Chapter 11 Standard Cost and Operating Performance Measures STANDARD COSTS VARIABLE MANUFACTURING OVERHEAD VARIANCES Management by exception

on An approach that emphasizes focusing on those areas of responsibility where goals and expectations are not being met. Variable overhead efficiency variance The difference between the actual level of activity (direct labor-hours, machine-hours, or some other base) and the standard activity allowed, multiplied by the variance part of the predetermined overhead rate. Variable overhead rate variance The difference between the actual variable overhead cost incurred during a period and the standard cost that should have been incurred based on the actual activity of the period. Formulae: AH actual hours AR actual rate SR standard rate SH standard hours allowed for actual output Variable overhead rate variance = = (AH x AR) (AH x SR) = AH (AR SR) Variable overhead efficiency variance = (AH x SR) (SH x SR) = SR (AH SH)

OPERATING PERFORMANCE MEASURES Delivery cycle time The elapsed time from receipt of a customer order to when the completed goods are shipped to the customer. Inspection time The amount of time spent ensuring that the product is not defective. Manufacturing cycle efficiency (MCE) Process (value-added) time as a percentage of throughput time. Move time The time required to move materials or partially completed products from workstation to workstation. Process time The amount of time work is actually done on the product. Queue time The amount of time a product spends waiting to be worked on, to be moved, to be inspected, or to be shipped. Throughput (Manufacturing cycle) time The amount of time required to turn raw materials into completed products. Formula: Manufacturing cycle efficiency (MCE) = Value-added time (Process time) Throughput (Manufacturing cycle) time

EXERCISE 116 Setting Standards [LO1] Victoria Chocolates, Ltd., makes premium handcrafted chocolate confections in London. The owner of the company is setting up a standard cost system and has collected the following data for Standard Costs and Operating Performance Measures 479 one of the companys products, the Empire Truf e. This product is made with the nest white chocolate and various llings. The data below pertain only to the white chocolate used in the product (the currency is stated in pounds denoted here as ): Material requirements, kilograms of white chocolate per dozen truf es . 0.70 kilograms Allowance for waste, kilograms of white chocolate per dozen truf es. . . 0.03 kilograms Allowance for rejects, kilograms of white chocolate per dozen truf es . . 0.02 kilogram s Purchase price, nest grade white chocolate . . . . . . . . . . . . . . . . . . . . . 7.50 per kilogram Purchase discount. .. . . . . 8% of purchase price Shipping cost from the supplier in Belgium . . . . . . . . . . . . . . . . . . . . . . . 0.30 per kilogram Receiving and handling cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.04 per kilogram Required: 1. Determine the standard price of a kilogram of white chocolate. 2. Determine the standard quantity of white chocolate for a dozen truf es. 3. Determine the standard cost of the white chocolate in a dozen truf es. EXERCISE 111 Setting Standards; Preparing a Standard Cost Card [LO1] Martin Company manufactures a powerful cleaning solvent. The main ingredient in the solvent is a raw material called Echol. Information concerning the purchase and use of Echol follows: Purchase of Echol Echol is purchased in 15gallon containers at a cost of $115 per container. A discount of 2% is offered by the supplier for payment within 10 days, and Martin Company takes all discounts. Shipping costs, which Martin Company must pay, amount to $130 for an average shipment of 100 15-gallon

containers of Echol. Use of Echol The bill of materials calls for 7.6 quarts of Echol per bottle of cleaning solvent. (Each gallon contains four quarts.) About 5% of all Echol used is lost through spillage or evaporation (the 7.6 quarts above is the actual content per bottle). In addition, statistical analysis has shown that every 41st bottle is rejected at nal inspection because of contamination. Required: 1. Compute the standard purchase price for one quart of Echol. 2. Compute the standard quantity of Echol (in quarts) per salable bottle of cleaning solvent. 3. Using the data from (1) and (2) above, prepare a standard cost card showing the standard cost of Echol per bottle of cleaning solvent. EXERCISE 115 Measures of Internal Business Process Performance [LO5] Management of Mittel Rhein AG of Kln, Germany, would like to reduce the amount of time between when a customer places an order and when the order is shipped. For the rst quarter of operations during the current year the following data were reported: Inspection time . . . . . . . . . . . . . . . . . . 0.3 days Wait time (from order to start of production) . . . . . 14.0 days Process time . . . . . . . . . . . . . . . . . . . . . 2.7 days Move time . . .. . . . . . . . . . . . . . . . . . . . 1.0 days Queue time . . . . . . . . . . . . . . . . . . . . . . 5.0 days Required: 1. Compute the throughput time. 2. Compute the manufacturing cycle ef ciency (MCE) for the quarter. 3. What percentage of the throughput time was spent in non-value-added activities? 4. Compute the delivery cycle time. 5. If by using Lean Production all queue time during production is eliminated, what will be the new MCE?