12. Standard costing. Hilton. Capitulo 16 Lectura Costos Estandar

Standard Costing,Variance Analysis,
and Kaizen Casting
A~er completing
this chapter, you should be able to:
1. Discuss how companies use standard-casting systems to
manage costs, and describe two ways to set standards.
Distinguish between perlection and practica!
standards.
Compute and interpret the direct-material price and
quantity variances and the direct-labor rate and efficiency
variances.
6. Explain how companies use standard costs in product
casting.
7. Summarize sorne advantages attributed to standard
casting.
8. Describe the changing role of standard-costing
systems in today's manufacturing environment.
9. Explain the concept of kaizen casting and its potential
benefits.
Describe several methods used to determine the
significance of cost variances.
Discuss sorne behavioral effects of standard casting
and the controllability of variances.
1O. Compute and interpret mix and yield variances
(Appendix).
ª<!><j'i!F&-
11
Company
==---c=-lll lil
2145 Yarra Orive
Melbourne, Victoria
Australia
To:
Geoff Weatherby
Production Manager
From:
ce:
Subject:
Marc Wesley
Controller
Margo Hastings
Presiden! and CEO
Ju ne cost-variance report
The cost-variance report far direct material and direct labor far the
month of Ju ne appears below. 1suggest that we add a discussion of the
report to tomorrow morning'sstaff meeting. This report is based on June
output of 3,000 Tree Line tents.
The unfavorable direct-material variances (both price and quantity),
while cause for concern, are not nearly as high in percentage terms as the directlabor rate variance. We need to get to the bottom of these varia-tions from
standard costs, and we can begin with tomorrow morning's
meeting. Befare then 1will analyze the direct-labor costs in greater detail
to see whether 1can provide any insights into our June performance.
Cost Variance Report for June: Direct Material and Direct Labor
Amount
Direct material:
Standard cost, given actual output ........
$288,000
Direct-material price variance
Direct-material quantity variance
Direct labor:
Standard cost, given actual output ........
Percentage of
Standard
Cost
6,000 U*
2.08%
3,200 u•
1.11%
$108,000
Direct-labor rate variance .....................
Direct-labor efficiency variance ............
5,900 u•
1,800 f•
5.46%
(1.67)%
•u denotes unfavorable; F denotes favorable
•
648
Part V
~~-º**
The memorandum on the preceding page includes a cost-variance report intended to
help the management of Koala Camp Gear Campan y manage the com-pany's production
costs. How do small manufacturing companies such as Koala. or large companies such as
Dcll Cornputer or Daimler/Chrysler. manage and control the many costs they incur in
their production process 0 As the preceding chapter explained. a budget provides a plan
for managers to follow in making decisions and directing an organization's activities. At
the end of a budget period, the budget serves another useful purpose. At that time,
managers use itas a benchmark against which to compare the results of actual operations.
Did the company make as much profit as anticipated in the budget 0 Were costs higher or
lower than expected 0
In addition to budgets, many companies use standards to help manage costs and
profits. A standard is a benchmark performance level. Far example, man y manufac-turing
firms set standards for the amount and price of direct materials and far the amount and
rate paid far direct labor used to produce their products. At the end of the period,
management compares the standards with actual results. These comparisons help
management gain insight into what went right and what went wrong in the pro-duction
process.
11
Campany
Evaluating and Mmiaging Performance
Use of Standard-Costing Systems for Control
Le:; ; Discuss how compan1es use standard-casting
systems to manage costs,
and describe two ways to
set standards
Any control system has three basic parts: a predetermined or standard performance leve!,
a measure of actual performance, anda comparison of standard and actual per-formances.
A thermostat, a control system with which we are ali familiar, has three parts. First, it has
a predetermined or standard temperature, which you can set at any desired leve!. If you
want the temperature in a room to be 70 degrees, you set the thermostat at the standard of
70 degrees. Second, the thermostat has a thermometer, which measures the actual
temperature in the room. Third, the thermostat compares the preset or standard
temperature with the actual room temperature. If the actual temperature differs from the
preset or standard temperature, the thermostat activates a heating or cooling device.
A cost manager's budgetarycontrol system works like a thermo-stat.
First, a predetermined, or stan-dard cost
85
is set. In essence, a standard cost is a
c_SO
budget far the production of one unit of
=75
=70
productor service. It is the cost chosen
=65
by the cost-management analyst to
=ªº
serve as the benchmark in the
=55
=50
budgetary-control system. When the
=45
firm produces many units, the cost=40
management analyst uses the standard
unit cost to determine the total standard
or budgeted cost of pro-duction. Far
example, suppose that
the standard direct-material cost for one of Koala Camp Gear's tent models is $96. and
the firm manufactures 1,000 units. The total standard or budgeted direct-material cost,
given actual output of 1,000 units, is $96,000 ($96 X 1,000).
Second, the cost-management analyst measures the actual cost incurred in the
production process.
Third, the cost-management analyst compares the actual cost with the budgeted. or
standard, cost. Any difference between the actual cost and the standard cost is called a
cost variance. Cost-management analysts then use these cost variances to control costs.
Management by Exception
Although managers do not ha ve time to explore the causes of every variance between
actual and standard costs, they do take the time to investigate the causes of significan!
cost variances. This process of following up only on significant cost variances is
Chapter 16 Standard Coqing. Variancc Analysi~. and Kaizen Co,,iing
called management by exception. When operations are going along as planned, actual
costs and profit are typically close to the budgeted amounts. However, signifi-can!
departures from planned operations appear as significant cost variances. Managers
investigate these variances to determine their cause, ifpossible, and take con-ective action
when indicated.
What constitutes a significant variance 0 This question has no precise answer, since
it depends on the size and type of the organization and its production process. We
consider this issue later in the chapter when we discuss common methods for determining
the significance of cost variances. First, however, we turn our attention to the process of
setting standards.
Setting Standards
Cost-management analysts typically use two methods to set cost standards: analysis
ofhistorical data and task analysis.
Analysis of historical data. One indicator of future costs is historical cost data. In a mature
production process, when the firm has considerable production experience, historical
costs can provide a reliable basis for predicting future costs. The methods for analyzing
cost behavior that we studied in Chapter 12 are used in making cost predictions. The cost
analyst often needs to adjust these predictions to reflect move-ments in price leve Is or
technological changes in the production process. For exam-ple, the amount of leather
required to manufacture a pair of Dr. Martens shoes is likely the same this year as last
year unless a significant change in the process used to manufacture shoes has occun-ed.
However, the price of leather is likely to be different this year than las t. and this fact must
be reflected in the new standard cost of a pair of shoes.
Despite the relevance of historical cost data in setting cost standards. costmanagement analysts must guard against relying on these data excessively. Even a
seemingly minor change in the way a product is manufactured could make historical data
almos! totally irrelevant. Moreover, new products also require new cost stan-dards. For
new products, such as genetically engineered vaccines, no historical cost data exist on
which to base standards. In such cases, the cost analyst must turn to another approach.
Task analysis. Another way to set cost standards, called task analysis, is the tech-nique
of analyzing the process of manufacturing a product to determine what it should cost. The
emphasis shifts from what the product d;d cost in the past to what it should cost in the
future. In using this approach, the cost-management analyst typi-cally works with
engineers who are intimately familiar with the production process. Together they conduct
studies to determine exactly the amount of direct material that should be required and the
way that machinery should be used in the production process. Time-and-motion studies
sometimes are conducted to determine how long each step performed by direct laborers
should take. Storyboarding sessions some-times are used to develop a detailed process
map of ali the activities in a work center.
A combined approach. Cost-management analysts often apply both historical cost analysis
and task analysis in setting cost standards. It might be, for example. that the technology
has changed for only one step in the production process. In such a case, the cost analyst
works with engineers to set cost standards for the technologically changed part of the
production process. However. the accountant likely relies on the less expensive method
of analyzing historical cost data to update the cost standards for the remaining steps in
the production process.
Standards should not be detennined by accounting
staff alone. People generally are more committed to meeting standards if they are allowed
to participate in setting them. For example, production supervisors should have a role in
setting production cost standards, and sales managers should be involved in setting targets
for sales prices and volume. In addition. knowledgcable staff personnel should participate
in the standard-setting process-a team consisting
Participation in setting standards.
649
650
Part V
Cost
Management
in Practice
16.1
This Tnyota--General
\'loror:-; plant in Fremont,
California, succeeded in
letting employees set their
own standards.
Evaluating and Managing Performance
Employees Set Standards
The i:Jyol2-Cencrc1. r·/lctors joint venture in Fremont. California, known as New United Motor
Manufacturing, lnc. (NUMMI), allows employees to set their own work standard s. The NUMMI plant
had been a General Motors plant notorious far poor quality, low productivity. and morale problems
At the old Fremont GM plant, industrial engineers who had little, if any, work experience making cars would shut themselves in a room and ponder how to set standards, ignoring the workers,
who in turn ignored the standards. Now, at NUMMI, workers themselves hold the stopwatches and
set the standards. Worker team members time each other,
looking far the most efficient and safest way to do the work.
The workers standardize each task so that everyone in the
team will do it the same way. They compare the standards across
shifts and far different tasks and prepare detailed written
specifications far each task. The workers are more informed
about how to do the work right than industrial engineers are, and
they are more motivated to meet the standards they set than
those set by industrial engineers working in an ivory tower.
lnvolving the workers has had benefits in addition to improved
motivation and standards. These include improved safety, higher
quality, easier job rotation because tasks are standardized, and
more flexibil'ltybecause workers are both assembly line workers
and industrial engineers. Source· P Adler.
"Time-and-Motion Regained " (Full citations to references are in the
Bibliography.)
of production engineers. production supervisors. and cost-management analysts should
perfarm task analysis.
Employee reluctance to reveal cost-saving ideas: an ethical issue.
In sorne cases,
employees may be reluctant to revea! cost-saving ideas that they ha ve discovered to
management orto the standard-setting team. The reason far this is that when such costsaving ideas are communicated to management. the standards are then reset to a tighter
(i.e .• more difficult to achieve) leveL Thus, employees may believe that they have no
incentive to be forthcoming about such matters if the end result will be to make their
standards more difficult to meet One way to mitigate this behavior is to reward
employees far submitting cost-saving ideas that are implemented and result in more
efficient processes. (See Exercise 17.31 in Chapter 17 for more on this ethical issue,)
Perfection versus Practica! Standards:
A Behavioral lssue
LO 2 Oistinguish
between How difficult should it be to attain standard costs? Should cost-management analysts
perfection and pract1cal set standards so that actual costs rarely exceed standard costs? Or, should standards
standards.
be so difficult to attain that actual costs frequently exceed them? The answers to these
questions depend on the purpose for which standards are used and the way standards affect
behavior.
Perfection standards.
A perfection ( or ideal) standard is one that can be attained
only under nearly perfect operating conditions, Such standards assume peak efficiency, the lowest possible input prices. the best-quality materials obtainable, and no
disruptions in production due to causes such as machine breakdowns or power failures, Sorne managers believe that a perfection standard motivates employees to
achieve the lowest cost possible. They claim that since the standard is theoretically
attainable, employees have an incentive to come as clase as possible to achieving it.
Other managers and many behavioral scientists disagree, They believe that perfection standards discourage employees. since such high standards are so un!ikely to
be attained, Moreover, setting unrealistically difficult standards could encourage
employees to sacrifice product quality to achieve lower costs. By skimping on the
Chapter 16 Standard Costing. Variance Analy~i~, and Kaizen Costíng
quality of raw materials or the attention to manual production tasks, employees might be
able to lower the production cost. However, this lower cost could come at the expense of
a higher rate of defective units. Thus, the firm ultimately might incur higher costs than
necessary if defective products are returned by customers or scrappcd upon inspection.
Practica! standards. Standards that are as light as practica! but still are expected to be
attained are called practical (or attainable) standards. Such standards assume a production
process that is as efficient as practical under normal operating conditions. Practica)
standards allow for events such as occasional machine breakdowns and nor-mal amounts
of raw-material waste. Attaining a practical standard keeps employees on their toes
without demanding miracles. Most behavioral theorists believe that practica! standards
encourage more positive and productive employee altitudes than do perfection standards.
Use of Standards by Nonmanufacturíng Organizations
Service-industry firms, nonprofit organizations, and governmental units also use standard
costs. For example, airlines set standards for fue! and maintenance costs. A county motorvehicle office might have a standard for the number of days required to process and return
an application for vehicle registration. American Expre" (www.americanexpress.com)
used standards to speed and improve service. According to BusinessWeek, the company's
financia! service operations were broken into basic tasks. For each of these tasks,
performance standards were set, and means were devised far achieving the standards. 1
Dutch Panlry. a restaurant chain in the eastern United States, established a standardcasting systern in its centralized food-processing facility.' According toan article in The
Wall Street Journal, the Lnitcd Parce! Sen ice (UPS) (www.ups.com) set standards far
various delivery tasks. For example, a standard of 3 feet per second was established as the
standard pace at which drivers should walk to a customer's door. 3 These and similar
organizations use standards in budgeting and cost management in much the same way that
manufactur-ers use standards.
1
2
3
"Boosting ProrJuctivity al American Express." BusinessWf?ek. (Full citatíons to references are in the Bibliography.)
D. Boll, "How Dutch Pantry Accounts for Standard Costs."
'"Upto Speed: United Parce! Service Gets Deliveries Done by Driving lts \Vorkers," The \Val! Srreer Journal .
. \111L·riL·;111
l·.\prc:-::-: used standards to help
management speed up and improve its customer
service operations.
If you were managing a HL'rt1.car-rental agency,
for what kinds of costs \Vould you set standards?
651
652
Part V
Evaluating and Managing Performance
Costs and Benefits of Standard-Casting Systems
Standard-costing systems provide information that can help managers control costs.
However, implementing and maintaining cost standards is itself a costly endeavor.
Establishing standards can be a time-consuming, labor-intensive, and expensive process.
Moreover, standards must be updated periodically to reflect changes in the cost structure
of a production process. As with any management-information system, each finer leve!
of detail in a standard-costing system entails higher costs to generate and use the
information. Deciding the appropriate leve! of standard-cost detail and the frequency with
which reports should be generated is part of the cost analyst's information-system design
problem. Ultimately, the benefits of the information, in terms of improved production
cost control and decision making, must be weighed against the cost of generating the
information.
Cost Variance Analysis
To illustrate the use of standards in controlling costs, we focus on Koala Camp Gear
Company, a manufacturer of camping tents based in Melbourne, Australia. Although
relatively small, Koala Camp Gear has established a reputation for excellence throughout
Australia, Europe, and the United States. Most of the company's sales are domestic, but
exports have been increasing to the United Kingdom, Germany, Switzerland, Italy, and
the United States. Koala recently introduced its newest prod-uct, a lightweight but durable
backpacking tent trade-named the Tree Line tent. Margo Hastings, Koala's founder and
CEO, plans to market the Tree Line tent aggressively in Europe and the United States.
