Standard A standard is a

performance.

benchmark or norm for measuring

Standard are widely used in managerial accounting where

they relate to the quantity & cost of inputs in manufacturing goods & providing services.
Quantity standards specify how much of an input should be

used to make a product or provide a service.

Cost or price standards specify how much should be paid for

each unit of input.

Standard Cost
A standard cost is a planned or pre-determined cost

which is calculated from managements standard of efficient operation & the relevant necessary expenditure.

Standard Costing
Standard costing is the preparation of standard costs

and applying them to measure the variations from actual costs and analyzing the causes of variations

with a view to maintain maximum efficiency in

production.
It can be used as a process of measuring and

correcting actual performance to ensure that the plans are properly set and implemented

 Establishing budgets.

Purpose of Standard Costing

Controlling costs, directing and motivating employees and measuring efficiencies. Promoting possible cost reduction. Simplifying costing procedures and expediting cost reports. Assigning costs to materials, work in process, and finished goods inventories. Forming the basis for establishing bids and contracts and for setting sales prices

Procedures of standard costing system

Set the predetermined standards for sales margin and production costs

Collect the information about the actual performance

Compare the actual performance with the standards to arrive at

the variance

Analyze the variances and ascertaining the causes of variance Take corrective action to avoid adverse variance Adjust the budget in order to make the standards more realistic

Functions of standard costing system

Valuation

Assigning the standard cost to the actual output

Planning

Use the current standards to estimate future sales

volume and future costs

Controlling

Evaluating performance by determining how efficiently the current operations are being carried out

Functions of standard costing system

Motivation
Notify the staff of the managements expectations

Setting of selling price

Ideal Standard Ideal standards are those that can be attained only
under the best circumstances. These can be achieved through the best possible combination of factors i.e. maximum output at minimum cost. Assumption:
Extremely tight & do not provide for waste & inefficient in any forms. No material is wasted. No units are spoiled. No idle time. Operators work at predetermined speed. The available capacity is fully utilized

 Practical standards are those standards that are tight but attainable. Assumption:

Practical Standard

Allow for normal machine downtime Employee rest period. Practical standards are used in Using signaling abnormal condition Forecasting cash flows Planning inventory

 Past records of purchase prices and input usage can help in

Setting Standard

setting standards.
Setting price and quantity standards requires the combined

expertise of all persons who have responsibility over input

prices and over effective use of inputs.
The standards should be designed to encourage efficient

future operations, not a repetition of past inefficient operations.

Setting Standard
Standard must be established for a definite period of

time so that they can be effective in performance evaluation, control & analysis of costs.
Standards are developed for

Materials Labor Overhead

Connotation of Standard
Standard Price Quantity Material Price Quantity Labor Rate Hour Overhead Rate Hour

Object Matrix
AQ=Actual Quantity AP=Actual Price SQ=Standard Quantity SP=Standard Price

Object AP SP

AQ AQ*AP AQ*SP

SQ -SQ*SP

 Purchase Price Freight

Factors in Setting Price Standard

Receiving & handling Purchase discount

Factors in Setting Quantity Standard

Basic materials input i.e. materials

requirement as specified in the bill of

material.

Allowance for waste & spoilage

Allowances for rejecting defective materials Evaporation Leakage

Factors in Setting Rate Standard

Basic wage rate per hour Employment taxes Fringe benefit Union negotiation

Experience of the worker

Factor in Setting Time(Hour) Standard

Basic labor time

Allowance for breaks & personal needs

Allowance for cleanup & machine downtime

Allowance for reject

Allowance for set-up time

Allowance for fatigue

Waiting time of operator

Variance analysis

A variance is the difference between the

standards and the actual performance

When the actual results are better than the expected results, there will be a favorable variance (F).

If the actual results are worse than the expected results, there will be an adverse variance (A).

Profit variance
Selling and Total production administrative Cost variance Cost variance Sales Variance

Sales variance based Sales Variance on turnover based on Margin

Materials cost variance

Labor Cost variance

Variable Overhead variance

Fixed Overhead variance

Overhead variance

Three types of cost variance

Material cost variance Labor cost variance Overheads variance Variable overheads variance Fixed overheads variance

Materials cost variance (AQ*AP SQ*SP)

