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 8/e
Journal entries:
Raw-Material Inventory........................................................
Direct-Material Price Variance.............................................
Accounts Payable......................................................
108,000
4,500
112,500
13,500
13,500
72,000
9,000
81,000
11,250
11,250
90,000
4,275
4,500
81,225
33,750
2,355
1,575
37,680
McGraw-Hill/Irwin
Inc.
10-56
207,000
207,000
175,500
124,200
175,500
124,200
To record sale of 450 guitars at a price of $390 each and a standard cost of $276 each.
Cost of Goods Sold..............................................................
Direct-Labor Rate Variance.................................................
Direct-Labor Efficiency Variance........................................
Direct-Material Price Variance...................................
Direct-Material Quantity Variance.............................
8,655
1,920*
2,925
4,500
9,000
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 8/e
Accounts Receivable
175,500
Work-in-Process Inventory
72,000 207,000
11,250
90,000
33,750
Accounts Payable
112,500
13,500
Finished-Goods Inventory
207,000 124,200
Wages Payable
81,225
37,680
Sales Revenue
175,500
Direct-Labor Rate Variance
2,355 4,275
1,920
Direct-Material
Quantity Variance
9,000 9,000
McGraw-Hill/Irwin
Inc.
10-58
Direct-Labor
Efficiency Variance
1,575 4,500
2,925
SOLUTIONS TO CASES
CASE 10-63 (60 MINUTES)
1.
Lot
N42..................................................................
N43..................................................................
N44..................................................................
Standard cost of production
Quantity
(boxes)
2,000
3,400
2,400
Standard
Cost per
Box
$106.50
106.50
90.48*
Total
Standard
Cost
$213,000
362,100
217,152
$792,252
*Standard material cost plus 80 percent of standard cost of labor and overhead:
$26.40 + (80%)($44.10 + $36.00).
2.
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 8/e
$212,800
209,000
$ 3,800 U
N42
N43
N44
2,000
3,400
2,400
7,800
24
24
24
24
48,000
48,200
200
$1.10
81,600
80,880
(720)
$1.10
57,600
57,650
50
$1.10
187,200
186,730
(470)
$1.10
$220 U $(792) F
Total
$55.00 U $(517.00) F
N43
N44
Total
N42
N43
5,960
10,260
Lot no.
N44
Total
5,780
$ .
$ .30
30
$1,788 U $3,078 U
$ .30
22,000
$
$1,734 U
.30
$6,600 U
Journal entries:
Raw-material Inventory........................................................
Direct-Material Price Variance.............................................
Accounts Payable......................................................
209,000*
3,800
212,800
205,920*
517
205,403
322,812*
6,600
588
330,000
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 8/e
15,000 lb.
10 lb. per drum
1,500 drums
2.
Direct material
a. Standard quantity per drum........................................
b. Standard price..............................................................
c. Standard cost per drum...............................................
d. Standard quantity allowed, given actual output........
e. Actual quantity purchased..........................................
f.
Actual price..................................................................
g. Actual quantity used....................................................
h. Price variance...............................................................
i.
Quantity variance.........................................................
A
10 lb.
$5.00/lb.
$50.00c
15,000 lb.
18,000 lb.
$4.50/lb.
15,570 lb.e
$9,000 Ff
$3,750 U
B
5 gal.a
$3.00/gal.b
$15.00
7,500 gal.
9,000 gal.
$3.20/gal.d
7,200 gal.
$1,800 U
$900 Fg
7,500 gal.
5 gal.
1,500 drums
McGraw-Hill/Irwin
Inc.
10-62
The reasoning for the actual price of direct material B is as follows, where the
subscripts denote materials A and B:
Increase in
actual cost of
= (PQA APA) + (PQB APB)
=
accounts payable
material purchases
$109,800 = (18,000 $4.50 ) + (9,000 APB)
APB = $3.20 per gallon
e
This conclusion comes from the following formula for the quantity variance:
Quantity variance (A) = SP(AQ SQ)
$3,750 U = (AQ 15,000) $5.00
AQ = 15,750 lb.
= PQ (AP SP)
= 18,000 ($4.50 $5.00)
= $9,000 F
= SP(AQ SQ)
= $3.00 (7,200 7,500)
= $900 F
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 8/e
I
(mixers)
2 hr.a
$15.00
$30.00
3,000 hr.c
$15.30i
3,000 hrh
$900 U
-0-g
II
(packers)
4 hr.
$12.00b
$48.00
6,000 hr.d
$11.90
6,150 hr.e
$615 Ff
$1,800 U
Direct labor type II, standard quantity allowed given actual output
= 1,500 drums 4 hr. per drum
= 6,000 hr.
McGraw-Hill/Irwin
Inc.
10-64
Direct labor type II, actual hours = 6,150 hr. Use the formula for the direct-labor
efficiency variance, as follows:
Direct-labor (II) efficiency variance = SR (AH SH)
$1,800 U = $12.00 (AH 6,000)
AH = 6,150 hr.
f
Direct labor type I, actual hours = 3,000 hr. Since there was no labor type I efficiency
variance, actual hours and standard hours are equal.
i
Direct labor type I, actual rate per hour = $15.30. Use the formula for the direct-labor
rate variance as follows:
Direct-labor rate variance =
$900 U =
AR =
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 8/e
AH(AR SR)
3,000 (AR $15.00)
$15.30
$9,000
3,750
1,800
900
F
U
U
F
Direct-labor variances:
I: Rate variance......................................................................................
I: Efficiency variance.............................................................................
II: Rate variance......................................................................................
II: Efficiency variance.............................................................................
900 U
?
615 F
1,800 U
$2,265 F
Total of all variances for the month: $2,265 F (favorable because of credit to Cost of
Goods Sold).
McGraw-Hill/Irwin
Inc.
10-66
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 8/e
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