Managerial Accounting Ch. 11 and 1.4

total standard cost per unit

1. after a company has established the standard quantity and price per unit of product, it can determine the total standard cost total standard cost = direct materials standard cost + direct labor standard cost + manufacturing overhead standard cost 2. the company prepares a standard cost card for each product 3. this card provides the basis for determining variances from standards

value chain

1. all business processes associated with providing a product or performing a service

business ethics

1. all employees within an organization are expected to act ethically in their business activities 2. given the importance of ethical behavior to corporations and their owners (stockholders), an increasing number of organizations provide codes of business ethics for their employees

reporting variances

1. all variances should be reported to appropriate levels of management as soon as possible -the sooner they know, the sooner they can evaluate problems and take corrective action 2. the form, content, and frequency of variance reports vary considerably among companies

the balanced scorecard

1. an approach that incorporates financial and non-financial measures in an integrated system that links performance measurement and a company's strategic goals -nearly 50% of the largest companies in the US are using the balanced scorecard approach 2. financial measures (measurement of dollars), such as variance analysis and return on investment (ROI), are useful tools for evaluating performance 3. however, many companies now supplement these financial measures with non-financial measures to better assess performance and anticipate future results

distinguishing between standards and budgets

1. both standards and budgets are predetermined costs, and both contribute to management planning and control 2. a standard is a unit amount 3. a budget is a total amount 4. a standard is the budgeted cost per unit of product -therefore, a standard is concerned with each individual cost component that makes up the entire budget

ideal vs normal standards

1. companies set standards at one of two levels: idea or normal 2. ideal standards: represent optimum levels of performance under perfect operating conditions 3. normal standards: represent efficient levels of performance that are attainable under expected operating conditions

standard for manufacturing overhead

1. companies use a standard predetermined overhead rate in setting the standard budgeted overhead costs ----------------------------- expected standard activity index 2. many companies employ activity-based costing to allocate overhead 3. normal capacity: the average activity output that a company should experience over the long run

in summary, the balanced scorecard does the following

1. employs both financial and non-financial measures 2. creates linkages so that high level corporate goals can be communicated all the way 3. provides measurable objectives for non-financial meausres 4. integrates all of the company's goals into a single performance measurement system, so that an inappropriate amount of weight will not be placed on any single goal

balanced scorecard perspectives: learning and growth

1. evaluates how well the company develops and retains its employees 2. this would include evaluation of such things as employee skills, employee satisfaction, training programs, and information dissemination 3. objectives: -reportable accidents -training hours -ethics violations -turnover rate -number of cross-trained employees

balanced scorecard perspectives: customer

1. evaluates the company from the viewpoint of people who buy its products or services 2. customer perspective: a viewpoint employed in the balanced scorecard that compares the company to competitors in terms of price, quality, product innovation, customer service, and other dimensions 3. objectives: -customer retention, response time per customer request, brand recognition, number of customers that would recommend

balanced scorecard perspectives: internal process

1. evaluates the internal operating processes critical to success 2. all critical aspects of the value chain--including product development, production, delivery, and after-sale service--are evaluated to ensure that the company is operating effectively and efficiently 3. objectives: percentage of defect-free products, stock-outs, labor utilization rates, wasted reduction, planning accuracy

accounting differences between budgets and standards

1. except in the application of overhead to jobs and processes, budget data are not journalized in cost accounting systems 2. standard costs may be incorporated into cost accounting systems 3. also a company may report its inventories at standard cost in its financial statements, but it would not report inventories at budgeted costs

advantages of standard costs

1. facilitate management planning 2. promote greater economy by making employees more "cost-conscious" 3. useful in setting selling prices 4. contribute to management control by providing basis for evaluation of cost control 5. useful in highlighting variances in management by exception 6. simplify costing of inventories and reduce clerical costs -these advantages only are realized when standard costs are carefully established and prudently used -using standards solely to place blame can have a negative effect on managers and employees -to minimize this effect, many companies offer wage incentives to those who meet the standards

lean manufacturing

1. focuses on reviewing all business processes in an effort to increase productivity and eliminate waste, all while continuing to improve quality