Koala Camp Gear plans to manufacture only the Tree Line tent itself. The com-pany
will purchase aluminum tent poles as finished components and package them with the
tent. As detailed in the memorandum at the beginning of this chapter, Koala's controller,
Marc Wesley, recently set standards for the direct materials and direct labor required to
manufacture the Tree Line tent as follows.
Direct-Material Standards
The fabric in a tent is considered a direct material. The thread is inexpensive and is
considered an indirect material, part of manufacturing overhead. The standard quan-tity
and price of fabric for the production of one Tree Line tentare as follows:
Standard quantity:
Fabric in finished product
11
Allowance for normal waste ..
_1 sq. meter
Total standard quantity required per tent ..
12 sq. meters
sq. meters
Standard price:
Purchase price per sq. meter of
fabric (net of pu re hase discounts) ..
Transportation cost per sq. meter ..
Total standard price per sq. meter of fabric .
$7.75
.25
...... $8.00
The standard quantity of fabric needed to manufacture one Tree Line tent is 12 square
meters, even though only 11 square meters actually remain in the finished product. One
square meter of fabric is wasted as a normal result of the cutting and trimming that are
part of the production process. Therefore, the entire amount of fab-ric needed to
manufacture a tent is included in the standard quantity of material.
The standard price of fabric reflects ali costs incurred to acquire the material and
transport it to the plant. Notice that the cost of transportation is added to the purchase
price. Any purchase discounts are subtracted out from the purchase price to obtain a net
price.
To summarize, the standard direct-material quantity is the total amount of materials
normally required to produce a finished product, including allowances for
Chapter 16 Standard Casting. Varíance Analysis. and K<iiren Costing
normal waste or inefficiency. The standard direct-material price is the total deliv-ered
cost alter subtracting any purchase discounts.
Direct-Labor Standards
The standard quantity and rate for direct labor for the production of one Tree Line tentare
as follows:
Standard quantity
Direct labor required per tent
2 hours
Standard rate:
Hourly wage rate ...
Fringe benefits (20o/o of wages)
Total standard rate per hour
$15
3
$18
The standard direct-Iabor quantity is the number of labor hours normally needed to
manufacture one unit of product. The standard direct-labor rate is the total hourly cost of
compensation, including fringe benefits.
Standard Costs GivenActual Output
During June, Koala manufactured 3,000 Tree Line tents. The total standard or bud-geted
costs for direct material and direct labor are computed as follows:
Direct material:
Standard direct-material cost per tent
(12 sq. meters x $8 per sq. meter).
Actual output
Total standard direct-material cost
$
X
96
3,000
$288,000
Direct labor:
Direct labor cost per ten! (2 hours X $18 per hour)
Actual output ..
Total standard direct-labor cost .
$
36
X 3,000
$108,000
Notice that the total standard cost for the direct-material and direct-labor inputs is
based on Koala's actual output. The division should incur costs of $396,000 ($288,000
+ $108,000) for direct material and direct labor, given that it produced 3,000 tents. The
total standard costs for direct material and direct labor serve as the cost-management
analyst's benchmarks against which to compare actual costs. This comparison then serves
as the basis for controlling direct-material and direct-labor costs.
A note about manufacturing overhead. We focus in this chapter on the use of standardcosting systems to control direct-materials and direct-labor costs. In the next chapter, we
extend our analysis to the control of overhead costs using a too! calledflexible budgeting.
Analysis of Cost Variances
During June, Koala incurred the following actual costs for direct material and direct labor.
Direct-material purchases: actual cost
40.000 sq. meters at $8.15 per sq. meter
Direct material used: actual cost
36,400 sq. meters at $8. 15 per sq meter
Direct labor: actual cost
5,900 hours at $19 per hour
$326.000
$296,660
$112.100
Compare these actual expenditures with the total standard costs for the produc-tion
of 3,000 tenis. Koala spent more than the budgeted amount for both direct material and
direct labor. But why were these excess costs incurred? Could the cost-management
analyst provide any other analysis to help answer this question 9
653
654
Part V Evaluating and l\.1anaging Performance
Actual Material Cost
Standard Material Cost
Direct-Material Price and
Actual
quantity
Ouant1ty Variances
-
<) 0
$
Actual
price
X
Actual
quantity
Standard
price
X
Standard
quantity
X
Standard
price
&
40,000
sq. meters
purchased
X
$8.15
40,000
per sq.
meter
sq. meters
purchased
X
$8.00
36,000
per sq.
meter
sq. meters
allowed
' ---- y -- '
' ---- y
$326,000 $320,000 $288,000
t
Company
X
$8.00
per sq.
meter
-- '
t
$6,000 Unfavorable
Oirect-material
price variance
36.400
$8.00
sq. meters
u sed
per sq.
meter
$291,200
$3,200 Unfavorable
Direct-material
quantity variance
Di rect-Material Variances
! ;-~ -, Compute
and inter-
pret the direct-material price
and quantity
variances and the directlabor rate and efficiency
var1ances
What caused Koala to spend more than the anticipated amount on direct materia!O First,
the company purchased fabric ata higher price ($8.15 per square meter) than the standard
price ($8.00 per square meter). Second, the company used more fabric than the standard
amount. The amount actually used was 36,400 square meters instead of the standard
amount of 36,000 square meters, which is based on actual out-put of 3,000 tents. The
cost-management analyst can show both of these deviations from standards by computing
a direct-material price variance (or purchase price vari-ance) anda direct-material quantity
variance. The direct-material price variance (or purchase price variance) is the difference
between the actual and standard price multiplied by the actual quantity of material
purchased. The direct-material quan-tity variance is the difference between the actual
quantity and the standard quantity of material allowed, given actual output, multiplied by
the standard price. The com-putations far these variances are displayed in Exhibit 16-1.
The formula far the direct-material price variance is as fallows:
l>irect-niaterial price Yarianl'l' = (P(j x A/)l = /'(Ji.\/' - .'il'I
t/'Q x ,'-,'/')
where
P<J = qu.antity ¡ntrrhased
A P = actual pricc
SP = 'itandard pri<:l'
Koala's direct-material price variance far June is computed as fallows:
l_)irc('t-111aterial pri<:c 'ariani:e :::: /'QC\/' -
.",'/')
= ~11.111111 1~S.15 -
~8.11111
= í'ú,000 t:nf~norahlc
This variance is unfavorable because the actual purchase price exceeded the standard
price. Notice that the price variance is based on the quantity of material purchased (PQ),
not the quantity actually used in production.
Chapter 16 Standard Costing, Variance Analy~i~, and Kaizen Costing
As Exhibit 16-1 shows, the following formula defines the direct-materials quan-tity
variance.
Dircct-material ttuantity variance = (A.Q x SP) -
t.','Q x SPl
= SPiAQ-SQi
where
AQ = actual quantity used
SQ = standard quantity allo\\'t~d
Koala's direct-material quantity variance for June is computed as follows:
Dircct-ntatcrial quantity variance = SP(A.Q - SQl
= $8.00 136,400 - 36,000)
= $.1.200 t:nl"arnrahk
This variance is unfavorable because the actual quantity of direct material used in June
exceeded the standard quantity allowed, given actual June output of 3,000 tents. The
quantity variance is based on the quantity of material actually used in production (AQ).
ldentifying the quantity purchased versus quantity used. The direct-material price variance is
based on the quantity purchased (PQ). This makes sense because devia-tions between the
actual and standard price, which are highlighted by the price vari-ance, relate to the
purchasing function in the firm. Timely action to follow up a sig-nifican! price variance will
be facilitated by calculating this variance as soon as possible after the material is purchased.
In contrast, the direct-material quantity variance is based on the amount of mate-rial
used in production (AQ). The quantity variance highlights the deviations between the
quantity of material actually used (AQ) and the standard quantity allowed (SQ). Thus, it
makes sense to compute this variance when the material is used in production.
Basing the quantity variance on actual output. Notice that the standard quantity of mate-rial
must be based on the actual production output for the quantity variance to be mean-ingful. It
makes no sense to compare standard or budgeted material usage at one leve! of output (say,
2,000 tents) with the actual material usage al a dijj"erent leve] of output (say, 3,000 tenis).
Everyone would expect more direct material to be used in the production of 3,000 tents than
of 2.000 tents. For the direct-material quantity variance to provide help-ful information for
management, the standard, or budgeted, quantity must be based on actual output. Then the
quantity variance compares the following two quantities:
When we extend our
analysis to the control of manufacturing overhead costs in the
next chapter, you will see that a
similar comment can apply to
overhead cost control. Using a
too] called flexible budgeting,
Standard quantity
allowed, g1ven
actual output
Actual quantity
used 1n the product1on of
actual output
we compare the overhead cost
allowed. given actual output,
with the actual overhead cost
incurred.
Direct-Labor Variances
Why did Koala Camp Gear spend more than the anticipated amount on direct labor during
June? First, the company incmTed a cost of $19 per hour for direct labor instead ofthe
standard arnount of$18 per hour. Second, Koala used only 5,900 hours of direct labor,
which is less than the standard quantity of 6,000 hours, given actual output of 3,000 tents.
The cost-management analysts study direct-labor costs by computing a direct-labor rate
variance anda direct-labor efficiency variance. The direct-Iabor rate variance is the
difference between the actual and standard hourly labor rate
655
656
Part V Evaluating and Managing Performance
Actual Labor Cost
D1rect-Labor Rate and
Efficiency Variances
§<$>0~<W
11
Actual
hours
5,900
hours
u sed
Standard Labor Cost
X
Actual
rate
X
$19
per
hour
Actual
hours
5,900
hours
u sed
X
Standard
rate
X
$18
per
Standard
6,000
X
hours
allowed
hour
Standard
rate
$18
per
hour
' - y -- '
' - y -- '
$112,100
t
Company
X
hours
t
$106,200
$5,900 Unfavorable
Direct-labor
rate variance
t
$108,000
$1,800 Favorable
Direct-labor
efficiency variance
$4, 100 Unfavorable
t
t
Direct-labor variance
multiplied by the actual quantity of direct labor used. The direct-labor efficiency variance
is the difference between the actual hours and the standard hours of direct labor allowed,
given actual output, multiplied by the standard hourly labor rate. Exhibit 16-2 displays
the computations for these variances.
The formula for the direct-labor rate variance is as follows:
I>irect-lahor ratc variancc =(,\JI X .-1/() = ,\l/iAR - SRI
(i\11 x S'Rl
where
AH = al'iual hour~ u-;cd
,\/( = :u:tu:.il ratc pl'r hour
.\'R = standard raíl' pcr hour
Koala's direct-labor rate variance for June is computed as follows:
l)irl•ct-lahor ratc Yarianl'l' = AH(AN -
,i.,'R)
= 5,9001$19 -
$181
= $5,900 l'nfa,·orahll'
This variance is unfavorable because the actual rate exceeded the standard rate dur-ing
June.
As Exhibir 16-2 shows, the formula for the direct-labor efficiency variance is as
follows:
Dircct·laborl'fficicnc}
Yarianc~
=(A// x S/() -
(.\'//x SRl
= SRUll - SHI
where
Sil = °'tandard hours <ilhnn.:d
Koala's direct-labor efticiency variancc for June is computed as follows:
f>ircl·t·lahor efficienc} 'ariancl' = SRL-111 -
SI-/ J
= SIX 15,91111 - 6,1111111
= $1,800 Fa\'orahll'
This variance is favorable because the actual number of direct-labor hours used in Junc
wcre less than the number of standard hours allowed, given actual .Tune output of 3,000
tents.
Notice that the direct-labor ratc and efficiency variances add up to the total directlabor variance. However, the rate and efficiency variances havc opposite signs since one
variance is unfavorable and the other is favorable.
Chaptcr 16 Standard Costing. Variance Analy5i~. and Kaizen Costíng
Direct-labor
rate variance
Direct-labor
efficiency variance
Direct-labor
var1ance
SS.900 Unfavorable
657
Favorable and
unfavorable variance
designations cancel just
as plus and minus signs
cancel in arithmetic.
1,800 Favorable
$4.100 Unfavorable
Basing the efficiency variance on actual output. The number of standard hours of direct labor allowed
is based on the actual production output. lt is not meaningful to compare standard or budgeted
labor usage at one leve! of output with the actual hours used ata different leve! of output.
Multiple Types of Direct Material and Direct Labor
Manufacturing processes usually involve severa! types of direct material. In such cases,
direct-materials price and quantity variances are computed far each type of material. Then
these variances are added to obtain a total price variance and a total quantity variance, as
follows:
$1,500 F'
2,400 u
900 u
$1,SOOU
D1rect material X
Oirect material Y
Direct material Z
Total variance
$1,90ou300 u
400 F
$1,800 u
'Fdenotes a favorable variance; U denotes an unlavorable variance
Similarly, if a production process involves severa! types of direct labor, rate and efficiency variances are computed far each labor type. Then they are added to obtain a total
rate variance anda total efficiency variance.
When a manufacturing process involves multiple types of direct material or direct
labor, additional variance analysis can be conducted to analyze the proportions with
which the multiple inputs are used. This analysis is covered in the Appendix to this
chapter.
Allowance for Defects or Spoilage
In sorne manufacturing processes, a certain amount of defective production or spoilage is
normal. This must be considered when the standard quantity of material is computed. To
illustrate, suppose that 1,000 liters of chemicals are normally required in a chemical
process to obtain 800 liters of good output. If total good output in February is 5,000 liters,
what is the standard allowed quantity of inputº
(;ood output quantity = 80c,;~ x
Dividing both sides
of the equation
by 80C/o
(~ood outµut
Using the numbers
5,(!00 liters ofgood out1.n•! _
Input quantity
.
quantitY
SO<,+
·-~- = Input lJUantity allo\red
so<i
in the illustration
..,-
.
6,-~0
, ..
· ll
1ters o
1
111put a o\ved
1
The total standard allowed input is 6,250 liters, given 5,000 liters of good output.
Global Use of Standard-Costing Systems
Standard-cost'1ngsystems are common throughout the world. Research has shown, far example,
that standard casting is widely used in Japan, the United Kingdom, and Germany. as well as in the United
States, In Germany, grenzplankostenrechnung, which means ''flexiblestandard casting," is used far
cost planning and control. "Reporting systems based on grenzplankosten-rechnung consist of monthly
statements of each cost center'sactual and planned demand far resources, actual costs, standard costs,
and different types of variances." Sources: P. Sharman,
"German Casi Accounting'';and B. Gaiser, "German Cost Management Systems."
Research
lnsight
16.1
658
Part V
Evaluating and Managing PeJformance
Significance of Cost Variances: When to Follow Up
LO 4 Describe several
methods used to determine
the significance of cost
var1ances
Managers are busy people. They do not ha ve time to investigate the causes of every cost
variance. Management by exception enables managers explore the causes of only
significan! variances. But what constitutes an exceptionº How does the manager know
when to follow up on a cost variance and when to ignore it?
These questions are difficult to answer because to sorne extent the answers are part
of the art of management. A manager applies judgment and experience in mak-ing
guesses, pursuing hunches, and relying on intuition to determine when to investi-gate a
variance. Nevertheless, there are guidelines and rules of thumb that managers often apply.