Actual Units Produced*SQ P/U

Material Price variance AQ*AP AQ*SP

Material Usage Variance AQ*SP SQ*SP

Mix Variance

Yield Variance

Labor Cost Variance AH*AR SH*SR

Actual Units Produced*SH P/U

Rate Variance AH*AR AH*SR

Efficiency Variance AH*SR SH*SR

Idle Time Variance SR*Hours Lost

Mix Variance

Yield Variance

Overhead Cost Variance

Variable Overhead Variance

Fixed Overhead Variance

Variable Overhead variance (AH*AR SH*SR)

VO Expenditure/Spending/ Budget Variance AH*AR AH*SR

VO Efficiency Variance AH*SR SH*SR

Actual Units Produced*SVMO P/U

Fixed Overhead variance AOC SH*SFOR

Fixed O/H Expenditure Variance AFOH - SFOH

Fixed O/H Volume variance (AP SP)*SFOHR PU

Calender variance

Efficiency variance

Capacity Variance

Sales Value Variance (AQS*ASP SQS*SSP)

Sales Price Variance ASP* AQS SSP*AQS

Sales Volume Variance AQS *SSP SQS*SSP

Sales Mix Variance

Sales Quantity Variance

Total sales margin variance (Actual Profit Budgeted Profit)

Sales Margin Price Variance (AMPU SSMPU)*AQ

Sales Margin Volume Variance (AQ SQ)*SSMPU

Sales Margin Mix Variance

Sales Margin Quantity Variance

(ASPPU SCPU)

(SSPPU SCPU)

Problem
ZB Company produce a single product. Variable manufacturing overhead is applied to products on the basis of direct-labor-hours. The standard costs for one unit of product are as under:
Standard Quantity Or Hour 3 Pound 2.5 Hours
2.5 Hours

Standard Price or Rte

Tk. 4

Standard Cost
Tk.12

Direct Materials

Direct Labor
Variable Manufacturing O/H

Tk. 14
Tk. 3

Tk.35
Tk. 7.5 Tk. 54.50

Total Standard Cost

During June, 2011, 2000 units were produced. The costs associated with Junes operations were as under Actual Quantity Or Hour Direct Materials Direct Labor 6500 Pound 5400 Hours 5400 Hours Actual Price or Rate Tk. 3.80 Tk. 13.75 Tk. 2.85 Actual Cost Tk.24700 Tk.74250 Tk.15390

Variable Manufacturing O/H

Requirements: 1. Compute & Comment on the material variance if I. All of the material purchased was used during June. II. 5000 units of materials is used during the period of to produce 1600 units of products 2. Compute & Comment on the Labor variance. 3. Compute & Comment on Manufacturing Overhead Variance.

Requirement: 01 (i) Material Price Variance = (AP SP)*AQ = (Tk.3.80 Tk.4)*6500 pounds = Tk.1300 F Data Derived: Standard Quantity (SQ) = SQ Per Unit * Units Produced = 3 Pounds * 2000 Units = 6000 Pounds Material Quantity Variance = (AQ SQ)*SP = (6500 6000)* Tk.4 = Tk.2000 U Since actual quantity is more than standard quantity to produce 2000 units of product, material quantity variance is unfavorable.

Requirement: 01 (ii) In this situation material price variance is not computed. This is because it is calculated when materials are purchased by purchase manager. Here only quantity variance will be calculated. Here AQ = 5000 units SQ = 3 pounds * 1600 units = 4800 pounds Material Quantity Variance = (AQ SQ)*SP = (5000 4800)* Tk.4 = Tk.800 U Since actual quantity is more than standard quantity to produce 1600 units of product, material quantity variance is unfavorable.

Requirement: 02 Labor Rate Variance = (AR SR)*AH = (Tk13.75 Tk.14)*5400 hours = Tk.1350 F Data Derived: Standard Hour (SH) = SH Per Unit * Units Produced = 2.5 hrs * 2000 Units = 5000 Hours Labor Efficiency Variance = (AH SH)*SR = (5400 5000)* Tk.14 = Tk.5600 U Since actual hours is more than standard hours to produce 2000 units of product, so material quantity variance is unfavorable.

Requirement: 03 Variable O/H Variance = (AR SR)*AH = (Tk.2.85 Tk.3)*5400 hours = Tk.810 F Data Derived: Standard Hour (SH) = SH Per Unit * Units Produced = 2.5 hrs * 2000 Units = 5000 Hours Variable O/H Efficiency Variance = (AH SH)*SR = (5400 5000)* Tk.3 = Tk.1200 U Since actual hours is more than standard hours to produce 2000 units of product, so material quantity variance is unfavorable.