favorable variance

1. if actual costs are less than standard costs, the variance is favorable 2. has a positive connotation; it suggest efficiencies in incurring manufacturing costs and in using direct materials, direct labor, and manufacturing overhead 3. be aware: a favorable variance could be obtained by using inferior materials -a variance is not favorable if the company has sacrificed quality control standards

automated manufacturing processes

1. in addition, the focus on improving efficiency in the value chain has also resulted in adoption of automated manufacturing processes 2. many companies now use computer-integrated manufacturing -these systems often reduce the reliance on manual labor by using robotic equipment -this increases overhead costs as a percentage of total product costs 3. ABC resulted -increased accuracy in allocating overhead -increased efficiency in the value chain

income statement presentation of variances

1. in income statements prepared for management under a standard cost accounting system, cost of goods sold is stated at standard cost and the variances are disclosed separately 2. unfavorable variances increase cost of goods sold, while favorable variances decrease cost of goods sold 3. observe that each variance is shown, as well as the total net variance

just-in-time (JIT) inventory

1. inventory system in which goods are manufactured or purchased just in time for sale 2. also necessitates increased emphasis on product quality 3. because JIT companies do not have excess inventory on hand, they cannot afford to stop production because of defects or machine breakdowns

theory of constraints

1. involves identification of "bottlenecks" constraints within the value chain that limit a company's profitability -once a major constraint has been identified and eliminated, the company moves on to fix the next most significant constraint

causes of labor variance

1. labor price variances usually result from two factors: -paying workers different wages than expected -misallocation of workers 2. in companies where pay rates are determined by union contracts, labor prices don't vary often; when workers are not unionized, there is a much higher likelihood of such variances 3. the responsibility for these variances rests with the manger who authorized the wage change 4. misallocation of the workforce refers to using skilled workers in place of unskilled workers and vice versa -inexperienced worker instead of an experienced one will result in a favorable price variance because of the lower pay rate of the unskilled worker -an unfavorable price variance would result if a skilled worker were substituted for an inexperienced one 5. the production department generally is responsible for labor price variances resulting from misallocation of the workforce 6. labor quantity variances related to the efficiency of workers -generally can be traced to the production department -the causes of an unfavorable variance may be poor training, worker fatigue, faulty machinery, or carelessness -these causes are the responsibility of the production department -however, if the excess time Is due to inferior materials, the responsibility falls outside the production department

causes of materials variances

1. material variances can be related to internal and external factors 2. the investigation of materials price variance usually begins in the purchased department 3. to the extent that these factors are considered in setting the price standard, the purchasing department is responsible for any variances 4. many factors affect the price paid for raw materials: -quantity and cash discounts -the quality of the materials requested -the delivery method used 5. however, a variance may be beyond the control of the purchasing department -external factors -production department (rush order and have to pay a higher price for materials 6. the starting point for determining the causes of a significant materials quantity variance is in the production department -inexperienced workers, faulty machinery, or carelessness; production department 7. if the materials were inferior quality; purchasing department

service industries

1. much of the US economy has shifted toward an emphasis on services -today more than 50% of US workers are employed by service companies 2. how do service companies differ from manufacturing companies? -services are consumed immediately -the accounts used by service companies represent a subset of those used by manufacturers because service companies are not producing inventory -however, each service company needs to keep track of the costs of its services in order to know whether it is generating a profit

reporting variances: weekly report for each department

1. one approach is to prepare a weekly report for each department that has primary responsibility for cost control 2. under this approach, materials price variances are reported to the purchasing department, and all other variances are reported to the production department that did the work. 3. materials price variance report 4. the explanation column is completed after consultations with the purchasing department manager 5. in using variance reports, top management normally looks for significant variances -these may be judged on the basis of some quantitative measure, such as more than 10% of the standard or more than $1000

analyzing and reporting variances

1. one of the major management uses of standard costs is to identify variances from standards 2. variances: the difference between total actual costs and total standard costs -can also mean the difference between total budgeted and total actual costs 3. note that the variance is expressed in total dollars, not on a per unit basis

causes of manufacturing overhead variances

1. one reason for an overhead variance relates to over-or under spending on overhead items 2. companies should investigate any spending variances to determine whether they will continue in the future 3. generally, the responsibility for these variances rests with the production department 4. the overhead variance can also result from the inefficient use of overhead 5. overhead can also be under utilized because of a lack of sales orders (sales department)