Size of Variances
The absolute size of a variance is one consideration. Managers are more likely to fol-low
up on large variances than on small ones. The relative size of the variance is prob-ably
even more important. A manager is more likely to investigate a $40,000 material quantity
variance that is 20 percent of the standard direct-material cost of $200,000 than a $60,000
labor efficiency variance that is only 2 percent of the standard direct-Jabor cost of
$3,000,000. The relative magnitude of the $40,000 material quantity variance (20
percent) is greater than the relative magnitude of the $60,000 labor effi-ciency variance
(2 percent). Far this reason, cost-management analysts often show the relative magnitude
of variances in their cost-variance reports. Far example, Koala 's June cost-variance report
is shown in the spreadsheet in Exhibit 16-3.
Managers often apply a rule of thumb that considers both the absolute and the relative
magnitude of a variance. An example of such a rule is the following: Investigate variances
that are either more than $10,000 or more than 1O percent of standard cost.
Recurring Variances
Another consideration in deciding when to investigate a variance is whether the vari-ance
occurs repeatedly or only infrequently. Suppose that a manager uses the rule of thumb
just stated and the following direct-materials quantity variances occur.
Cost-Variance Report far
June. Koala Camp Gear
l
;¡
:3
Amount
Favorable
or
Unfavorabl•
Percenta11•
of Standard
Co1t
4,;
.!>
Dlrect material:
ª7- Standard cost, g1ven actual output.. .
Direct-material price variance .
9 ! Oirect-material quantily variance ..
$ 288,000
6,000 Unfavorable
3,200 Unfavorable
1.11 %
101
1.!J DI re et labor:
J
1il
.13' Standard cost, given actual output..
t
Oirect-labor rate variance ...
IHJ.!.l:J..!J..jj····¡t...~Jieettfe fyjf'jf#Mji/\\!1 '</:;;¡"•: ..
·w;;."1ig;.;;3!1i!"f\;:01,y/, ~;,1:w11 'Ft···. r.
$ 108,000
5 ,900 Unfavorable
1,800 Favorable
'1•'1'' iJ.tl
·°" •
5.46%
(1.67)%
~l
L ,.r-rr-
.,
.
!JJ
rr "'
Chapter 16
Month
Standard Co~ting, Yariance Analy~i~, and Kai1en Co:-ting
Variance
Percentage of
Standard Cost*
October ..
6,400 F
6.0°/o
6.4o/o
November
3.200 F
3.2%
December ..
6,200 F
6.2%
September .
$6,000 F
~The standard direct-material cost is $100.000
Strict adherence to the rule of thumb indicates no investigation since none of the
monthly variances is more than $10,000 or 10 percent of standard cost. Nevertheless, the
manager might investigate this variance in December, since it has recurred at a reasonably
high leve] for severa] consecutive months. In this case, the consistency of the variance
triggers an investigation, not its absolute or relative magnitude.
Trends
A trend in a variance also might call for investigation. Suppose that a manager observes
the following direct-labor efficiency variances.
Month
September
Variance
$ 250 u
Percentage of
Standard Cost*
.25º/o
840 u
.84%
November ..
4,000 u
4.00%
Oecember ..
9,300 u
9.30%
October
'Thestandard direct-laoor cost is $100,000
None of these variances is large enough to trigger an investigation if the manager uses
the "$10,000 or 10 percent" rule ofthumb. However, the four-month trend is worrisome.
An alert manager will likely follow up on this unfavorable trend to deter-mine its causes
befare costs get out of hand.
Controllability
Another importan! consideration in deciding when to investigate the causes of a vari-ance
is the manager's view of the controllability of the cost item. A manager is more likely to
investigate a variance for a cost that someone in the organization can control than a
variance for a cost that cannot be controlled. For example, there might be little point to
investigating a materials-price variance if the organization has no control over the price.
This could happen, for example, if the firm has a long-term contrae! with a supplier of
the material at a price determined on the international market. In contras!, the manager is
likely to follow up on a variance that should be controllable, such as a direct-labor
efficiency variance ora direct-materials quantity variance.
Favorable Varíances
Investigation of significan! favorable variances is justas importan! as of significan!
unfavorable variances. Far example, a favorable direct-labor efficiency variance could
indicate that employees have developed a more efficient way to perform a pro-duction
task. By investigating the variance, management can learn about the improved method.
A similar approach might be u sed elsewhere in the organization.
Costs and Benefits of lnvestigation
The decision to investigate a cost variance is a cost-benefit decision. The costs of
investigation include the time spent by the investigating manager and the employees in
the department where the investigation occurs. Other potential costs include the disruption of the production process to conduct the investigation and to take correcti ve
actions to eliminare the cause of a variance. The benefits of a variance investigation
include reduced future production costs if the cause of an unfavorable variance can be
eliminated. Another potential benefit is the cost savings associated with lowering the
659
660
Part V Evaluating and Managing Performance
cost standards when the
cause of a favorable variance
is discovered. Weighing these
considerations
takes the
judgment of skillful
and
experienced managers. Key
to this judgment is an intimare understanding of the
organization·s
production
process and day-to-day contact with its operations.
Co1nputerized databases
of cost inforn1ation
facilitate statistical
analysis of cost
performance.
Statistical Analysis
Cost variances are caused by
many factors. Far example, a
direct-labor efficiency variance could be caused by
inexperienced employees,
employee inefficiency, poorquality raw materials, poorly maintained machinery, oran intentional work slowdown
dueto employee grievances. In addition to these substantive reasons, there are purely
random causes of variances. People are not robots, and they are not perfectly consisten!
in their work habits. Random ftuctuations in direct-labor efficiency variances can be
caused by factors such as employee illnesses, sleep deprivation, workers experimenting
with different production methods, or simply random fatigue. ldeally, managers are able
to sort out the randomly caused variances from those with substantive and control-lable
underlying causes. Although accomplishing this with 100 percent accuracy is impossible,
a statistical control chart can help.
A statistical control chart plots cost variances across time and compares them with a
statistically determined critica! value that triggers an investigation. Determination of this
critica! value usually involves assuming that cost variances ha ve a normal probability
distribution with a mean of zero. The critica! value is set at sorne multiple ofthe
distribution's standard deviation. Variances greater than the crit-ica! value are
investigated. (Chapter 7 discusses the use of statistical control charts far quality control.)
Exhibit 16-4 shows a statistical control chart with a critica! value of 1 standard
deviation. The manager would investigate the variance observed in April since it falls
Statistical Control Chart
Favorable
variances
-.-.....
1 standard
deviation
-
.....
X
o
X
X
1 standard
deviation
January February
Unfavorable
variances
March
April
May
June
661
Chapter 16 Standard Costing. Variance Anal y.; is, and Kaizen Costing
further than 1 standard deviation from the mean (zero). The variances for the remain-ing
five months would not be investigated. The presumption is that these minar vari-ances
are dueto random causes and are not worth the cost of investigating.
Direct.. Material and Direct.. LaborVariances
You're the
In December, Koala Camp Gear Company produced 2,000 Tree Une tents and incurred the fol-lowing
actual costs for direct material and direct labor:
Decision
Maker
Purchased 25,000 sq. meters of tent fabric at $8.25 per sq. meter.
U sed 24,500 sq. meters at $8.25 per sq. meter.
16. I
Used 4,200 hours of direct labor at $16.75 per hour.
The standard costs for tent production were the same in December as those given earlier in the
chapter for June.
a.
Compute Koala'sdirect-material and direct-labor variances for December using the format
shown in Exhibits 16-1and16-2.
b.
Suppose that Koala'smanagement uses a statistical control chart to plot cost variances and
help management decide which variances to investigate. Let'sassume that the costmanagement team has estimated that all of Koala'svariances exhibit a normal probability distribution with a mean of zero anda standard deviation of $4,800. The critica! value is 1 standard
deviation. Which of Koala'sDecember cost variances would you investigate? Explain.
(Solutions begin on page 676.)
Behavioral Effects of Standard Costing
Standard costs and variance analysis help managers discern "the story behind the
story"-the details of operations that underlie reported cost and profit numbers. Standard
costs, budgets, and variances also are used to evaluate the performance of individuals
and departments. The performance of individuals, relative to standards or budgets, often
is used to help determine salary increases, bonuses, and promotions. When standards and
variances affect employee reward structures, they can profoundly influence behavior.
For example, suppose that the manager of a hotel 's Food and Beverage Department
earns a bonus when food and beverage costs are below the budgeted amount, given
actual sales. This reward structure will provide a concrete incentive for the manager to
control food and beverage costs. But such an incentive can ha ve either positive or negative effects. The bonus might induce the manager to seek the most economical food
suppliers and to watch more carefully for employee theft and waste. However, the
bonus also might persuade the manager to buy cheaper but less tender steaks for the
restaurant. This could ultimately result in lost patronage for the restaurant and the hotel.
Ethical issues also might arise when employees' performance relative to standards
affects their reward system. Assume, for example, that a manufacturer's purchasing
manager earns a bonus when a significan! favorable material-price variance is
recorded. Suppose that the purchasing manager has an opportunity to purchase belowstandard material al a significan! reduction in price. Let's assume that the inferior quality of the material is not readily apparent and that the negative implications will not be
realized until long after the products are manufactured and sold. lt is a serious violation
of cthical standards for the purchasing manager to buy the off-standard material.
One aspect of skillful management is knowing how to use standards, budgets,
and variances to get the most out of an organization's employees. Unfortunately,
there are no simple answers or formulas for success in this area.
Controllability of Variances
Cost management is accomplished through the efforts of individual managers in an
organization. By determining which managers are in the best position to influence each
cost variance, the managerial accountant can assist managers in deriving the greatest
benefit from cost variance analysis.
LO s Discuss sorne
behavioral effects of stan-
dard casting and the controllability of variances.
662
Part V
Evaluacing and l\1anaging Performance
Which Managers lnfluence Cost Variances?
Who is responsible far the direct-materials price and quantity variancesº The direct-Jabor
rate and efficiency variances 0 Answering these questions is often difficult because any
one person rarely has complete control of any event. Nevertheless, it often is possible to
identify the manager who is most able to influence a particular variance even if he or she
does not exercise complete control over the outcome.
Direct-material price variance. The purchasing manager generally is in the best position
to infiuence material price variances. Through skillful purchasing practices, an expert
purchasing manager can get the best prices available far purchased goods and services.
To achieve this goal, the purchasing manager uses practices such as buying in quantity,
negotiating purchase contracts, comparing prices among vendors, and global sourcing.
Despite these purchasing skills, the purchasing manager is not in complete con-trol
of prices. The need to purchase componen! parts with precise engineering speci-fications,
the all-too-frequent rush requests from the production department, and worldwide
shortages of critica] materials all contribute to the challenges that the pur-chasing
manager faces.
Direct-material quantity variance. The production supervisor is usually in the best
position to infiuence material quantity variances. Skillful supervision and motivation of
production employees, coupled with the careful use and handling of materials, contribute
to minimal waste. Production engineers also are partially responsible for material quantity
variances since they determine the grade and technical specifica-tions of materials and
component parts. In sorne cases, using a low-grade material results in more waste than
using a high-grade material.
Direct-labor rate variance. Direct-labor rate variances generally result from using a dif-ferent
mix of employees than that anticipated when the standards were set. Wage rates differ among
employees due to their skill Jevels and their seniority with the organization. Using a higher
proportion of more senior or more highly skilled employees than a task requires can result in
unfavorable direct-labor rate variances. The production supervisor is generally in the best
position to infiuence the employee work schedules.
Direct-labor efficiency variance. The production supervisor is usually most responsible for the efficient use of employee time. Through motivation toward production goals
and effective work schedules, employee efficiency can be maximized.
lnteraction amongVariances
lnteractions among variances often occur, making the determination of the responsi-bility
far a particular variance even more difficult. To illustrate, consider the fallow-ing
inciden!, which occurred at Koala Camp Gear Company during March. The pur-chasing
manager obtained a special price on tent fabric from a new supplier. When the material
was placed into production, it turned out to be a lower grade of material than the
production employees were used to. The fabric was of a slightly different composition,
which made the material tear easily during cutting. Koala could have returned the material
to the supplier, but doing so would have interrupted production and kept the company
from filling its orders on time. Since using the off-standard material would not affect the
quality ofthe company's finished products, the produc-tion manager decided to keep the
material and make the best of the situation.
The ultimate result was that Koala incurred four interrelated variances during March.
The material was less expensive than normal, so the direct-material price variance was
favorable. However, the employees had difficulty using the material, which resulted in
more waste than expected. Hence, the division incurred an unfavor-able direct-material
quantity variance.
What were the labor implications of the off-standard materiaJO Dueto the diffi-culty
in working with the fabric, the employees requirecl more than the standard
663
Chapter 16 Standard Costing. Variance Analysis. and Kaizen Coqing
amount of time. This resulted in an unfavorable direct-labor efficiency variance.
Finally, the production supervisor had to use his most senior employees to work with
the off-standard material. Since these people earn relatively high wages, the directlabor rate variance was also unfavorable.
To summarize, the purchase of off-standard material resulted in the following
interrelated variances:
Pun:lut..,l' of
off--;tandard
inatcrial
¡
Favorable clirect-111aterial pri<.T \'::trian('t'
~> Lnfa\·orablc dirc1:t-n1atcrial quantity Yari:-HJ('l'
L;nfavur::iblc dirct·t-lahor rat<.· Yarian('l'
Unfayorahlc dircct-lahor l'fticiency \ ariancc
Such interactions of variances make the assignment of responsibility more difficult for
any particular variance.
Trade-offs among variances. Does the preceding inciden! mean that the decision to buy and
use the off-standard material was a poor one? Not necessarily. Perhaps these variances
were anticipated, and a conscious decision was made to buy the material anyway. How
could this be a wise decision'' Suppose the amounts of the variances were as follows:
$(7,900)
Favorable direct-material price variance
1,100
Unfavorable direct-material quantity variance
1.900
Unfavorable direct-labor rate variance
2,100
Unfavorable direct-labor efficiency variance
$(2 800)
Favorable net overall variance
Koala saved money overall on the decision to use a different grade of fabric. Given that
the quality of the final product was not affected, the company's management acted wisely.
A value-chain perspective. Think back to our discussions of the value chain in earlier
chapters. Recall that the va/ue chain is the set of linked operations or processes that begins
by obtaining resources and ends with providing products or services that cus-tomers
value. Exhibit 16-5 depicts Koala Camp Gear Company's value chain.
The preceding discussion regarding interactions and trade-offs among variances
emphasizes that variances in one part of the value chain can result from root causes in
another part of the chain. For example, when Koala Camp Gear's purchasing man-ager
bought tent fabric at a special price, and the material turned out to be below stan-dard,
severa] direct-material and direct-labor variances resulted in the production process.
Thus, an inciden! in the supply componen! of Koala's value chain resulted in cost
variances in the production component of the chain.
