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### Financial%20&%20 management%20accounting%20 %20chapter%2022%20(standard%20costing%20&%20variance%20analysis)[1]

1. 1. Chapter 22 Standard Costing and Variance Analysis Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University
2. 2. Learning Objectives 1. Define standard costs and describe how managers use standard costs in the management cycle. 2. Explain how standard costs are developed and compute a standard unit cost. 3. Prepare a flexible budget and describe how variance analysis is used to control costs. Copyright © Houghton Mifflin Company. All rights reserved. 22–2
3. 3. Learning Objectives (cont’d) 4. Compute and analyze direct materials variances. 5. Compute and analyze direct labor variances. 6. Compute and analyze manufacturing overhead variances. 7. Explain how variances are used to evaluate managers’ performance. Copyright © Houghton Mifflin Company. All rights reserved. 22–3
4. 4. Standard Costing • Objective 1 – Define standard costs and describe how managers use standard costs in the management cycle Copyright © Houghton Mifflin Company. All rights reserved. 22–4
5. 5. Standard Costing … is a method of cost control that includes a measure of actual performance and a measure of the difference, or variance, between standard and actual performance Copyright © Houghton Mifflin Company. All rights reserved. 22–5
6. 6. Standard Costs • Realistic estimates of costs – Based on analysis of both past and projected operating costs and conditions • Provide a predetermined performance level for the standard costing method • Usually stated in terms of cost per unit Copyright © Houghton Mifflin Company. All rights reserved. 22–6
7. 7. Standard Costs (cont’d) • Based on – Past costs – Engineering estimates – Forecasted demand – Worker input – Time and motion studies – Type and quality of direct materials Copyright © Houghton Mifflin Company. All rights reserved. 22–7
8. 8. Standard Costing • How the standard costing method differs from the normal and actual costing methods Product Cost Elements Direct Materials Direct Labor Manufacturing Overhead Standard Costing Estimated costs Estimated costs Estimated costs Copyright © Houghton Mifflin Company. All rights reserved. Normal Costing Actual costs Actual costs Estimated costs Actual Costing Actual costs Actual costs Actual costs 22–8
9. 9. Standard Costs and the Management Cycle • Planning – Managers use standard costs to • Develop budgets – Direct materials – Direct labor – Variable manufacturing overhead • Establish goals for product costing Copyright © Houghton Mifflin Company. All rights reserved. 22–9
10. 10. Standard Costs and the Management Cycle (cont’d) • Executing – Managers use standard costs to • Apply dollar, time, and quality standards to work • Collect actual cost data Copyright © Houghton Mifflin Company. All rights reserved. 22–10
11. 11. Standard Costs and the Management Cycle (cont’d) • Reviewing – Managers compare standard and actual costs • Compute variances – Provide measures of performance that can be used to control costs and evaluate managers – Analyze significant variances to determine cause » Unfavorable variances may reveal operating problems that require correcting » Favorable variances may indicate favorable practices that should be implemented elsewhere Copyright © Houghton Mifflin Company. All rights reserved. 22–11
12. 12. Standard Costs and the Management Cycle (cont’d) • Reporting – Managers use standard costs to report on • Operations • Managers’ performance Copyright © Houghton Mifflin Company. All rights reserved. 22–12
13. 13. Standard Costing, Variance Analysis, and the Management Cycle 22–13
14. 14. The Relevance of Standard Costing in Today's Business Environment • Manufacturing companies – Increased automation • Significant decrease in direct labor cost – Corresponding decline in importance of labor-related standard costs and variances • Many companies now apply standard costing only to direct materials and manufacturing overhead • Service organizations – Use standard costing for direct labor and service overhead costs Copyright © Houghton Mifflin Company. All rights reserved. 22–14
15. 15. Discussion Q. What is the main difference between the standard costing and normal costing methods? A. The standard costing method uses estimated costs for direct materials and direct labor, whereas the normal costing method uses actual costs for these items The methods are similar in that both use estimated costs for manufacturing overhead Copyright © Houghton Mifflin Company. All rights reserved. 22–15
16. 16. Computing Standard Costs • Objective 2 – Explain how standard costs are developed and compute a standard unit cost Copyright © Houghton Mifflin Company. All rights reserved. 22–16