standard costs

1. predetermined unit costs which companies use as measures of performance 2. we primarily focus on manufacturing, but standard costs also apply to many types of service businesses as well

enterprise resource planning (ERP) systems

1. provide a comprehensive, centralized, integrated source of information to manage all major business processes--from purchasing, to manufacturing, to sales to HR

direct labor variance

1. same as determining the direct materials variances total labor variance= (AHxAR) - (SHxSR) 2. the total labor variance is caused by differences in the labor rate or difference in labor hours total labor variance= labor price variance + labor quantity variance 3. labor price variance= (AHxAR) - (AH x SR) 4. labor quantity variance = (AHxSR) - (SHxSR)

code of ethical standards

1. sarbanes-oxley act (SOX) -from business scandals -helps prevent lapses in internal control -top management certifies the financial statements -top management must certify that the company maintains an adequate system of internal controls to safeguard the company's assets -company's board of directors must be comprised entirely of independent members (non-employees) and must contain at least one financial expert -increases penalties from misconduct -IMA (institute of management accountants) has developed a code of ethical standards (guidance for managerial accountants)

application of ideal and normal standards

1. some managers believe ideal standards will stimulate workers to ever-increasing improvement, while others believe it can lower morale because it can be difficult, if not impossible to achieve 2. very few companies use ideal standards 3. most companies use normal standards: properly set, normal standards should be rigorous but attainable 4. normal standards allow for rest periods, machine breakdowns, and other "normal" contingencies in the production process

creating proper incentives

1. sometimes complex systems to monitor, control, and evaluate the actions of managers may lead to unethical behavior 2. need to be effective and realistic

standard costs may be used in financial statements prepared for stockholders and other external users

1. standard costs may be used in financial statements prepared for stockholders and other external users 2. the costing of inventories at standard costs is in accordance with GAAP when there are no significant differences between actual costs and standard costs 3. however, if there are significant differences between actual and standard costs, the financial statements must report inventories and cost of goods sold at actual costs 4. it is also possible to show the variance in an income statements prepared in the variable costing (CVP) format -to do so, it is necessary to analyze the overhead variances into variable and fixed components

Introduction

1. standards are common in business 2. regulations are government standards -Fair Labor Standards Act -Equal Employment Opportunity Act -many environmental standards 3. in managerial accounting, we have standard costs

sustainable business practices

1. sustainable business practices present numerous issues for management and managerial accountants 2. first, companies need to decide what items need to be measured, generally those that are of utmost importance to its stakeholders 3. then, for each item identified, the company determines measurable attributes that provide relevant information regarding the company's performance with regard to that item 4. finally, the company needs to consider the materiality of the item -the cost of measuring these attributes, and the reliability of the measurements 5. global reporting initiatives have offered some guidance in reporting the sustainable business practices

balanced scorecard perspectives

1. the balanced scorecard evaluates company performance from a series of "perspectives" 2. the four most common -financial -customer -internal process -learning and growth

introduction to 1.4

1. the business environment never stands still 2. regulations are always changing, global competition continues to intensify, and technology is a source of constant change 3. in this rapidly changing world, managerial accounting needs to continue to innovate in order to provide managers with the information they need

direct labor price standard (also called direct labor rate standard)

1. the direct labor price standard: is the rate per hour that should be incurred for direct labor 2. this standard is based on current wage rates, adjusted for anticipated changes such as cost of living adjustments (COLAs) 3. the price standard also generally includes employer payroll taxes and fringe benefits

direct materials price standard

1. the direct materials price standard: the cost per unit of direct materials that should be incurred 2. this standard is based on the purchasing department's best estimate of the cost of raw materials 3. this cost is frequently based on current purchase prices 4. the price standard also includes an amount for related costs such as receiving, storing, and handling

direct materials quantity standard

1. the direct materials quantity standard: the quantity of direct materials that should be used per unit of finished goods 2. expressed as a physical measure, such as pounds, barrels, or board feet 3. in setting the standard, management considers both the quality and quantity of materials required to manufacture the product 4. the standard includes allowances for unavoidable waste and normal spoilage

corporate social responsibility

1. the efforts of a company to employ sustainable business practices with regard to its employees, society, and the environment 2. sometimes referred to as the triple bottom line: -because it evaluates a company's performance with regard to people, planet, and profit

balanced scorecard perspectives: financial

1. the most traditional view of the company 2. financial perspective: a viewpoint employed in the balanced scorecard to evaluate a company's performance using financial measures 3. objectives: return on assets, net income, credit rating, share price, profit per employee

within each perspective, the balanced scorecard identifies objectives that contribute to attainment of strategic goals