Think about other possible interactions in Koala's value chain. Could production cost
variances be caused by events in Koala's design process? How about its down-stream
processes, such as marketing or distribution?
Koala Camp Gear
Company'sValue Chain
§~lii;!i&
11
Company
664
Part V
Evaluating and Managing Perfonnance
Use of Standard Costs for Product Costing
lJJ 6 Expla1n how companies use standard costs in
product casting
Our discussion of standard casting has focused on its use in controlling costs. Firms that
employ standard-casting systems also use standards for product casting. As pro-duction
takes place, product costs are added to the Work-in-Process Inventory account. The flow
of product costs through a firm's manufacturing accounts is depicted in Exhibit 16-6. In
a standard-costing system the standard costs of direct material and direct labor are entered
into Work-in-Process Inventory.
journal Entries under Standard Costing
Direct material. During June, Koala purchased 40,000 square meters of direct mate-rial far
5326,000. lt actually used 36,400 square meters in production. However. the standard cost
of direct material. given June's actual output of 3,000 Tree Line tents, was only $288,000.
The following jo urna! entries record these facts and isolate the direct-material price and
quantity variances.
320.000
6.000
Raw-Material lnventory
Oirect-Material Price Variance
1
1
Accounts Payable
326.000
To record the purchase of raw material and the incurrence of an unfavorable price variance
Work-in-Process lnventory
288,000
3,200
Direct-Material Quantity Variance
¡
291,200 '
Raw-Material lnventory
To record the use of direct material in production and the incurrence of an unfavorable quantity variance
Notice that the material purchase recorded in the Raw-Material Inventory account
appears at its standard price ($320.000 = 40,000 square meters purchased X $8 per square
meter). The $288,000 debit entry to Work-in-Process Tnventory adds only the standard
cost of the material to Work-in-Process lnventory as a product cost ($288,000 = 36,000
square meters allowed X SS per square meter). The two vari-ances are isolated in their
own variance accounts. Since both are unfavorable, they are represented by debit entries.
Work-in-Process lnventory
Flow of Product Costs
through Manufacturing
Accounts
F1nished-Goods lnventory
Direct-material cost ----Product cost transferred
Direct-labor cost -----when product is finished
Manufacturing overhead ______.._ !
Product cost transferred when product is sold
lncome Summary
Cost of Goods Sold
Expense closed to
lncome Summary at end
of accounting period
665
Chapter 16 Standard Costing. Variancc Analysis, and Kaizen Costing
Direct labor. The following journal entry records the actual June cost of direct labor as
an addition to Wages Payable. The entry also adds the standard cost of direct labor to
Work-in-Process Inventory and isolates the direct-labor variances.
Work-in-Process lnventory ..
108,000
Direct-Labor Rate Variance
5,900
Direct-Labor Efficiency Variance
Wages Paya ble ..
1.800
112.100
To record the usage of direct labor and the d1rect-labor variances far June.
Since the direct-labor efficiency variance is favorable, it is recorded as a credit entry.
Disposition of variances. Variance accounts are temporary accounts as are revenue and
expense accounts, and they are closed at the end of each accounting period. Most
cornpanies close their variance accounts directly in to Cost of Goods Sold. The jour-nal
entry required to clase Koala's June variance accounts follows:
Cost of Goods Sold
13,300
Direct-Labor Efficiency Variance
1,800
1
Direct-Labor Rate Variance
5.900
Direct-Material Price Variance
6,000
Direct-Material Ouantity Variance .
3,200
The increase of $13,300 in Cost of Goods Sold is explained as follows:
Unfavorable
Varlances
lncrease Cost
ofGoods
Sold
Direct-labor efficiency variance ..
Direct-labor rate variance
Favor-able
Variance
Decreases
Cost of Goods
Sold
Net
lncrease in
Costof
GoodsSold
$1,800
.$
5,900
Direct-material price variance ..
6.000
Direct-material quantity variance ..
3.200
Total
$ 15,100
- $1.800
~ $13,300
The unfavorable variances represen! costs of operating inefficiently, relative to the
standards. and thus cause Cost of Goods Sold to be higher. The opposite is true for
favorable variances.
An alternative method of variance disposition is to apportion ali variances among
Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold. This
accounting treatment reflects the effects of unusual inefficiency or efficiency in ali
accounts through which the manufacturing costs flow. This method, called variance
proration, is covered in Appendix A to Chapter 17.
Cost Flows under Standard Costing
In a standard-casting system, standard costs are entered in Work-in-Process Inventory
and fiow through ali manufacturing accounts. Thus, in Exhibit 16-6, all product costs
fiowing through the accounts are standard costs. To illustrate, suppose that Koala finished 3,000 Tree Line tents in June and sold 2,500 of them. The journal entries to record
the ftow of standard direct-material and direct-labor costs are as follows:
396,ooo·
Finished-Goods lnventory
Work-in-Process lnventory
*Total standard cost of direct material and d1rect labor: $396.000 =
Cost of Goods Sold
Finished-Goods lnventory
-2.soo of 3.000 tents soid: five-s1xths 01 5>396.000 is 5330,000
!
!
1 396,000
1
'
$288.000 + $108,000
330.000'
330,000 i
666
Part V
Evaluating and Managing Performance
Our Koala Camp Gear illustration is not really complete yet because we have not
discussed manufacturing overhead costs. This tapie is covered in the next chapter. The
important point at this juncture is that in a standard-casting system, standard
costs jlo1rv throuf?h the manujl1cturing accounts rather than actual costs.
lmpact of lnformationTechnology on Standard Costing
Standard-casting systems can facilitare the use of information technology to link together
severa] business processes. When a manufacturer uses standard casting far product
casting and cost management, the standard costs of materials and labor are loaded into
the computer. When raw materials or purchased components are requisi-tioned far
production, the standard cost of the materials or components used is automati-cally
recorded by accessing the computer database where the standard quantities and prices of
the materials are stored. Similarly, when production employees work on a pro-duction
job, their time on the job is recorded and the standard labor cost is automatically
determined by accessing the standard labor times and rates in the computer database.
Use of Bar Codes
Bar codes are now widely used to capture importan! events in manufacturing processes.
In real-time shop jioor data-collection systems, production employees can record the time
they begin working on a particular job order by scanning the bar code on their employee
ID badge and a bar code assigned to the production job order. The standard direct-labor
cost is assigned to the productionjob.
When raw materials arrive at the production facility, their bar code is scanned and
the event is recorded. Inventory records are updated automatically. Raw materi-als and
partially completed components are assigned bar codes, and their movement through the
production process is efficiently recorded. For example, raw materials might be
requisitioned by a production employee simply by scanning the bar code assigned to the
needed raw materials. When the materials are sent from the ware-house to the
requisitioning production department, the bar code is scanned again. Inventory records
are updated instantly, and the standard cost of the materials is recorded as a product cost.
Computer-Aíded Design
Many co1npanies use
computer-aided design
(CAD) systems, which
make standard cost
infonnation available to
the design engineers.
Standard-casting systems also can be integrated with a computer-aided design (CAD)
system to assist design engineers in the product design process. The standard costs of
material and labor are stored in the computer database where the product design team
can access them easily. This
information enables a product design engineer to get a
quick answer to the question,
What will be the new product cost if certain design
changes are made to the
productº If, far example, the
engineer wants to know the
cost of changing the exterior
case on a particular computer
model, this information is
easily determined by accessing the cost database. 4
~S. Vv'. Anderson and K. Scdatolc, "Dcsigning Quality inlo Pruducb: The Cse ofAccounting Data in Ne\V Product
Dcvclopmcnt.'" J. M. Patell. "Co~t Accounting, Process Control. and Product Design: A Case Study of thc HewlettPackard Personal Office Computer Division:'
Chapter 16 Standard Costing. Variance Analysis. and Kaizen Costíng
667
In other applications, cost data from target-costing or value engineering approaches
are used in new product desigu. At Kocing. for example. "firm-specific cost and
productivity data are used to improve lraditional engineering cost estimates in the early.
system design stage ofproduct developmenL"
Standard Costing: ltsTraditional Advantages
Standard casting has been a widely used accounting system in manufacturing compa-nies
for both cost control and product-costing purposes for severa] decades. This remains true
today, and the use of standard casting is spreading to nonmanufacturing firms as well.
The widespread use of standard casting over such a long time period suggests that it has
traditionally been perceived as advantageous. However, today's manufacturing
environment is changing dramatically. Sorne managers are calling into question the
usefulness of the traditional standard-casting approach. They argue that the role of
standard-casting systems must change.
In this section, we will list sorne advantages traditionally attributed to standardcosting systems. In the next section, we will discuss sorne of the contemporary criti-cisms
of the standard-casting approach and suggest severa] ways in which the role of standard
casting is beginning to change.
Sorne advantages traditionally attributed to standard casting include these:
u; 1 Summarize sorne
advantages attributed to
standard casting
Computation of standard costs and cost variances enables managers to employ
management by exception. This approach conserves valuable management time.
Standard costs provide a basis for sensible cost comparisons. As we discussed earlier,
comparing budgeted costs at one (planned) activity leve] with actual costs incurred
ata different (actual) activity leve] makes no sense. Standard costs enable the cost
manager to compute the standard allowed cost, given actual output, which then serves
as a sensible benchmark to compare with the actual cost.
Yariances provide a means of peifonnance evaluation and rewards for employees.
Since the variances are used in performance evaluation, they provide motivation for
employees to adhere to standards.
Use of standard costs in product casting results in more stable product costs than the
use of actual production costs. Actual costs often fluctuate erratically, whereas
standard costs change only periodically.
A standard-costing system is usually less expensive than an actual or normal costing
system. (In actual and normal casting systems, the actual cost of direct material and
direct labor is accumulated as product costs. See Chapter 3 for fur-ther discussion.)
Like any too!, a standard-casting system can be misused. When employees are
criticized for every cost variance, the positive motivational effects will quickly vanish.
Moreover, if standards are not revised often enough, they will become outdated. Then the
benefits of cost benchmarks and product casting will disappear.
Changing Role of Standard-Costing Systems in
Today's Manufacturing Environment
The rise of global competition, the introduction of JIT production methods and flexi-ble
manufacturing systems, the goal of continuous process improvement, and the emphasis
on product quality are dramatically changing the manufacturing enviran-ment. What are
0
the implications of these changes for the role of standard-casting sys-tems We begin by
listing sorne contemporary criticisms of standard costing.
;_o Describe the chang-ing
role of standard-casting
systems in today's
manufacturing envrronment
668
Part V
Evaluating and Managing Performance
Criticisms of Standard Costing in Today's
Manufacturing Environment
Listed here are severa! drawbacks attributed to standard costing in an advanced man5
ufacturing setting.
The variances calculated under standard casting are too aggregated and come too late to
be useful. Sorne accountants argue that traditional standard casting is out of step with the
philosophy of cost-ma11ageme11t systems and activity-based management. A production
process comprises many activities, and these activities result in costs. By focusing on the
activities that incur costs, by elimi-nating non-value-added activities, and by continually
improving performance in value-added activities, an organization can minimize costs and
maximize profit. What is needed are performance measures that focus directly on performance issues that managcment wants to improve. For example, such issues could
include product quality, processing time, and delivery performance.
Traditional cost variances also are too aggregated in the sense that they are not tied to
specific product lines, production batches, or ftexible-manufacturing-system (FMS) cells.
The aggregate nature of the variances makes detennining their cause difficult.
Traditional standard-casting systems focus too much on the cost and efticiency of direct
labor, which is rapidly becorning a relatively unimportant factor of production.
One of the most importan! conditions for the successful use of standard casting is a stable
production process. However, the introduction of flexible manufacturing systems has
reduced this stability, with frequent switching among a variety of products on the same
production line.
Shorter product life cycles mean that standards are relevan! for only a short time.
When new products are introduced, new standards must be developed.
Traditional standard-casting systems tend to focus too much on cost minimiza-tion, rather
than increasing product quality or customer service. Indeed, standard-costing systems can
cause dysfunctional behavior in a JIT/FMS environment. For example, buying the least
expensive materials of a given quality to avoid a material price variance could result in
using a vendar whose delivery capabilities are not consisten! with JIT requirements.
Automated manufacturing processes tend to be more consisten! in meeting pro-duction
specifications. As a result, variances from standards tend to be very small or nonexistent.
Traditional standard costs are not defined broadly enough to capture various impor-tan!
aspects of performance. Far example, the standard direct-materials price does not capture
all costs of ownership. In addition to the purchase price and transporta-tion costs, the total
cost of ownership (TCO) includes the costs of ordering, paying bills, scheduling delivery,
receiving, inspecting, handling, and storing, as well as any production-line disruptions
resulting from untimely or incorrect delivery.
6
Adaptation of Standard-Costing Systems
As a result of thcse criticisms of standard-casting systems, sorne highly automated
manufacturers have deemphasized standard casting in their control systems. Most manufacturing firms continue to use standard casting to sorne extent, however, even after adopting
7
advanced manufacturing methods. Such firms make changes in their use of standard casting
to reftect various features of advanced manufacturing technology.
5
The sources for this material are R. S. Kaplan, ''Limítations of Cost Accounting in Advanced l\1anuracturing
Environments'': H. T. Johnson ... Performance Measure1nent for Competitive Excel!ence .. : R. A. Bonsack, ·'Does ActivityBascd Co~ting Replace Standard Casting?'': and M. Sukurai, ''The Inftuence of Factory Aucomation on \ilanagement Accounting
Practices: A Study of Japanese Companies.''
6Sorne cornpanies are developing co~1-ol'-ownership reportíng systems. Among thcm are \'nnhnlp\1r~T..1l1
1)1\ ¡,11m. f'vkD\lnncll Duu1:'.b~. ·1c,a~ 1i1~tn1111c111 ~. and Bl:il·k & Dcd,L·r. See L. Carr and C. IUncr. "l'vfea.~uring the
Cost of üwnership'': and L. :vt. Ellram. ·'Activity-Bascd Cos!ing and Total Cost of Owncrship: A Critica! Linkagc."
Chaptcr 16 Standard Casting, Variance Analy~ís, and Kaizen Co~ting
Cost of Ownershlp
\JCJrtrrop A1rcraft Div-s1on (www.northgrum.com) tracks various elements of the total cost of OWíl-
ership (TCO)'through its cost-based Supplier Performance Rating System (SPRS). Among the
cost factors that SPRS measures are the costs Northrop iílcurs dueto suppliers'hardware, paper-work, or
delivery deficiencies. Any "nonconformaílce event is assigned a standard cost based Oíl industrial
eílgineering studies of the hours required to resolve the problem."
Tex2,s lnstr··Jn1ents(www.ti.com) has developed a supplier rating system called CETRAO, which
stands far cost, eílvironmental responsibility, technology. responsiveness, assurance of supply, and
quality. The company'svendors are regularly measured Oíl these six criteria.