17. 17. Computing Standard Costs • Fully integrated standard costing system – Uses standard costing for all elements of product cost • Direct materials • Direct labor • Manufacturing overhead – Inventory accounts and Cost of Goods Sold account • Maintained and reported in terms of standard costs • Standard unit costs used to compute account balances • Actual costs recorded separately – Actual and standard costs can then be compared Copyright © Houghton Mifflin Company. All rights reserved. 22–17
18. 18. Computing Standard Costs (cont’d) • Six elements of a standard unit cost for a manufactured product 1. Price standard for direct materials 2. Quantity standard for direct materials 3. Standard for direct labor rate 4. Standard for direct labor time 5. Standard for variable overhead rate 6. Standard for fixed overhead rate Copyright © Houghton Mifflin Company. All rights reserved. 22–18
19. 19. Standard Direct Materials Cost … is found by multiplying the price standard for direct materials by the quantity standard for direct materials Standard Direct Materials Cost = Direct Materials Price Standard Copyright © Houghton Mifflin Company. All rights reserved. x Direct Materials Quantity Standard 22–19
20. 20. Standard Direct Materials Cost (cont’d) • Direct materials price standard – Careful estimate of the cost of a specific direct material in the next accounting period – Developed by purchasing agent or purchasing department • Takes into account – All possible price increases – Changes in available quantities – New sources of supply Copyright © Houghton Mifflin Company. All rights reserved. 22–20
21. 21. Standard Direct Materials Cost (cont’d) • Direct materials quantity standard – Estimate of the amount of direct materials that will be used in the accounting period • Includes scrap and waste – Influenced by • • • • Product engineering specifications Quality of direct materials Age and productivity of machinery Quality and experience of work force – Established and monitored by • Production managers • Management accountants • Others – Engineers, purchasing agents, machine operators Copyright © Houghton Mifflin Company. All rights reserved. 22–21
22. 22. Standard Direct Labor Cost … for a product, task, or job is calculated by multiplying the standard wage for direct labor by the standard hours of direct labor Standard Direct Labor Cost = Direct Labor Rate Standard Copyright © Houghton Mifflin Company. All rights reserved. x Direct Labor Time Standard 22–22
23. 23. Standard Direct Labor Cost (cont’d) • Direct labor rate standard – Hourly direct labor rate expected to prevail during the next accounting period • For each function or job classification – Average standard rate is developed for each task • Standard rate is used even if worker is paid more or less than the standard rate – Easy to establish • Rates are set by labor unions or defined by the company Copyright © Houghton Mifflin Company. All rights reserved. 22–23
24. 24. Standard Direct Labor Cost (cont’d) • Direct labor time standard – Expected time required for each department, machine, or process to complete the production of one unit or one batch of output – Developed using • Current time and motion studies of workers and machines • Records of past performance – Should be revised when • Machinery is replaced • Quality of work force changes Copyright © Houghton Mifflin Company. All rights reserved. 22–24
25. 25. Standard Manufacturing Overhead Cost … is the sum of the estimates of variable and fixed overhead costs in the next accounting period • Two parts – Variable costs and fixed costs • Compute separately because their cost behavior differs Copyright © Houghton Mifflin Company. All rights reserved. 22–25
26. 26. Standard Manufacturing Overhead Cost (cont’d) • Standard variable overhead rate – Computed by dividing the total budgeted variable overhead costs by an expression of capacity, such as number of standard direct labor hours or standard machine hours Standard Variable Overhead Rate = Total Budgeted Variable Overhead Costs Expected Number of Standard Machine Hours Copyright © Houghton Mifflin Company. All rights reserved. 22–26
28. 28. Total Standard Unit Cost Remember When, Inc., recently updated the standards for its line of watches Compute the total standard cost of one watch Direct materials price standards Casing materials Movement mechanism Direct materials quantity standards Casing materials Movement mechanism Direct labor time standards Case Stamping Department Watch Assembly Department Direct labor rate standards Case Stamping Department Watch Assembly Department Standard manufacturing overhead rates Standard variable overhead rate Standard fixed overhead rate \$9.20 per square foot \$2.17 each .025 square foot per watch 1 per watch .01 hour per watch .05 hour per watch \$8.00 per hour \$10.20 per hour \$12.00 per direct labor hour \$9.00 per direct labor hour Direct materials costs Casing (\$9.20 per sq.ft. x .025 sq.ft.) One movement mechanism Direct labor costs Case Stamping Dept. (\$8.00 per hour x .01 hour per watch) Watch Assembly Dept. (10.20 per hour x .05 hour per watch) Variable overhead (\$12.00 per hour x .06 hour per watch) Total standard variable cost of one watch Fixed overhead (\$9.00 per hour x .06 hour per watch) Total standard cost of one watch Copyright © Houghton Mifflin Company. All rights reserved. \$ .23 2.17 .08 .51 .72 \$3.71 .54 \$4.25 22–28