1. the objectives are linked across perspectives in order to tie performance measurement to company goals 2. the financial perspective objectives are normally set first, and then objectives are set in the other perspectives in order to accomplish the financial goals 3. through this linked process, the company can better understand how to achieve its goals, and what measures to use to evaluate performance

setting standard costs

1. the setting of standard costs to produce a unit of product is a difficult task 2. it requires input from all persons who have responsibility for costs and quantities -for direct materials: management consults purchasing agents, product managers, quality control engineers, and production supervisors -for direct labor: managers obtain pay rate data from the payroll department. industrial engineers generally determine the labor time requirement 3. the managerial accountant provides important input for the standard-setting process by accumulating historical cost data and by knowing how costs respond to changes in activity levels

direct labor quantity standard (direct labor efficiency standard)

1. the time that should be required to make one unit of the product 2. this standard is especially critical in labor-intensive companies 3. allowances should be made in this standard for rest periods, clean up, machine setup, and machine downtime

manufacturing voerhead variances

1. the total overhead variances: the difference between actual overhead costs and overhead costs applied based on the standard hours allowed for the amount of goods produced 2. to find the total overhead variance in a standard costing system, we determine the overhead costs applied based on standard hours allowed 3. standard hours allowed: the hours that should have been worked for the units produced total overhead variance = actual overhead - overhead applied 4. the overhead variance is generally analyzed through a price and a quantity variance -the name usually given to the price variance: overhead controllable variance -the quantity variance: overhead volume variance

how standard costs are effective

1. to be effective in controlling costs, standard costs need to be current at all times -thus, standards are under continuous review 2. circumstances that warrant revision of a standard include changed wage rates resulting from a new union contract, a change in product specifications, or the implementation of a new manufacturing method

to establish the standard cost

1. to establish the standard cost of producing a product, it is necessary to establish standards for each manufacturing cost element: direct materials, direct labor, and manufacturing overhead 2. the standard for each element is derived from the standard price to be paid and the standard quantity to be used

total quality management

1. to reduce defects in finished products, with the goal of zero defects

unfavorable variance

1. when actual costs exceed standard costs, the variances is unfavorable 2. has a negative connotation; it suggests that the company paid too much for one or more of the manufacturing cost elements or that it used the elements inefficiently

Ch. 11

Standard Cost and Balance

standard direct labor cost per unit

standard direct labor cost per unit = standard direct labor rate x standard direct labor hrs

standard direct materials cost per unit

standard direct materials cost per unit = standard direct materials price x the standard direct materials quantity

standard manufacturing overhead cost per unit

standard manufacturing overhead cost per unit = predetermined overhead rate x the activity index quantity standard

total materials or labor variance matrix

total materials or labor variance AQ x AP AQ x SP SQ x SP (AH x AR) (AH x SR) (SH x SR) price variance materials variance 1. note that the left side of the matrix is actual cost and the right side is standard cost 2. the only additional element you need in order to compute the price and quantity variance is the middle element, the actual quantity at the standard price

direct materials variance

total materials variance = (AQ x AP) - (SQxSP) 1. the total materials variance could be caused by differences in the price paid for the materials or by differences in the amount of materials used total materials variance = materials price variance + materials quantity variance 2. the materials price variance = (AQxAP) - (AQxSP) 3. materials quantity variance = (AQ x SP) - (SQ x SP) 4. when the matrix is used, a company computes the amounts using the formulas for each cost element first and then computes the variances

total variance

total variance = materials variance + labor variance + overhead variance 1. to interpret a variance, you must analyze its components -variances can result from differences related to the cost of materials, labor, or overhead 2. the materials variance and the labor variance are the sum of variances resulting from price differences and quantity differences