Ata Spennymore, England, plant owned by B1ack & Decker (www.blackanddecker.com), the
company "has integrated the cost-of-ownership concept into its activity-based casting system." Among
the TCO issues iílcluded are quality, delivery, flexibility, and customer service. Also con-sidered is a
suppliers'billing reliability. "As one Spennymore manager noted, 'Youcan be dealing with the best
company in the world in terms of quality, but if they can'tget their invoices right. you'regoing to have
trouble doing business with them."'Source_. L. Carr and C. lttner. "Measuring the
Cost of Ownership."
*The total cost of
ownership includes ali costs incurred to have materials in place and ready for use in production, including
the purchase price; the transportation cost; and the costs of ordering, receiving, inspecting, and storing
the materials.
Reduced importance of labor standards and variances. As direct labor has come to occupy an
ever-diminishing role in the manufacturing environment, the standards and variances
used to control labor costs also have declined in importance. The heavy emphasis of
traditional standard-costing systems on labor efficiency variances is giving way to
variances that focus on the more critica! inputs to the production process. Machine hours,
materials and support-department costs, product quality, and manufac-turing cycle times
have assumed greater importance as the objects of managerial control.
Emphasis on material and overhead costs. As labor continues to diminish in impor-tance,
materials and support-department costs also have assumed greater significance.
Controlling the costs of materials and quality and controlling non-unit-level costs through
cost-driver analysis become key aspects of the cost-management system.
Cost drivers. Identification ofthe factors that drive production costs becomes more
important in the cost-management system. Cost drivers such as machine hours, num-ber
of parts, engineering change orders, and production runs become the focus of the costmanagement system.
Shifting cost structures. Advanced manufacturing systems require large outlays for
production equipment, which entail a shift in the cost structure from unit-level costs
toward non-unit-level costs. üverhead cost control becomes especially critica!. The next
chapter explores the role of standard-costing systems in controlling overhead costs.
High quality and zero defects. Total quality management (TQM) programs that typi-cally
accompany a JIT approach strive for very high quality levels for both raw mate-rials and
finished products. One result should be very low materials price and quan-tity variances
and low costs ofrework.
Non-value-added costs. A key objective of a cost-management system is to eliminate nonvalue-added costs. As these costs are reduced or eliminated, standards must be revised
frequently to provide accurate benchmarks for cost control.
Shorter product lile cycles. As product life cycles shorten, developing standards and
revising them more frequently become necessary.
Nonfinancial measures for operational control. Managerial accountants traditionally ha ve
focused on financia! measures of performance such as deviations from budgeted
7
For example, ~ee J. M. Patell, "Cost Accounting, Process Control. and Product Design: J\ Ca<>e Srndy of thc
Hcwlett-Packard Personal Office Computer Division"; J. B. Schiff, "ABC at Lederle": and R. A. Bon~ack, "Does
Activity-Bascd Co~ting Replace Standard Costing'l"
669
Cost
Management
in Practice
16.2
670
Part V Evaluaring and tv1anaging Performance
costs. Financia! rneasures still are very importan!, but toan ever-greater extent, financia! performance criteria are being augrnented by nonfinancial rneasures. In today's
advanced manufacturing environrnent, operational rneasures are being developed to
control key aspects of the production process.
Benchmarking. One widely used rnethod to control costs and irnprove operational
efficiency is henchmarking-the continua! search far the rnost effective rnethod of
accomplishing a task by cornparing existing rnethods and performance levels with
those of other organizations or other subunits within the sarne organization. For
exarnple, hospitals routinely benchrnark their costs of patient care by diagnosticrelated groups (such as circulatory disorders) with the costs of other hospitals.
Real-time information systems. A computer-integrated rnanufacturing (CIM) systern
enables the cost-rnanagement analyst to collect operating data as production occurs
and to report relevant performance rneasures to managernent on a real-time basis. This
enables managers to eliminate the causes of unfavorable variances more quickly.
Kaizen Costing
í f) Y Explain the concept
of kaizen casting and its
potential benefits.
In today's global business environrnent, for sorne cornpanies to survive, they must
continually seek to reduce production costs. If a standard-casting system is used in
such a competitive environrnent, the standards must be reduced every year or even
every rnonth. Kaizen costing is the process of cost reduction during the rnanufacturing phase of a product. 8 The Japanese word kaizen refers to continua! and gradual
irnprovernent through srnall betterment activities rather than large or radical irnprovernent rnade through innovation or large investments in technology. The idea is simple.
Improvernent is the goal and responsibility of every worker, from the CEO to the manual laborers, in every activity, every day, all the time! Through the srnall but continua!
efforts of everyone, significan! reductions in costs can be attained over time.
To help achieve the continuous cost reduction irnplied by the kaizen casting concept.
an annual ( or rnonthly) kaizen cost goal is established. Then actual costs are tracked o ver
time and compared to the kaizen goal. Depending on the nature of the production process
and the cornpetitive environment, a cornpany could focus its kaizen casting efforts on a
particular segrnent of its cost structure. For exarnple, Sumitorno Electric lndu,trie,
(www.sei.corn.jp), a Japanese company that is the world's third largest rnanufacturer of
electrical wire and cable, concentrates its kaizen cost-reduction program on material
costs.9 In contrast, "at the Kyoto brewery of Kirín beer (www.kirin.com), cost-reduction
prograrns typically identified four or five targets for irnprovernent each year. This continuous change offocus helped keep the programs active."'º
Citizcn Watch Company (www.citizenwatch.com) focuses its kaizen casting
efforts on direct labor. "The rnajor way to reduce labor is to alter the time required to
operate or support the production machines. Alterations can be achieved in two ways.
First, the running speed of the machines can be increased so that more parts per hour
can be produced. Second, a single ernployee can be used to operate more machines. " 11
We presenta typical kaizen casting chart in Exhibit 16-7. 12 Notice that the cost
base, or reference point, is the actual cost performance at the end of the prior year. A
kaizen goal is established far the cost-reduction rate and arnount during the curren!
year. Actual cost performance throughout the year is cornpared with the kaizen goal.
At the end of the curren! year, the curren! actual cost becomes the cost base. or reference point, for the next year. Then, a new (lower) kaizen goal is established, and the
cost-reduction effort continues.
8
9
Y. Monden and K. Han1ada, "'Target Costing and Kaizen Coqing in Japancsc Autmnobile C01npanies."
R. Cooper, H'hen Leun Enterprises Collide.
11
'
:
1
lbid .. p. 251.
Ibid .. pp. 240. 241.
i: The kaizen casting chart depicted is based on one used at Daihat~u. a Japane~e auto manufacturer o\vned in
part by To;. (1!;1. See Y. Monden and J. Lee. ''How a Japanese Auto Tvlaker Reduced Co.;;t.;;."
Chapter 16
Standard Co<;ting, Variance Analysis, and Kaizen Costing
671
Cost per product unit
Typical Kaizen Casting
Chart
Current year
Actual
cost
performance
at end of
Kaizen goal:
cost-reduction
amount
last year
Actual cost
reduction
achieved
for next
year
Time
12/31/xO
12/31/x1
How are kaizen casting goals met 0 The continua! and relentless reduction of nonvalue-added activities and costs, the elimination of waste, and improvements in
manufacturing cycle time ali contribute to the effort. In addition, management takes
seriously the improvement suggestions and kaizen efforts of ali employees and
implements them when appropriate. The result is a continually more efficient and costeffective production process.
Chapter Summary
A standard-costing system is a traditional cost-management technique with two purposes: cost control and
product costing. Accountants work \.Vith others in the organization to set standard costs for direct n1aterial,
direct labor, and manufacturing overhead through either historical cost analysis or task analy-sis. The costmanagement analyst uses the standard costas a benchmark against which to compare actual costs incurred.
Managers then use management by exception to determine the causes of signifi-cant cost variances. This costn1anagement purpose of the standard-casting system is accomplished by computing a direct-materials price
variance. a direct-materials quantity variance, a direct-labor rate vari-ance. anda direct-labor efficiency
variance.
Managers detemüne the significance of cost variances through judgment and rules of thumb. The absolute
and relative size of variances, recurrence of variances, variance trends, and controllability of variances are ali
considered in deciding whether variances warrant investigation. The product-costing purpose of the standardcosting system is achieved by entering the standard cost of production in Work-in-Process lnventory as a
product cost. Standard-costing systems offer an organization many benefits, but these benefits will be obtained
only ifthe standard-casting system i<; used properly.
Today's manufacturing environn1ent is changing rapidly dueto the influences of worldwide com-petition,
JIT, flexible manufacturing systems. and an emphasis on product quality and customer service. As a result,
many n1anufacturers are adapting their standard-casting systems to reflect these aspects of the contemporary
manufacturing environmcnt.
Kaizen casting is the process of cost reduction during the manufacturing phase of a product. Kai::.en
refers to continua] and gradual improvement through small betterment activities. Many companies fac-ing
global competition find that continua! cost reduction is crucial to thcir survival.
Appendix
to Chapter Sixteen
Productlon Mix and Yleld Varlances
Manufacturing processes typically involvc multiple direct-material inputs. Food,
chemical, steel, fabric, plastic, and many other products require a mix of direct materials, sorne of which can be substituted for each other without greatly affecting product
LO !O Compute and 1nterpret mix and y1eld
vanances.
672
Part V
Evaluating and t-.1anaging Performance
quality. Moreover, multiple types of direct labor often are required (e.g .. machinists and
assembly employees). When a manufacturing process involves multiple types of direct
material or direct labor, additional variance analysis can be conducted to analyze the
proportions with which the multiple inputs are used. Such an analysis assumes that sorne
degree of substitutability exists among the inputs to the production process.
Production Mix and YieldVariances lllustrated
ª'°'·º$%Let's return to Koala Camp Gear Company. Margo Hastings's nephew has convinced her that Koala
11
Company
should expand its product line to include certain camp foods. For its
initial entry into this market, Koala has begun to produce trail mix. Variously known to outdoor enthusiasts
as trail mix or gorp (for "good ole' raisins and peanuts"), this venerable food has sustained many a hiker.
Koala has introduced its trail mix product under the brand name Crocodile Chomp.
Multiple direct-material inputs. The three inputs to Crocodile Chomp are raisins (R), peamlts (P),
and sunflower seeds (S ). The standard costs and quantities far Crocodile Chomp are given in
the following table. The trail mix is produced in 10-kilogram units; subsequently, each unit is
divided into 20 half-kilo packages (a little overa pound).
(a)
(b)
Di re et
Material
Standard Price
(e)
Standard Number of
Kilograms per Unit
per Kilogram
of Finished Product
Standard Proportion
(Cole+ 10)
R
$200
1.60
4
4
4
4
p
s
1.50 ..
(d)
2 ..
10
Total ..
2
During September, Koala produced 1,000 units of Crocodile Chomp (i.e .. 10,000
kilograms oftrail mix). However, it purchased and consumed 10,800 kilograms of inputs,
as the following table shows.
(a)
Di re et
(b)
Actual
Material
Price
(e)
Actual
AmountUsed
R ..
$2.00
1 80.
3,780 kilograms
5,400 kilograms
p
s
(d)
Actual Proportion
U sed (Col. e + 10,800)
35
50
i .620 kilograms
10.800 kilograms
1.45 ..
Total
15
First, let's compute the direct-material price and quantity variances far September.
Notice that the quantity purchased (PQ) and the actual quantity used (AQ) are the same,
dueto the perishability of the inputs.
Di re et
Material
R ..
p
s
Total
Quantity
Price
PQ (AP - SP)
3,780 ($2 DO - $2 00)
5.400 ($1.80 - $1.60)
1,620 ($1.45 -
$1 50)
Variance
o
$1.080 u
81 F
$ 999 u
SP(AQ - SQ*)
Variance
$2 00 (3.780 $160 (5.400 -
4,000)
4.000)
$ 440 F
2.240 u
$1.50 (1,620 -
2,000)
570 F
$1.230U
'SO,Lhe standaro quant1ty allowed g1ven actual output, is equal 10 :he standard inpwt proportion r-iult:pliea by 10,000
kilograrr,s (the ac1ual output produccd)
As the variance analysis shows. the total price variance is $999 unfavorable, and the
total quantity variance is $1,230 unfavorable. Now we divide the quantity vari-ance into
a direct-rnaterial rnix variance anda direct-materials yield variance. The direct-material
mix variance for a particular dircct material is the difference between the actual and
standard input proportions for that direct material multiplied by that material's standard
price and multiplied by the actual total quantity of all direct materials used. The direclmaterial mix variance is computecl as follows. Notice that the total direct-material mix
variance is defined as the sum of the direct-material mix variances for each input.
Chapter 16 Standard Costing, Variance Analysis, and Kaizen Co5ting
llirect-1natcrial
1nix varianl'C
rnatcrial
Sun1 of direct 111aterial mix Yariances
for each direct 1natcrial uscd
input
'"'"'
(
"'"' '1nix ( """""ropr!l'Cof )
varianlT for
direct
n1aterial i
=
chrl'l't
n1atcrial i
proportion
X
for direct
material i
Actual total
input
'"""")
proportion
(
X
for direct
1naterial i
quantit~ or
ali direct
n1atcrials
u sed
Using this formula, Koala's September direct-material mix variances are computed
as follows:
R mix variance =
$2.00 X (.35 -
.40) X 10,800 =
P mix variance = $1.60 x (.50 -
40) x 10,800 =
S mix variance =
20) X 10.800 =
$1.50X(.15 -
$
1,080 F
1,728 u
810 F
$
Total mix variance
162 F
Koala's September direct-material mix variance is $162 favorable, which means that the
mix of inputs was altered in such a way that it hada favorable impact on the total pro-duction
cost. Notice that signs (F or U) are assigned to the individual input components of the mix
variance in accordance with this rule: F if the actual input proportion is lower than the standard
input proportion and U otherwise. During September, the actual input proportions far raisins
and sunftower seeds were lower than their standard input propor-tions: the actual proportion
for peanuts was higher than its standard. It is importan! to note, however, that il is the total
direct-material mix variance of $162 F that is a mean-ingful 111easure.for manage1nent'.~
analysis, not the individual mix variance components.
The direct-material yield variance far a particular direct material is the differ-ence
between the actual quantity of ali direct materials used and the standard quantity of ali
direct materials. given actual output, multiplied by that particular direct mater-ial's
standard price and multiplied by that direct material's standard input proportion. Again,
the total direct-material yield variance is defined as the sum of the individual yield
variance components for the severa! inputs.
J)irect-111aterial
yicld v<1rial1l'C
Oircct111atcrial yield
varianl'l' fur
dircct
n1aterial i
Su1n ol'direct material yicld variances
for cal'h dircct 111aterial used
=
Standard
price of'
direct
n1aterial i
X
Actual
quantity of
ali dircct
materials
used
Standard
allo\Yed total
(_JUantity of
all direct
n1aterialo.;
givcn actual
outpul
X
Standard
input
proportion
for direct
111aterial i
Using this formula, Koala's September direct-material yield variances are computed
as follows:
R y1eld variance = $2.00 x (10,800 -
10.000) x
.40 =
P yield variance = $1 60
x (10,800 -- 10,000) x .40
=
S yield variance ~ $1.50
x (10,800 - 10.000) X 20
=
Total yield variance
$ 640 U
512 U
240 U
$1 .392 U
Koala 's September direct-material yicld variance is $1,392 unfavorable. The
interpretation is that the total inputs used (10,800 kilograms) cxceeded the standard
quantity allowed given actual output ( 10,000 kilograms of input allowed far 10,000
kilograms of output). As with the mix variance, the most meaningful interpretation applies
to the total yield variance rather than its individual components.