29. 29. Discussion Q. Why are the variable and fixed components for the standard manufacturing overhead cost computed separately? A. Variable costs and fixed costs are computed separately because their cost behavior differs Copyright © Houghton Mifflin Company. All rights reserved. 22–29
30. 30. Variance Analysis • Objective 3 – Prepare a flexible budget and describe how variance analysis is used to control costs Copyright © Houghton Mifflin Company. All rights reserved. 22–30
31. 31. Variance Analysis … is the process of computing the differences between standard costs and actual costs and identifying the causes of those differences • Managers use – Flexible budgets to improve variance analysis – Variance analysis to control costs Copyright © Houghton Mifflin Company. All rights reserved. 22–31
32. 32. The Role of Flexible Budgets in Variance Analysis • Accuracy of variance analysis depends greatly on the type of budget managers use when comparing variances – Static budget – Flexible budget Copyright © Houghton Mifflin Company. All rights reserved. 22–32
33. 33. The Role of Flexible Budgets in Variance Analysis (cont’d) • Static budget – Also called fixed budget – Forecasts revenues and expenses for just one level of sales and just one level of output • Does not allow for changes in output level – If actual output differs from budgeted output, a variance between actual and budgeted amounts will occur » Cannot judge performance accurately Copyright © Houghton Mifflin Company. All rights reserved. 22–33
35. 35. The Role of Flexible Budgets in Variance Analysis (cont’d) • Flexible budget – Also called variable budget – Summary of expected costs for a range of activity levels • Provides forecasted data that can be adjusted for changes in output level – Used primarily as a cost control tool in evaluating performance Copyright © Houghton Mifflin Company. All rights reserved. 22–35
36. 36. The Role of Flexible Budgets in Variance Analysis (cont’d) • Flexible budget formula – An equation that determines the expected, or budgeted, cost for any level of output • Includes – Per unit amount for variable costs – Total amount for fixed costs Total Budgeted Costs = (Variable Cost per Unit × No. of Units Produced) + Budgeted Fixed Costs Copyright © Houghton Mifflin Company. All rights reserved. 22–36
38. 38. The Role of Flexible Budgets in Variance Analysis (cont’d) • The flexible budget formula for Remember When, Inc. is Total Budgeted Costs = (\$3.71 × No. of Units Produced) + \$9,450 • The company produced 19,100 units during 20x5 Total Budgeted Costs = (\$3.71 × 19,100) + \$9,450 = \$70,861 + \$9,450 = \$80,311 Copyright © Houghton Mifflin Company. All rights reserved. 22–38
40. 40. Using Variance Analysis to Control Costs Step 1 Compute variance Is the variance significant? No No corrective action needed Yes Step 2 Analyze variance to determine its cause Step 3 Select performance measures to correct the problem Step 4 Take corrective action Copyright © Houghton Mifflin Company. All rights reserved. 22–40
41. 41. Using Variance Analysis to Control Costs (cont’d) • Computing the amount of a variance is important – But, this does not prevent the variance from reoccurring – Must determine its cause • Select performance measures that will help track the problem • Must then find the best solution Copyright © Houghton Mifflin Company. All rights reserved. 22–41
42. 42. Discussion Q. What is the flexible budget formula? A. It is an equation used to determine expected, or budgeted cost for any level of output Total Budgeted Costs = (Variable Cost per Unit × No. of Units Produced) + Budgeted Fixed Costs Copyright © Houghton Mifflin Company. All rights reserved. 22–42
44. 44. Computing and Analyzing Direct Materials Variances • To control operations, managers compute and analyze variances for – Whole cost categories • Such as total direct materials costs – Elements of those categories • Such as the price and quantity of each direct material The more detailed the analysis of a variance is, the more effective managers will be in controlling costs Copyright © Houghton Mifflin Company. All rights reserved. 22–44