Reasons for variances

Material price variance

Price changes in market conditions

Change in the efficiency of purchasing dept. to obtain

good terms from suppliers

Purchase of different grades or wrong types of materials

Non-availability of quantity discount

Freight cost changes & changes in purchasing & storekeeping costs.

Reasons for variances

Materials usage variance

More effective use of materials/ wastage arising from the efficient production process

Purchase of different grade or wrong types of materials

Wastage by the staff

Change in production methods

Poor material handling

Reasons for variances

Labor rate variance

Non-controllable market changes in the basic wage rate

Use of higher/lower grade of workers Unexpected overtime allowance paid Labor strike leading to utilization of unskilled help Change in labor rate within industry

Reasons for variances

Labor efficiency variance Purchase of different grade or wrong types of materials Breakdown of machinery High/low labour turnover Changes in production method Introduction of new machinery

Poor working condition Assignment wrong type of worker to work Adequacy of supervision Changes in working condition Change in motivation methods Poor supervision Insufficient training of workers

Reasons for variances

Variable overheads expenditure variance

It may be caused by the non-controllable change in

the price level of indirect wages or utility rates since

the predetermined rate is set

It is meaningless to interpret this kind of variance on

its own. One should look various components of the

fixed overheads

Reasons for variances

Variable overheads efficiency variance

Both the variable overheads and direct

labor cost vary with the direct labor hours

worked

Reasons for variances

Fixed overheads expenditure It is meaningless to interpret this kind of variance on its own. It may be caused by the change in the price levels of rent, rates and other fixed expenses

Reasons for variances

Fixed overhead volume variance

When the level of activity is higher than

the budgeted level, there is a favourable

variance

Reasons for variances

Sales margin price variance Change in the pricing strategies of the company Response to the change of pricing policies of its competitors Higher profit margin with growing demand for the product Lower profit margin for simulating sales

Reasons for variances

Sales margin volume variance

Change in prices and demand

Change in the market share of its competitors

Responsibility for cost Variance

MPV

Purchasing Agent/Manager

MQV Plant Superintendent, Departmental Supervisor, Production Manager, Machine Operator LRV LEV OSV OVV HRD, Departmental Supervisor, Plant Superintendent Plant Superintendent, Departmental Supervisor, Production Manager, Machine Operator

Balanced Score Card

The Balanced Scorecard (BSC) was published in 1992 by Robert Kaplan and David Norton.

A Balanced scorecard consists of an integrated set of

performance measures that are derived from the companys strategy & that support the companys strategy throughout the organization. The Balanced Scorecard evaluates the firm's efforts for future improvement using process, customer, and learning and growth metrics.

Balanced Score Card

The term "scorecard" signifies quantified performance measures and "balanced" signifies that the system is

balanced between:
short-term objectives and long-term objectives

financial measures and non-financial measures

lagging indicators and leading indicators internal performance and external performance perspectives

Balanced Score Card

The Balanced Scorecard is a management system that maps an organization's strategic objectives into

performance metrics in four perspectives:

financial performance,

internal processes,
customers, and learning and growth.

Balanced Score Card Framework

Financial Performance Objectives Measures Targets Initiative Customers Objectives Measures Targets Initiative Internal Process Objectives Measures Targets Initiative

Strategy
Learning & Growth Objectives Measures Targets Initiative

Balanced Score Card

The financial perspective addresses the question of

how shareholders view the firm and which financial goals are desired from the shareholder's perspective.

The specific goals depend on the company's stage in the

business life cycle.

Balanced Score Card

The customer perspective addresses the question of

how the firm is viewed by its customers and how well the firm is serving its targeted customers in order to meet the financial objectives.

Generally, customers view the firm in terms of time,

quality, performance, and cost.

Balanced Score Card

Internal

business process objectives address the

question of

which processes are most critical for satisfying

customers and shareholders.

These are the processes in which the firm must

concentrate its efforts to excel.

Balanced Score Card

Learning and growth metrics address the question of

how the firm must learn, improve, and innovate in order to meet its objectives.

Much of this perspective is employee-centered.

Balanced Score Card

Within each of the Balanced Scorecard financial, customer, internal process, and learning perspectives, the firm must define the following:

Strategic objectives - what the strategy is to achieve in

that perspective.

Measures - how progress for that particular objective

will be measured. Targets - the target value sought for each measure. Initiatives - what will be done to facilitate the reaching of the target.

The Process of Building A Balanced Score Card

The Process of Building A Balanced Scorecard

Step-one: Assessment

Assessment of the organizations Mission & Vision,

challenges (pains), enablers & values.