Notice that Koala's direct-material mix variance ($162 F) and yield variance ($1,392
U) add up to the direct-material quantity variance ($1,230 U). Koala's September directmaterial variances in the production of Crocodile Chomp are sum-marized in Exhibit 168.
)
673
674
Part V
Evaluating and Managing Performance
September Direct-Material
Variances in the
Production of Crocodile
Chomp Trail Mix
111
Direct-material
mix variance
Direct-material
yield variance
$162 F
$1,392 u
Multiple direct-labor inputs. The same analysis far direct material can be applied to direct
labor if a company has multiple types of direct-labor input. Suppose, for example, that
Koala's direct-labor employees in the Crocodile Mix line include inspectors, mixers, and
packers, each with a different standard pay rate. Moreover, assume that there is a standard
or expected input proportion far each type of direct labor. Then we can apply the same
analysis to direct labor as we used far direct material. Just substi-tute the words "direct
labor" for "direct material" in ali of the formulas given in the preceding section. Now the
total direct-labor variance consists of the direct-labor rate and efficiency variances, and
the direct-labor efficiency variance is decomposed ínto
a direct-labor mix variance anda direct-lahor yield variance. The direct-labor-mix
variance far a particular type of direct labor is the difference between the actual and
standard input proportions for that type of direct labor multiplied by that labor type 's
standard rate and multiplied by the actual total quantity of ali direct labor used. The directIabor yield variance for a particular type of direct labor is the difference between the
actual quantity of ali direct labor used and the standard quantity of ali direct labor, given
actual output, multiplied by the standard rate for that particular type of direct labor and
multiplied by the standard input proportion far that type of direct labor. As with direct
materials, this analysis makes sense only if sorne degrce of substitutability exists among
the various types of direct labor.
Mix and Yíeld Varíances in Service Organizations
The concepts underlying production mix and yield variances can be applied to serv-ice
organizations also. Service organizations oftcn make substitutions among differ-ent types
of labor. Ernst & Young. far example, might substitute partner time for staff time on a
particular audit job.
Consider the well-known consulting firm of Kirk, Spock and McCoy, which has bid
a job for 1,000 hours: 300 hours of partner time al a cost of $60 per hour and 700 hours
of staff time at a cost of $20 per hour. Dueto scheduling problems. the pai1ner spends 500
hours, and the staff member spends 500 hours. lf the actual costs are $60 far partner time
and $20 far staff time. no labor rate variance exists. However. even though the 1,000 hours
required were exactly what was bid, the job cost is $8.000 over budget, as shown here:
Actual cost = (500 hours x $60) + (500 hours x $20)
~ $30,000 + $10,000
~ $40,000
Budgeted cost ~ (300 hours x $60) + (700 hours x $20)
~ $18,000 + $14,000
~ $32,000
Cost overrun = $8.000
We can apply the mix and yield variance analysis to help us understand this cost
overrun. First, there is no yield variance because the total number of actual hours and
Chapter 16 Standard Costing. Variance Analy~i~. and Kai1cn Costing
675
total budgeted hours are the same. (Review the formula far the yield variance.) However,
there is an unfavorable mix variance of SS,000, which is calculated as fol-lows by
applying the mix variance formula given earlier in the appendix.
Partner labor mix var1ance = $60 x
(.5* - .3t) x
í .000 =
Staff labor mix variance
(.5* - .7-) x
í .000 ""'
= $20 x
$ 12.000 u
4,000 F
$ 8,000 u
Total mix variance
x
The actual input propor\1ons were 5 for both partner and staff time (500 -'- 1 000)
-The budgeted (standard) input proport1ons were .3 for partner time (300 + 1,000) and 7 for
staff time (700 + 1,000)
Thus, the entire budget overrun of SS,000 is due to the unfavorable mix effect of
substituting expensive partner time for less expensive staff time. This scenario had no
rate (price) or yield effects at ali.
KeyTerms
For each term '.1· definition rej'er to the indicated page, vr turn to the glossary at the end (~f the text.
cost variance, 648
direct-labor efficiency
variance, 656
direct-labor mix
variance,* 674
direct-labor rate ,·ariance, 655
direct-labor _yield
variance,* 674
direct-material mix
variance, * 672
direct-material price
variance (or purebase
price variance ), 654
direct-material quantity
variance, 654
direct-material yicld
variance, * 673
Meeting the Cost-Management
kaizen casting, 670
management by
exception, 649
perfection (or ideal
standard), 650
practical (or attainable)
standard, 651
standard cost, 648
standard-costing system, 664
standard direct-labor
quantity, 653
standard direct-labor rate, 653
standard direct-material
price, 653
standard direct-material
quantity, 652
statistical control chart, 660
task analysis, 649
Challenges
1• How could Koala Camp Gear'scontroller set standards for the production of tents using the
company'sstandard-costing system?
duction process than should have been used in accordancc \Vith the
standard. (A favorable variance has the opposite interpretation.)
Koala Camp Gear's controller could use several approaches to set
standards. One method of setting standards is thc anal y sis of historical
cost <lata. which provide an indicator of future costs. The n1ethod". for
analyzing co~t behavior described in Chapter ! ! are use<l to predict future
costs on thc basis of his-torical costs. These predictions then form the
basis for setting standards. Another standard-setting n1ethod is task
analysis, which analyLes a production process to determine what the cost
to produce a product or service should be. The emphasis shifts from \Vhat
the product did cost in the past to what il should cost in the future.
The unfavorable direct-labor rate variance experienced by Koala
Camp Gear Company means that it paid a higher labor rate than was
anticipated when the standard \Vas set One pos~ible cause is that labor rate
raises granted were higher than those anticipated in setting the standards.
Another possibility is that more highly skilled w·orkers w·ere used to
perform tasks than w·ere required or anticipated when the standards were
set (A favorable varlance has the opposite interpretation.)
A pcrfcction (or ideal) standard is the co~t expected under perfect or
ideal operating conditions. A practical (ar attainable) standard is the cost
expected under normal operating conditions.
2.
What is the appropriate interpretation of each vari-ance
detailed in Koala Camp Gear Company'scost-variance
report?
Koala Camp Gear's unfavorable direct-material price variance mcans rhat
it paid a higher price for the material than \vas expected when the ~tandard
wa~ set. (A favorable variance ha~ the opposite interpretation.)
Koala's unfavorable direct-n1aterial quantity variance n1eans that a
larger a1nount of inaterial was used in the pro-
Koala Camp Gear's favorable direct-labor efficiency vari-ance
n1eans that it used less labor to accomplish a given task than was required
in accordance \VÍth the standards. (An unfavorab!e variance has the
opposite interpretation.)
3.
Who is in the best position in the organization to
influence each of these variances?
The purchasing rnanager is in the best position to infiuence the
direct-material price variance.
Thc production n1anager is usually in the best position to influence
the direct-material quantity variancc.
In <>orne cases, the production inanager i~ in the best position to
influence the direct-labor rate variancc. In othcr cases, thc pcr-sonnel
n1anager or union negotiator has more influence.
The production manager is usually in the best position to inftuence
the direct-labor efficiency variance.
676
4.
Part V
Evaluating and Managing Performance
What criticisms are made of standard-casting
Shorter product life cycles mean that individual standards are
soon outmoded.
Traditional standard-casting systerns tend to focus too much
systems as they are used in today'sbusiness
environment?
on cost 1ninimization rather than on increasing product quality or customer scrvice.
Eight criticisms of standard costing in an advanced tnanufactur-ing
setting are the following:
Automated manufacturing processes are highly reliable in
n1ecting production specifications. As a resu\t, varianccs from
standards tend to be very s1nall or nonexistent.
Traditional standard costs are not defined broadly enough to
include important costs, such as the total cost of ownership.
Variances are too aggrcgate and too late to be useful.
Variances are not tied to specific product lines, production
batches, or flexible manufacturing system (FMS) cells.
Standard-costing sy<;tems focus too much on direct labor.
frequcnt switching a1nong products in an FMS cell 1nakes
cost standards Jess appropriate.
Solutionto You're
the Decision Maker
16.1 Direct-Material and Direct-LaborVariances
p.661
a.
The direct-material and direct-labor variances are co1nputed in
Exhibits 16-9 and 16-1 O, respectively.
b.
The direct-n1aterial price variance and the direct-labor rate
variance should be investigated since they excecd 1 stan-
dard deviation. The direct-material price variance is $6,250
unfavorable, and the direct-labor rate variance is $5,250
favorable.
Direct-Material Price and Quantity Variances
Direct-Material Price and
Ouantity Variances: You're
the Decision Maker
§': ~ ,0 $<i
11
Actual Material Cost
Actual
quantity
25,000
sq. meters
purchased
Company
X
X
Standard Material Cost
Actual
price
Actual
quantity
X
$8.25
25,000
per sq.
meter
sq. meters
purchased
$8.00
'-------v----'
x
per sq.
meter
'-------v----'
$206,250
t
Standard
price
Standard
quantity
24,000
sq. meters
allowed
Direct-material
price variance
24,500
$8.00
per sq.
meter
'-------v----'
$196,000
$4,000 Unfavorable
Direct-material
quantity variance
Using Formulas
DirL'l't-n1att:'fial prin..· Yariancc = PQC4P .loi'/'l
= 25.000 t$8.25 - $8.00J = $<,,250 l~nfayorahlc
Dircct-111att:'1·ial quantit~ ,·,11·ialll'l' = .)'PL4Q - SfJl
= SS.110124,5110 -
2~.0001
= S4.0llO l nf°aH>rahle
X
$192,000
t
sq. meters
u sed
Standard
prlce
$8.00
per sq.
meter
'-------v----'
$200,000
$6,250 Unfavorable
X
Chaptcr 16 Standard Costing, Variance Analysi~, and Kaizen Casting
677
Direct-Labor Rate and Efficiency Variances
Direct-Labor Rate and
Actual Labor Cost
Actual
hours
4,200
hours
u sed
X
X
Standard Labor Cost
Actual
rate
Actual
hours
$16,75
4,200
per
hour
hours
u sed
Standard
rate
X
X
Standard
hours
$18.00
4,000
per
hour
hours
allowed
X
X
Standard
rate
$18.00
Efficiency Variances
You'rethe Decision Maker
§90<!'&
11
per
hour
~~~
$70,350
t
$75,600
$5,250 Favorable
t
Direct-labor
rate variance
$72,000
$3,600 Unfavorable
t
Company
Direct-labor
efficiency variance
Using Formulas
L>ircct-labor rate \'ariance = AIJ(All -
5'/{)
= 4,200 ($16.75 -
$18.00) = $5,250 Favorable
Dircct-l<tbor cfficienc~ variance = 51R\11H - SH)
= $18.111114,2110 - 4,000) = $3,600 l!nfavorable
Review Questions
16.1 One of the principles espoused by management is that one
should manage by exception. How can responsibility
reporting systems and/or analysis of variances assist in that
process?
16.2 Explain how standard material prices and quantities are set
16.3 What is the interpretation of the direct-material price
variance?
16.4 What manager usually is in the best position to influence the
direct-material price variance?
16.5 What is the interpretation of the direct-tnaterial quantity
variance?
16.6 What manager usually is in the best position to influence the
direct-material quantity variance?
16.8
What is the interpretation of the direct-labor rate van'ance? What are sorne possible causes?
16.9
What manager generally is in the best position to influ-ence
the direct-labor rate variance?
16.10
What is the interpretation of the direct-labor efficiency
variance?
16.11
What manager generally is in the best position to influ-ence
the direct-labor efficiency variance?
Describe how standard costs are used for product casting.
What is meant by the term kaizen casting?
16.12
16.13
16.14
(Appendix) List tOur companies that probably use direct·
1naterial mix and yield variances.
16.7 Describe the factors that managers often consider when
determining the significance of a variance,
Critica! Analysis
16.15
Distinguish between perfectiun and practica! standards,
Which type of standard is likely to produce the best
motivational effects?
16.20 Many companies set wage rates through union negotia-tions.
Under these circumstances, how could a labor price variance
arise that is the responsibility of a line manager?
16.16
In a service environ1nent with no inventories. is variance
analysis useful? Why or why not?
16.17
Why should nlanageinent want to divide production cost
variances into price and efficiency variances'?
16.21 Discuss severa! ways in which standard-casting systems
should be adapted in today's advanced manufacturing
environmenL
16.18
Explain why the quantity purchased (PQ) is used in con1puting the direct-n1aterial price variance, but the actual
quantity consumed (AQ) is u<:.ed in co111puting the directmaterial quantity variance,
16.22 Which ofthe following ten11s is most consistent with the old
saying, ''Slow and steady -w·ins the race": advanced
1nanufacturing system, product innovation, kaizen cost-ing.
or investrnent in high technology? Explain.
16.19
Refer to queslion 16.18. Why <loe~ an analogous question
no! arise in the context of the <lirect-labor variances?
678
Part V
Evaluating and .\1anaging PeTformance
Exercises
Exercise 16.23
Direct-Material Variances
Material Purchased and
Material Used Are Not
Equal
Hascga\va Co1npany 1nanufaclures lahoratory glass\varc in its plant ncar Kyoto. Japan. The con-troller recently
reported the follo\ving infonnation concerning direct-1naterial requiren1cnti;; in departmcnt 8.
Standard direct-material cost per unit produced
1 31 yen
Direct material purchased (actual)
58.158 yen
Standard cost of material purchased
57.510 yen
Standard price times actual amount of material used
Actual production
38.340 yen
28.000 units
Required
Compute the direct-material cost variances for department 8. Prepare an anal y sis for rnanageinent like the
onc in Exhibit 16-l. (Remember to exprcss your analysis in terms of yen, the Japancse national currcncy.)
Exercise 16.24
Direct-Labor Variances
The standard direct-Jabor cost per unit for Reimal Housevvares, Inc. \Vas $10 (55 per hour tin1cs 2 hours per
unit). During the period, actual direct-labor cost<; amounted to $18,800, 3. 900 direct-labor hours v.rerc
\vorked, and 1.900 units were produccd.
Required
Con1putc the direct-labor rate and efficiency variances for the period. (Refer to Exhibir 16-2 for the format.)
Exercise 16.25
Direct-Labor Variances
The standard direct-lahor cost per reservation for A.dventurc Air Charters is $ .65 ($6.50 per hour divided by
10 rcscrvations per hour). During the period, actual direct-labor cost~ totalcd $44,500. 6,800 direct-labor hours
were v,..·orked, and 72,000 reservations were madc.
Required
Co1npute the direct-labor rate and efficiency variances for the period. (Refer to Exhibit 16-2 for the fonnat.)