45. 45. Computing Direct Materials Variances • Total direct materials cost variance – Difference between the standard cost and actual cost of direct materials Copyright © Houghton Mifflin Company. All rights reserved. 22–45
46. 46. Computing Direct Materials Variances Cambria Company makes leather bags. Each bag should use 4 feet of leather (standard quantity), and the standard price of leather is \$6.00 per foot. During August, the company purchased 760 feet of leather costing \$5.90 per foot and used the leather to produce 180 bags Standard cost Standard price × standard quantity = \$6.00 per foot × (180 bags × 4 feet per bag) = \$6.00 per foot × 720 = \$4,320 Less actual cost Actual price × actual quantity = This is an unfavorable (U) situation \$5.90 per foot × 760 = 4,484 Total direct materials cost variance \$ 164 (U) Actual cost > standard cost Copyright © Houghton Mifflin Company. All rights reserved. 22–46
47. 47. Computing Direct Materials Variances (cont’d) • Total direct materials cost variance must be broken into two parts to find the cause of the variance – Direct materials price variance – Direct materials quantity variance Copyright © Houghton Mifflin Company. All rights reserved. 22–47
48. 48. Computing Direct Materials Variances (cont’d) • Direct materials price variance – Difference between the standard price and the actual price per unit multiplied by the actual quantity purchased – Also called the direct materials spending or rate variance Direct Materials Price Variance = (Standard Price − Actual Price) × Actual Quantity = (\$6.00 − \$5.90) × 760 feet = \$76 (F) Because the company paid less for direct materials than it expected, the variance is favorable (F) Copyright © Houghton Mifflin Company. All rights reserved. 22–48
49. 49. Computing Direct Materials Variances (cont’d) • Direct materials quantity variance – Difference between the standard quantity and the actual quantity used multiplied by the standard price – Also called the direct materials efficiency or usage variance Direct Materials Quantity Variance = Standard Price × (Standard Quantity Allowed − Actual Quantity) = \$6.00 per foot × (720 feet − 760 feet) = \$240 (U) Because the company used more for direct materials than it expected, the variance is unfavorable (U) Copyright © Houghton Mifflin Company. All rights reserved. 22–49
50. 50. Computing Direct Materials Variances (cont’d) • Test calculations of variances – If correct, the net of the direct materials price variance and direct materials quantity variance will equal the total direct materials cost variance Direct materials price variance Direct materials quantity variance Total direct materials cost variance Copyright © Houghton Mifflin Company. All rights reserved. \$ 76 (F) 240 (U) \$164 (U) 22–50
53. 53. Discussion Q. What is the direct materials price variance? A. It is the difference between the standard price and the actual price per unit multiplied by the actual quantity purchased. It is also called the direct materials spending or rate variance Direct Materials Price Variance = (Standard Price − Actual Price) × Actual Quantity Copyright © Houghton Mifflin Company. All rights reserved. 22–53
55. 55. Computing Direct Labor Variances • Total direct labor cost variance – Difference between the standard direct labor cost for good units produced and actual direct labor costs • Good units are the total units produced less units that are scrapped or need to be reworked Copyright © Houghton Mifflin Company. All rights reserved. 22–55
56. 56. Computing Direct Labor Variances (cont’d) At Cambria Company, each leather bag requires 2.4 standard direct labor hours, and the standard direct labor rate is \$8.50 per hour. During August, 450 direct labor hours were used to make 180 bags at an average pay rate of \$9.20 per hour Standard cost Standard rate × standard hours allowed = \$8.50 per foot × (180 bags × 2.4 hours per bag) = \$8.50 per hour × 432 hours = \$3,672 Less actual cost Actual rate × actual hours = \$9.20 per hour × 450 hours = 4,140 Total direct labor cost variance \$ 468 (U) Actual cost > standard cost Copyright © Houghton Mifflin Company. All rights reserved. 22–56
57. 57. Computing Direct Labor Variances (cont’d) • Total direct labor cost variance must be broken onto two parts to find the cause of the variance – Direct labor rate variance – Direct labor efficiency variance Copyright © Houghton Mifflin Company. All rights reserved. 22–57
58. 58. Computing Direct Labor Variances (cont’d) • Direct labor rate variance – Difference between the standard direct labor rate and the actual direct labor rate multiplied by the actual direct labor hours worked – Also called the direct labor spending variance Direct Labor Rate Variance = (Standard Rate − Actual Rate) × Actual Hours = (\$8.50 − \$9.20) × 450 hours = \$315 (U) Because the company paid more per hour for direct labor than it expected, the variance is unfavorable Copyright © Houghton Mifflin Company. All rights reserved. 22–58