Preparing

change

management

plan

for

the

organization & conducing a focused communication

workshop to identify messages, media outlets, timing, &

messengers.

The Process of Building A Balanced Scorecard

Step Two: Strategy

In Step Two, elements of the organizations strategy, including Strategic Results, Strategic Themes, and Perspectives, are developed by workshop participants to focus attention on customer needs and the organizations

value proposition.

The Process of Building A Balanced Scorecard

Step Three: Objectives In Step Three, the strategic elements developed in Steps One and Two are decomposed into Strategic Objectives, which are the basic building blocks of strategy and define the organization's strategic intent. Objectives are first initiated and categorized on the Strategic Theme level, categorized by Perspective, linked in cause-effect linkages (Strategy Maps) for each Strategic Theme, and then later merged together to produce one set of Strategic Objectives for the entire organization.

The Process of Building A Balanced Scorecard

Step Four: Strategy Map

In Step Four, the cause and effect linkages between the

enterprise-wide Strategic Objectives are formalized in an enterprise-wide Strategy Map.

The previously constructed theme Strategy Maps are merged into an overall enterprise-wide Strategy Map that shows how the organization creates value for its customers and stakeholders.

The Process of Building A Balanced Scorecard

Step Five: Performance Measures

In Step Five, Performance Measures are developed for

each of the enterprise-wide Strategic Objectives.

Leading and lagging measures are identified, expected

targets and thresholds are established, and baseline and benchmarking data is developed.

The Process of Building A Balanced Scorecard

Step Six: Initiatives

In Step Six, Strategic Initiatives are developed that support

the Strategic Objectives.

To build accountability throughout the organization,

ownership of Performance Measures and Strategic

Initiatives is assigned to the appropriate staff and

documented in data definition tables.

The Process of Building A Balanced Scorecard

Step Seven: Automation In Step Seven, the implementation process begins by applying performance measurement software to get the right performance information to the right people at the right time. Automation adds structure and discipline to implementing the Balanced Scorecard system, helps transform disparate corporate data into information and knowledge, and helps communicate performance information. In short, automation helps people make better decisions because it offers quick access to actual performance data.

The Process of Building A Balanced Scorecard

Step Eight: Cascade In Step Eight, the enterprise-level scorecard is cascaded down into business and support unit scorecards, meaning the organizational level scorecard (the first Tier) is translated into business unit or support unit scorecards (the second Tier) and then later to team and individual scorecards (the third Tier). Cascading translates high-level strategy into lower-level objectives, measures, and operational details. Cascading is the key to organization alignment around strategy. Team and individual scorecards link day-to-day work with department goals and corporate vision.

The Process of Building A Balanced Scorecard

Cascading is the key to organization alignment around

strategy. Performance measures are developed for all objectives at all organization levels.
As the scorecard management system is cascaded down

through

the

organization,

objectives

become

more

operational and tactical, as do the performance measures. Accountability follows the objectives and measures, as

ownership is defined at each level.

An emphasis on results and the strategies needed to produce

results is communicated throughout the organization.

The Process of Building A Balanced Scorecard

Step Nine: Evaluation

In Step Nine, an Evaluation of the completed scorecard is

done. During this evaluation, the organization tries to

answer questions such as, Are our strategies working?,

Are we measuring the right things?, Has our environment changed? and Are we budgeting our money strategically?.

Benefits of the Balanced Scorecard system

Translation of strategy into measurable parameters.

Communication of the strategy to everybody in the firm.

Alignment of individual goals with the firm's strategic

objectives - the BSC recognizes that the selected

measures influence the behavior of employees.

Feedback of implementation results to the strategic

planning process.

Pitfall of the Balanced Scorecard system

Lack

of a well-defined strategy: The Balanced

Scorecard relies on a well-defined strategy and an understanding of the linkages between strategic

objectives and the metrics. Without this foundation,

the implementation of the Balanced Scorecard is

unlikely to be successful.

Pitfall of the Balanced Scorecard system

Using only lagging measures: Many managers believe

that they will reap the benefits of the Balanced

Scorecard by using a wide range of non-financial

measures. However, care should be taken to identify

not only lagging measures that describe past

performance, but also leading measures that can be used to plan for future performance.

Pitfall of the Balanced Scorecard system

Use of generic metrics: It usually is not sufficient simply to adopt the metrics used by other successful firms. Each firm should put forth the effort to identify the measures that are appropriate for its own strategy and competitive position.