Exercise 16.26
Standard Costs Ethics
Agrien, !ne. produces iten1s madc from local farm products that it distributes to supcrmarkets. Because price
con1pctition has become increasingly i1nportant over the years, Abby Tyler. the company's con-troller. ü.
planning to itnplement a standard-costing systen1. She asked her cost-managen1ent analyst, Larry ~adison, to
gather cost information on the production of strawberry jam (Agrico's most popular product). Madison
rcported that stnnvberrics co<;t $ .90 per quart. the price he intcnds to pay to hi<; good friend v,,·ho has been
operating a stra\\lberry farm in thc red for the !ast fcv.· years. Dueto an oversupply in the market, the prices for
strawberries havc dropped to$ .65 pcr quart. Madison is sure that the S .90 price \vil! be cnough to pull his
friend's <;trav..·berry farm out ofthe red and into the black.
Required
Is Madi~on's bchavior regarding thc cost inforn1ation he provided to Tyler unethical? Explain your ansv,,'er.
[CMA adapted]
Exercise 16.27
Standards for a New
High-Tech Product
•
Required
As a group, discuss how companies developing nev·i high-tcch products v,..·ould set standard costs for them.
\Vhat spccial challenge <loes the "formar'' issue present in standard setting for the new hybrid auton1obiles?
Exercise 16.28
Straightforward
Computation of
variances
<
Read "When Hybrid Cars Collidc:' The ~Val! Street Journa!, February 6. 2003, p. Bl. by ;..Jorohiku Shirouzu.
i ()
eXcel
mhhe.com/hil1on3e
Columbus Container Company 1nanufacturcs rccyclable soft-drink cans. A unit of production is a case of 12
doLen can~.
Actual material purchases a1nounted to 240.000 kilogran1s at S .81 per kilogram. Actual costs incurred
in the production of 50,000 units follow:
Direct labor
$211,900 for 13,000 hours
Direct material
$170, 100 for 210.000 kilograms
Chapter 16
Standard Costing. VarianccAnalysi5. and Kaizen Co~tíng
679
The following standards havc heen set by the production-engi neering staff and the control ter.
Direct material
Ouantity, 4 kilograms
Price. $ .79 per kilogram
Direct labor:
Ouantity, .25 hour
Rate, $16 per hour
Required
Use the variance forn1ulas to co1npute the direct-1naterial price and quantity variances and the direct-labor
rate and efficiency variances. Indicate \Vhether each variance is favorable ar unfavorable.
Refer to the data in the preceding exercise.
Exerclse 16.29
Required
Cse diagra1ns sin1ilar to those in Exhibits 16-1and16-2 to detern1ine the dircct rnaterial and direct-labor
varianccs. lndicate \vhether each variance is favorable or unfavorable.
3i
Preparation of Journal
Entries under Standard
Casting: Posting Journal
Entries for Variances
Required
h.
{L()
Exerclse 16.30
Refer to the data in Exercise 16.28 for Co\utnbus Container Co1npany.
a.
Determination of
Variances Using
Diagrams
Prepare joun1al entries to:
(1)
Record the purchase of direct material on account.
(2)
Add direct-n1aterial and direct-lahor cost to VVork-in-Proccss lnvcntory.
(3)
Record the direct-material and direct-labor variances.
(4)
Close these variances to Cost ofGoods Sold.
Set up T-accounts, and post the journal entries to the general ledger.
Choose one of thc following: 111anufacturers (or any n1anufacturer of your choosing). and use the Internet to
gather infonnation about any ne\v products the con1pany has recently introduced or plans to introduce.
Hneinp. (\.V\.V\.\ .boeing.co1n)
K(ld~1k (ww\v.kodak.con1)
(';t1erpi 1lar ( W\VW.caternillar.com)
Pli1cr ( W\Vw.pfizer.co1n)
f-'ord (V.'V."w·.ford.com/us)
Xerox (ww\v.xerox.cotn)
1
Required
Discuss the steps you think the co1npany took in establishing standard costs for its nev. product.
1
Dueto evaporation during produclion. Piscataway Plastics Co1npany requires 8 pounlb of n1aterial input for
every 7 pounds of good plastic sheets manufactured. During May, the company produced 4.725 pounds of
good sheet<;.
Exerclse 16.31
Development of
Standards for New
Products: Internet Use
•
Exerclse 16.32
Standard Allowed Input
Required
Con1pute the total standard allowed input quantity given the good output produced.
Kalama100 Chemical Company manufactures industrial chemicals. The company plans to introduce a new
chemical solution and needs to develop a standard product cost. The new chenücal solution is 1nade by
con1bining a chenücal co1npound (lotrel) anda solution (salex), heating the mixture, adding a second
compound (prolelJ, and boltling the resulting solution in l 0-liter containers. The initial mix, which is 11 liters
in volun1e, consists of 12 kilograms of lotrel and 9.6 liters of salex. A 1-liter reduction in volume occurs during
the boiling proccss. Thc solution is coolcd slightly bcforc 5 kilograrns of protet are added. Thc addition of
protet does not aiTecl the total liquid volume.
The purchase pricc of the direct materials used in the manufacture of this new chemical solution follow;
Lotrel
Sal ex
Protet
$1.58 per kilogram
1.80 per liter
2.40 per kilogram
Exerclse 16.33
Determination of
Standard Material Cost
(L(}
i'
680
Part V Evaluating and Managing Performance
Required
Determine the standard direct-1naterial cost of a 10-liter container of the ncv·i product.
[CMA adapted]
Exercise 16.34
Cost Variance
lnvestigation
The controller for Tribecca Caterers·, Inc., uses a statistical control chart to help manage1nent determine \vhen to
investigate variances. The critica! value is l standard deviation. The company incurred the following dircct-labor
efficiency variances during: the first six n1onths of the current year.
\Lf) 4)
$250 F
April
$900 u
February
800 u
May
1.050 u
March
700 u
Ju ne
1.200 u
January
The standard direct-labor cost during each of thcsc 1nonths was $ l 9,000. The controllcr has estinutted that the
firn1'sn1onthly dlrect-labor varianccs have a standard dcviation of $950.
Required
Exei-cise 16.35
Labor Mix and Yield
Variances (Appendix)
a.
Draw a statistical control chart and plot the preccding variance data. Which varianccs should be
investigated?
b.
Suppose that the controller\ rule of thu111b i:-. to invc'>tigate ali varianccs equa] to or grcater than 6
percent of standard cost. Which varianccs will be investigated?
c.
\Voul<l you investigare any of the variances lis1ed other than those indicated by the rules di5cussed in
requirements (a) and (b)'? \Vhy?
Boca Raton Burrito has two categories of direct labor, unskilled, \Vhich costs $6.50 per hour, and .;;kille<l, \vhich
costs S 10.30 per hour. Managernent has estahlished stan<lards per "e4uivalcnt n1eal," \vhich has been defined as a
typical n1eal consi~ting of a burrito, a drink, anda side or<lcr. Standard~ have been ~et as follows:
Unskilled labor
10 minutes per equivalen! meal
Skilled labor
4 minutes per equivalen! meal
During May, Boca Raton Burrito sold 30Jlüü cquivalent mea]~ and incurred thc follo\ving lahor costs:
4,600 ~1ours
33.000
1,800 hours
$17,500
Unskilled labor
Skilled labor.
Required
Exercise 16.36
a.
Co1nputc the direct-labor rate and cfficiency variances.
b.
Co1npute the direct-!ahor nlix an<l yield varianccs.
Ca!tex, lnc. has set the follo\ving dircct-1naterial :.tandards for its product. the univer~al gisn10.
Direct-Material Mix and
Yield Variances
(Append1x)
Standard costs for ono unit of output
Material 1, 10 units of input at $100 per unit
Material 11, 20 units of input at $150 per unrt
eXcel
rnhhe.corn/hilton3o
During August, the co1npany had thc follo\ving results:
Universal gismos produced
2.000 units
Materials purchased and used:
Material 1
22.000 units at $94
Material 11
38,000 units at $152
Required
a.
Compute the direct-material pricc and quantity variances.
b.
Co1npute che direct-rnaterial mix and yield variances.
Chaptcr 16 Standard Costing, Variance Analysis. and Kaizen Casting
681
Problems
Orion Corporation has established the follo\ving standards for the prin1e costs of one unit of its chief product,
dartboards.
Direct material
Direct labor
Total
Standard Quantity
Standard Price or Rate
8.5 pounds
25 hour
$1.80 per pound
Standard Cost
$15.30
2.00
$8.00 per hour
Problem 16.37
Direct-Material and
Direct-Labor Variances
(LO 'J
$17.30
During May. Orion purchased 160,000 pounds of direct material ata total cost of $315,200. The total
wages for May \Overe $42,000, 90 perccnt of which were for direct labor. Orion manufactured 19.000
dartboards during May, using 142,500 pounds of direct material and 5,000 direct-labor hours.
Required
Compute the following variances for May, and indicate whether each is favorable or unfavorable.
a.
Direct-material price variance.
b.
Direct-material quantity variance.
c.
Direct-labor rate variance.
d.
Direct-labor efficiency variance.
[CMA adapted]
Problem 16.38 DirectMaterial and DirectLabor Variances Missing
Data
Analyze each of the folknving scenarios in<lependently.
a.
Infonnation about Maxey Corporation's direct-n1aterial cost follows:
Standard price per direct-material ounce
Actual quantity purchased and used
Standard quantity allawed far praduction
Price variance
$ 345
420 ounces
435 ounces
$2.950 F
\\·'hat \.Vas the actual purchase price per ounce, rounded to the nearest cent"!
b.
Yankay Con1pany repor!s !he folknving direct-Iabor inforn1ation for its primary product for
()ctober:
Standard rate
Actual rate pa1d
Standard hours allawed far actual production
Direct-labor efficiency variance
$ 7.00 per hour
... s; 7 20 per haur
1,400 hours
$ 500 u
What were thc actual hours \.vorkcd, and what was the dircct-labor rate variancc'!
Texarkana Textiles, Inc. inanufactured 500 units of a spccial multilayer fahric \Vith the trade name Stylex
during July.
The standard prin1e costs for one unit of Stylex are:
Direct material: 20 yards at $1.35 per yard
Direct labor: 4 hours at $9.00 per hour
Total standard prime cost per unit of output
$27
36
$63
The following inlünnation from the Stylex production departmcnt pertains to July:
Direct material purchased: 18,000 yards at $1.38 per yard
Direct material used: 9,500 yards at $1.38 per yard
Direct labor used: 2, 1DO hours at $9. 15 per hour
$24.840
13.110
19.215
Required
Compute the fol!o\ving variances for the 1nonth of July. indicating '0ihether each variancc is favorable or
unfavorable.
a.
b.
Dircct-1naterial price variance.
Direct-matcrial quantity variance.
Problem 16.39
Direct-Material and
Direct-Labor Variances
682
Part V
Evaluating and Managing Performance
c.
Direct-labor rate variance.
d.
Direct-labor efficiency variance.
e.
Build your ow11 spreadsheet. Build an Exccl spreadsheet to solve rcquircments (a) through (d). LTse
your spreadsheet to determine the nev..· values far each of the variances listed in requiren1ents (a)
through (d) if each of the following input parameters changes by the amount indicated. (Unless
othcf'Nise indicated, treat each parameter change independently.)
(1) The actual direct-material price is $1.40 per yard.
(2) The standard direct n1aterial quantity per unit of Stylex is 21 yards.
(3)
The standard direct-labor rate is $9.10 per hour.
(4)
All of the changes in parts ( 1) through (3) occur siinultaneously.
[CPA adapted]
Problem 16.40
Behavioral lmpact of
lmplementing a
Standard-Casting
System
(LO i,S)
PrimeCare, Inc., a 1nanufacturer of custom-designed home health care equipment. has been in bu~iness for 15
years. Last year, to bettcr control the costs of its products. the controller implernented a standard-costing
syste1n. Reports for tracking perforn1ance are issued n1onthly. and any unfavorable vatiances are investigated
further.
The production manager complained that the standards are unreali~tic, stifte motivation by concen-trating
only on unfavorable variances. and are out of date too quickly. He noted that his recent switch to titanium for
the wheelchairs has resulted in higher n1aterial costs but decreased labor hours. The net result was no increase
in the total cost to produce thc v.·heelchair. The 1nonthly reports continue to shov·i an unfavorable material
variance and a favorable labor variance despite indications that the workers are slo\.ving down.
Required
a.
Describe severa\ \Vays that a standard-costing system strengthens n1anagement cost control.
b.
Give at least tv.·o reasons to explain why a standard-costing system could negatively impact the
motivation of production en1ployees.
[CMA adapted]
Problem 16.41
Development of Standard
Costs: Causes of
Variances; Ethics
(LO J,S, 7)
TasteeFruit Company is a small producer of fruit-flavored frozen desserts. Far many years, its products have
had strong regional sales on the basis of brand reeognition. However. other companies have begun marketing
sin1ilar products in the arca, and price con1petition has become increasingly itnportant. John Wakefield, the
company's controller, is planning to implementa standard-costing systcm and has gath-ered considerable
information on production and n1aterials require1nents for TasteeFruifs products. He believes that the use of
standard costing will allov.· the company to make better pricing decisions.
TasteeFruit's most popular product is raspberry sherbel. The sherbet is produced in 10-gallon batches,
and each batch requires ~ix quarts of good ra5pberties. The fresh raspberries are sorted by hand before entering
the production process. Bccause of imperfections in the raspberries and normal spoilage, one quart of berries
is discarded far evcry four quarb accepted. Three 1ninutes is the standard direct-labor time far the sorting
required to obtain one quart of acceptable raspberries. The acceptable raspber-ries are then blended with the
other ingredicnts; hlending requires 12 minutes of direct-labor time per batch. After blending. thc sherhet is
packaged in quart containers. Wakefield has gathered the following information from Teresa Adan1s.
TasteeFruit's cost accountant.
TasteeFruit purchases raspberries ata cost of $ .80 per quart. Ali other ingredients costa total of $ .45
per gallan.
Direct labor is paid at the rate of 59 per hour.
The total cost of 1natcrial and labor required to package the shcrbet is S.41 per quart.
Adams has a friend who owns a berry farm that has beco losing money in recent years. Becau~e of good
crops, an oversupply of ra~pberries has been available, and prices have dropped to $ .50 per quart. Adams has
arranged for TasteeFruit to purchase raspberries fro1n her friend and hopes that $ .80 per quart will help her
friend's farm becomc profitable again.
Required
a.
b.
Develop the standard cost of direct 1naterial, direct labor, and packaging for a 10-gallon batch of
raspberry sherbet.
As part of the implementation of a standard-casting system, Wakefield plans to train those responsible for maintaining the standards in the use of variance anal y sis. He is particularly concerned
Chapter 16
Standard Casting. Variance Analysis. and KaiLen Costing
683
v.'ith the causes of unfavorablc variances. As his assistant. prepare a page far a con1pany training
document that discusses thc follo\ving:
(1) The possihle cause<; of unfavorable 1naterial price varianccs and idenlifies the individual(s)
\Vho should be held responsible for thesc variances.