59. 59. Computing Direct Labor Variances (cont’d) • Direct labor efficiency variance – Difference between the standard direct labor hours allowed for good units produced and the actual direct labor hours worked multiplied by the standard direct labor rate – Also called the direct labor quantity or usage variance Direct Labor Efficiency Variance = Standard Rate × (Standard Hours Allowed − Actual Hours) = \$8.50 per hour × (432 hours − 450 hours) = \$153 (U) Because the company used more direct labor hours than it expected, the variance is unfavorable (U) Copyright © Houghton Mifflin Company. All rights reserved. 22–59
60. 60. Computing Direct Labor Variances (cont’d) • Test calculations of variances – If correct, the net of the direct labor rate variance and direct labor efficiency variance will equal the total direct labor cost variance Direct labor rate variance Direct labor efficiency variance Total direct labor cost variance Copyright © Houghton Mifflin Company. All rights reserved. \$ 315 (U) 153 (U) \$468 (U) 22–60
61. 61. Diagram of Direct Labor Variance Analysis 22–61
62. 62. Analyzing and Correcting Direct Labor Variances • Managers analyzed – Employee time cards • An assembly worker who had fallen ill was replaced with a machinery operator from another department – Assembly worker is paid \$8.50 per hour and the machine operator is paid \$9.20 per hour – Machine operator not as skilled as the assembly worker » Temporary situation so no corrective action taken – Materials handling • Parts delivered late on five occasions – Will track delivery time and number of delays for next three months Copyright © Houghton Mifflin Company. All rights reserved. 22–62
63. 63. Discussion Q. What is the direct labor efficiency variance? A. The direct labor efficiency variance is the difference between the standard direct labor hours allowed for good units produced and the actual direct labor hours worked multiplied by the standard direct labor rate. It is also called the direct labor quantity or usage variance Direct Labor Efficiency Variance = Standard Rate × (Standard Hours Allowed − Actual Hours) Copyright © Houghton Mifflin Company. All rights reserved. 22–63
65. 65. Computing and Analyzing Manufacturing Overhead Variances • Controlling variable and fixed overhead costs is more difficult for managers than controlling direct materials and direct labor costs – Responsibility for manufacturing overhead costs is hard to assign • Fixed overhead costs – Unavoidable past costs – Not under the control of any department manager • Variable overhead costs – Some control possible if they can be related to departments or activities Copyright © Houghton Mifflin Company. All rights reserved. 22–65
66. 66. Using a Flexible Budget to Analyze Manufacturing Overhead Variances • Cambria Company’s managers use a flexible budget to evaluate performance – For manufacturing overhead costs only – Evaluate activity level using direct labor hours • Variable costs vary with the number of direct labor hours worked • Total fixed overhead costs remain constant Copyright © Houghton Mifflin Company. All rights reserved. 22–66
67. 67. Flexible Budget for Evaluation of Manufacturing Overhead Costs 22–67
68. 68. Using a Flexible Budget to Analyze Manufacturing Overhead Variances • Flexible budget formula Total Budgeted OH Costs = (Variable Costs per Direct Labor Hour × Number of Direct Labor Hours) + Budgeted Fixed OH Costs • Flexible budget formula when applied to Cambria’s data Total Budgeted OH Costs = (\$5.75 × No. of Direct Labor Hours) + \$1,300 To find the total monthly budgeted overhead costs, insert direct labor hours into the flexible budget Copyright © Houghton Mifflin Company. All rights reserved. 22–68
73. 73. Variable Overhead Variances (cont’d) At Cambria Company, each leather bag requires 2.4 standard labor hours and the variable overhead rate is \$5.75 per direct labor hour. During August, the company incurred \$2,500 of variable overhead costs Overhead applied to good units produced Standard variable rate × standard direct labor hours allowed = \$5.75 per hour × (180 bags × 2.4 hours per bag) = Less actual cost \$5.75 per hour × 432 hours = \$2,484 2,500 Total variable overhead cost variance \$ 16 (U) Actual cost > standard cost Copyright © Houghton Mifflin Company. All rights reserved. 22–73
74. 74. Diagram of Variable Overhead Variance Analysis 22–74
76. 76. Variable Overhead Variances (cont’d) • Variable overhead spending variance – Difference between the budgeted variable overhead costs at actual hours and actual variable overhead Variable OH Spending Variance = Budgeted Variable Costs at Actual Hours − Actual Variable Overhead = (Standard Variable Rate × Actual Hours Worked) − Actual Variable OH = (\$5.75 × 450 hours) − \$2,500 = \$87.50 (F) Copyright © Houghton Mifflin Company. All rights reserved. 22–76