(2)
The possihlc causes of unfavorable labor efficicncy variances and identifies the individual(s)
\Vho should be held responsiblc for thcse variances.
c.
Citing the specific ethical standards of con1petence, confidentiality, integrity. and objectivity for
manage1nent accountants, explain vvhy Adam<>'s behavior regarding the cost inforn1ation provided
to Wakefield is unethical. (See the Appendix to Chapter 1 for these cthical standards.)
d.
Build your own spreadsheet. Build an Excel sprcad5heet to sol ve require1nent (a). Use your spreadsheet to detennine the nev.' values far all of the amounts calculated in requirement (a) if each of the
fo\lowing input paran1ecers changes by thc an1ount indicated. (Unless othenvise indicated, treat each
parameter change independently.)
(1)
The standard cost of raspberries is $.90 per quart.
(2)
The standard cost of direct labor far sorting and blcnding is $9.50 per hour.
(3)
The total standard cost of material and labor for packaging is $.45 per quart of sherbet.
(4)
Ali of the changes in parts ( l) through (3) occur simultaneously.
[CMA adapted]
Surf's Up. Inc. manufactures fiberglass boards used for riding the v.'aves at thc beach. The products are sold
under the brand name Crazy Board. The standard cost for material and labor is $89.20 per board. This includes
8 kilogran1s of direct 1naterial ata standard cost of $5.00 per kilogram and 6 hours of direct labor at $8.20 per
hour. The following data pertain to Nove1nber:
Problem 16.42
Variances; Journal
Entries; Missing Data
\L() 1 __ t<;
Units co1npleted: 5,600 units.
Purchases of material: 50,000 kilograms for $249,250.
Total actual laborcosts: $300.760.
Actual hours of labor: 36.500 hours.
Direct-material quantity variance: $1.500 unfavorable.
Work-in-process inventory on November 1: none.
Work-in-process invcntory on Nove1nber 30: 800 units (75 percent co1nplete as to labor; 111aterial
is issued at the beginning of processing).
Required
a.
Compute the follov. ing amounts. Indicate whether each variance is favorable or unfavorable.
1
(1)
Direct-labor rate variance far November.
(2)
Dircct-labor efficiency variance for November.
(3)
Actual kilograms of material used in the production process during Nove1nber.
(4) Actual price paid per kilogram of direct niaterial in November.
(5) Total amounts of direct-material and direct-labor cost transferrcd to Finished-Goods
lnventory during Nove1nbcr.
(6)
b.
Total amount of direct-111aterial and direct-labor cost in the balance of Work-in-Process
Inventory at the end of November.
Prepare journal entrics to record the following:
Purchasing ra\v n1ateria!.
Adding dircct material to Work-in-Process Inventory.
Adding dircct labor to Work-in-Process Jnventory.
Recording variances.
[CMA adapted]
United Kingdorn Agribusiness, Ltd. (UKA). 111anufactures agricultura] 1nachincry in Manchester. Problem 16.43 England. Ata
recent staff meeting the controller prcsented the follow·ing direct-labor variance rcport for Cost-Variance
the year ju<;t ended.
lnvestigation
684
Part V
Evaluating and Managing Performance
UNITED KINGDOM AGRIBUSINESS, LTD
D11 l'Ct-L.1bo1 V.u 1ance Rcpo1 t
(all v;u 1.1nccs 111 Bnt1sh pounds sterhng)
Direct·Labor
Efficiency Variance
Dlrect-Labor
Rate Varlance
Amount
January
E 800 F
February
4.900 F
98
March
u
2,000 u
02
100
Amount
Standard Cost, %
16°/o ..
April
May
3,800 F
40
.76
Ju ne
3,900 F
.78
July
August
4,200 F
5, 100 F
.84
1.02
September
4.800 F
96
October
November
5,700 F
4,200 F
1 14
84
December
4.300 F
86
E 5,000 U
Standard Cost, %
i .00°/o
u
u
12,800 u
7,500
1 50
9.700
1.94
20,100 u
2 56
4 02
17,000
u
u
340
28,500
38,000 u
5.70
7 60
u
u
7 40
37,000
42.000
60,000 u
840
12 00
u
1040
52.000
UKA's controller uses the following rule of thumb: lnvestigate all variances equal to or greater than f30,000.
which is 6 percent of standard cost.
Required
Problem 16.44
Kaizen Costing Chart
(LO B. 9}
a.
Which variances would have been investigated during the year? (Indicate month and type of variancc.)
b.
What characteristics ofthe variance pattern shoVv·n in the report should draw the controller's attention regardless ofthe usual investigation rule? Explain. Given these considerations, \\.:hich variances
would you have investigated? Why?
c.
Is it important to follow up on favorable variances, such as those shown in the report? Why?
d.
The controller believes that the firm 's direct-labor rate variance has a normal probability distribu-tion
\Vith a mean of zero anda standard deviation of f5,000. Prepare a statistical control chart and plot the
company 's direct-labor rate variances for each month. The critica] value is 1 standard dcvi-ation.
Which variances v.'ould have been investigated under this approach?
Melhourne Electronics Corporation manufactures TV sets in Australia, largely for the domestic market. The
company recently implemented a kaizen costing program with the goal of reducing the manufactur-ing cost
per television set by 1O percent during 20x 1, the first year of the kaizen effort. The cost per TV set at the end
of 20x0 was $500. The following table shows the average cost per television set estin1ated during each month
of 20xl. (On the day this problem was v.Titten, the Australian do llar \Vas equivalent in value to .5153 L'S
dollars.)
Month
Cost per Set
Month
July
Cost per Set
January ..
$500
February.
500
August
$485
470
March
495
September
460
April
492
October
460
May
490
November ..
450
June
485
December
440
Required
Prepare a kaizen costing chart for 20xl to show the results of Melbourne Electronics Corporation'-; first ycar
of kaizcn costing. In developing the chart use the following steps:
a.
b.
Draw and !abe! the axes of thc kaizen casting chart.
Indicare the currcnt year cost base and the kaizcn goal (cost-reduction ratc) on the chart.
c.
Lahel the horizontal axis vvith the months of 20x 1. Label the vertical axis with dollar a1nounts in
thc appropriate range.
Plot thc 12 monthly es ti mates of the average cost per TV set. Then draw a line connccting the cost
points that v.icrc plotted.
d.
Chapter 1(1 Standard Costíng. Variam.:e Analysi:-., and Kaizcn Costing
e.
Complete the chart with any othcr \abels necessary.
f.
Briefly explain the purpose of kaizen costing. How could a continuous quality-i1nprove1nent pro-gram,
coupled with the kaizcn costing effort implemented by Melbourne Electronics Corporation, help the firm
bcgin competing in the worldwide market?
Gibraltar Insurance Company compares actual results with standard costs. The standard direct-Jabor rates
are establü.hed each year when the annua1 plan is formulated and held constant for the entire year. The
standard direct-labor rates in effect for the current fiscal year and thc standard hours allowed for the actual
output of insurance claims for April in the claims department are shown in the following schedule:
Standard
Direct-Labor
Rate per hour
$8
Labor class 111
Labor class 11
7
Labor class 1.
5
Standard
Direct-Labor Hours
Allowed for Actual Output
500
685
Problem 16.45
Direct-Labor Mix and
Yield Variances
(Appendix)
(LO l O)
500
500
The wage rates for each labor class increased under the term~ of a new contraer. The standard \\'age rates
were not revised to reflect the new contract.
The actual direct-labor hours worked and the actual direct-labor rates per hour experienced for the
month of April were as follows:
Labor class 111
Labor class 11 .
Labor class 1
Actual
Direct-Labor
Rate per Hour
$8.50
7.50
5.40
Actual
Direct-Labor
Hours
550
650
375
Required
a.
Calculate the do llar amount of the total direct-labor variance for April for Gibraltar Insurance
Company, and break the total variance into the following components:
(1) Direct-labor rate and efficiency variances.
(2) Direct-labor mix and yield variances.
b.
Prepare a variance chart similar to Exhibir 16-8.
[CMA adapted]
Oakland Chemical Corporation manufactures a wide variety of chemical compounds and liquids for
industrial uses. The standard mix for producing a single batch of 500 gallons of doroxaline follows:
Input Chemical
Kalite
Salex.
Cralyn
Total
Quantity
(in gallons)
Cost
(per gallan)
Total Cost
100
300
225
$2.00
.75
1.00
$200
225
225
625
$650
A 20 percent loss in the doroxaline's liquid volume occurs during processing dueto evaporation. The finished
liquid is sold in 10-gallon bottles. Thus, the standard material cost for a 10-gallon bottle is $13.
The actual quantities and the cost of direct materials placed in production during November wcre as follows.
(Ali matcrials purchased are immediately placed into production during the saine pcriod.)
Input Chemical
Kalite
Salex
Cralyn
Total.
Quantity
(in gallons)
8.480
25.200
18.540
52.220
Total Cost
$17,384
17,640
16.686
$51.710
A total of 4.000 bottles ( 40,000 gallons) of doroxaline werc produccd during November.
Problem 16.46
Direct-Material Mix and
Yield Variances
(Appendix)
(LO IO)
686
Part V
Evaluating and Managing Performance
Required
a.
b.
Calculatc thc total direct-n1aterial variance for <loroxaline for lhe 1nonth of November, and then further
analyze the total variance by computing these variances:
(1)
Direct-matcrial price and quantity variances.
(2)
Direct-material mix and yield variances.
Prepare a variancc chart si1nilar to Exhibit 16-8.
Cases
Case 16.47~
Direct-Material and
Direct-Labor Variances;
Job-Order Casting:
Journal Entries
Manhattan Fashions, lnc., 1nanufactures inexpensive men's dress shirts, which are pro<luced in lots to fill each special
order. lts customcrs are department stores in various cities. ~anhattan Fashions scv.";; the particular store\ labels on
the shirts. During November the company \\'Orked on three orders. for vvhich the month 's job-cost records disclose
the folkl\.ving data.
Lot Number
Boxes in Lot
Material Used (yards)
Hours Worked
A43
1,000
24, 100
2,980
A44
1700 ..
40.440
5. 130
A45
1.200
28,825
2 890
The fo!hl\ving additional inforn1ation is available:
l.
The firm purchased 95,000 yards of material during November ata cost of S 106.400.
2.
Direct labor during November ainounted to $165,000. According to payroll records, production
employees v.·ere paid $15 per hour.
3.
There \Vas no \vork in process on Noven1ber 1. During November, lots A43 and A44 v.'ere
completed. AH material \Va~ issued for lot A45, which was 80 percent completed as to labor.
4.
The standard costs for a box of six shirts are as folknvs:
$ 26.40
Direct material
24yardsat$1.IO
Direct labor
3 hours at $14.70
44. 10
Manufacturing overhead
3 hours at $12 00
3600
$ 106 50
Standard cost per box
Required
a.
b.
Prepare a schedule con1puting the standard co~t of lo1s A43. A44. and A45 for Noven1ber.
For each lot produccd during Novemher. prepare a schedule showing the following:
(1)
Direct-n1aterial price variance.
(2)
Dircct-matcrial quantity variance.
(3)
Direct-labor efticicncy variance.
(4) Direct-labor rate variance.
lndicate \Vhether each variance is favorable or unfavorable.
c.
Prepare journal en tries to record each of the following events for Manhartan Fashions.
Purchasc of rnaterial.
lncurrence of direct-labor cost.
Addition of direct-material and dircct-labor cost to \Vork-in-Process Inventor~y.
Recording of direct-material and direct-labor variance~.
[CPA adapted]
Note: Cases ¡ 7.67 and 17.68 in Chap\1.T 17 includc more integrative cnst-variance analyses as well a~ more
~igniticant mamigcrial implication~.
Chapter 16 Standard Co~ting, Variancc Analysis. and Kaizen Costing
687
Clapton Guitar Co1npany manufactures acoustic guitars. The con1pany uses a standard, job-order costCase 16.48
accounting system in tv.·o production depart1nents. Highly skilled artisans build the wooden guitars in the
Comprehensive Problem
con~truction dcpartn1ent and coat them with several layers of lacquer. Then the units are transferred to the on Variance Analysis finishing
department. where the bridge of the guitar is attached and the strings are installed. The guitars also (LO 3, S. 7) are tuned and inspected
in the finishing dcpart1nent. The follov.·ing diagram depicts the production process:
Finishing department
(Bndge and stnngs attached,
gu1ldr lunPd <Jnd 1nspccted)
Fach finished guitar contains seven pounds of veneered wood. In addition, one pound of woo<l is
typically V•/asted in the production process. The veneered v, ood used in thc guitars has a standard price of S
12 per pound. Thc other parts needed to complete ea.ch guitar, su ch as the bridge and strings, cost $16 per
guitar. The labor standards for Clapton 's tv. 0 production departJnents follow:
1
1
Constn1ction department: 6 hours of direct labor at $20 per hour
Finishing depart1nent: 3 hours of direct labor at $15 per hour
The following additional infonnation pertains to the month of July:
1.
Neither production department had any beginning or ending work-in-process inventories.
2.
The co1npany had no beginning finished-goods inventory.
3.
Thc company actually produced 500 guitars and sold 300 guitars on account for $400 each.
4. The cornpany purchased 6,000 pounds of veneered \.vood ata pricc of $12.50 per pound. S.
Actual usage of veneered \vood was 4,500 pounds.
6.
Enough parts (bridges and strings) to finish 600 guitars wcrc purchased ata cost of $9,600.
7.
The construction departlnent used 2,850 direct-labor hours. The total direct-labor cost in the construction department was $54,150.
8.
The finishing department used 1.570 direct-labor hours. The total direct-labor cost in that departn1cnt \Vas $25,120.
9.
The finishing dcpartment had no dircct-material variances.
Required
a.
Prepare a schedule that computes the standard costs of direct material and direct labor in each production department.
b.
Prepare three exhibits that compute the July direct-1naterial and direct-labor variances in the construction department and the July dircct-labor variances in the finishing department. (Refer to
Exhibits 16-1 and 16-2 for guidance.)
c.
Prepare a cost variance report far July similar to that shown in Exhibit 16-3.
Refer to the preccding case.
Required
a.
Prepare journal cntries to record ali events listed for Clapton Guitar Con1pany during July.
Specifically, the journal entries shoul<l reflect the following events.
(1) Purchase of direct material.
(2) Use of direct material.
(3) lncurrence of direct-labor costs.
( 4)
Addition of production costs to the Work-in-Process Inventory account for each department.
(5) lncurrence of ali varianccs.
(6) Completion of 500 guitars.
(7) Sale of 300 guitars.
(8) Closing ali variance accounts to Cost of Goods Sold.
b.
Drav. T-accounts and post the joumal cntries preparcd in requirement (a). Assume that thc bcginning balance in al! accounts is zero.
1
Ca1e 16.49
Journal Entries under
Standard Casting
Continuation of Case
16.48
(LO 6)