77. 77. Variable Overhead Variances (cont’d) • Variable overhead efficiency variance – Difference between the standard direct labor hours allowed for good units produced and the actual hours worked multiplied by the standard variable overhead rate Variable OH Efficiency Variance = Standard Variable Rate × (Standard Hours Allowed − Actual Hours) Copyright © Houghton Mifflin Company. All rights reserved. 22–77
78. 78. Variable Overhead Variances (cont’d) • Compute standard hours allowed Standard Hours Allowed = Good Units Produced × Standard Hours per Bag = 180 bags × 2.4 hours per bag = 432 hours • Compute variable overhead efficiency variance Variable OH Efficiency Variance = Standard Variable Rate × (Standard Hours Allowed − Actual Hours) = \$5.75 × (432 hours − 450 hours) = \$103.50 (U) Copyright © Houghton Mifflin Company. All rights reserved. 22–78
81. 81. Diagram of Fixed Overhead Variance Analysis 22–81
82. 82. Fixed Overhead Variances (cont’d) At Cambria Company, each leather bag requires 2.4 standard direct labor hours and the standard fixed overhead rate is \$3.25 per direct labor hour. During August, the company incurred \$1,600 of actual fixed overhead costs Overhead applied to good units produced Standard fixed rate × standard direct labor hours allowed = \$3.25 per hour × (180 bags × 2.4 hours per bag) = \$3.25 per hour × 432 hours = \$1,404 Less actual cost 1,600 Total fixed overhead cost variance Copyright © Houghton Mifflin Company. All rights reserved. \$ 196 (U) 22–82
86. 86. Fixed Overhead Variances (cont’d) • A volume variance will occur if more or less than normal capacity is used – Fixed overhead volume variance measures the use of existing facilities and capacity – Favorable overhead volume variance • Capacity exceeds the expected amount – Unfavorable overhead volume variance • Company operates at a level below normal capacity – May be in best interest of company during periods of slow sales – Means company is not building up excess inventory Copyright © Houghton Mifflin Company. All rights reserved. 22–86
90. 90. Using Cost Variances to Evaluate Managers’ Performance • Objective 7 – Explain how variances are used to evaluate managers’ performance Copyright © Houghton Mifflin Company. All rights reserved. 22–90
91. 91. Using Cost Variances to Evaluate Managers’ Performance • The effectiveness and fairness of a manager's performance evaluation depends on – Human factors – Company policies • Should be based on input from managers and employees • Should specify procedures that managers are to use Copyright © Houghton Mifflin Company. All rights reserved. 22–91
92. 92. Using Cost Variances to Evaluate Managers’ Performance (cont’d) • Procedures that should be specified for managers – Preparing operational plans – Assigning responsibility for carrying out the operational plans – Communicating operational plans to key personnel – Evaluating performance in each area of responsibility – Identifying causes of significant variances from the operational plan – Taking corrective action to eliminate problems Copyright © Houghton Mifflin Company. All rights reserved. 22–92
93. 93. Using Cost Variances to Evaluate Managers’ Performance (cont’d) • Variance analysis – Provides detailed data about differences between standard and actual costs • Effective at pinpointing efficient and inefficient operating areas – Basic comparison of budgeted and actual data not as effective Copyright © Houghton Mifflin Company. All rights reserved. 22–93
94. 94. Using Cost Variances to Evaluate Managers’ Performance (cont’d) • Effective managerial performance reports based on standard costs and related variances should – Identify • Causes of the differences • Personnel involved • Corrective actions taken – Be tailored to the manager’s specific areas of responsibility • Explain clearly and accurately in what way the manager’s department did or did not meet operating expectations Managers should only be held accountable for cost areas under their control Copyright © Houghton Mifflin Company. All rights reserved. 22–94
95. 95. Using Cost Variances to Evaluate Managers’ Performance (cont’d) • Managerial performance reports should – Summarize all cost data – Include variances for direct materials, direct labor, and manufacturing overhead – Identify • Causes of variances • Corrective actions taken Copyright © Houghton Mifflin Company. All rights reserved. 22–95
96. 96. Using Cost Variances to Evaluate Managers’ Performance (cont’d) • The occurrence of a variance does not indicate poor performance • If a variance consistently occurs, its cause is not identified, and no corrective action is taken, it may indicate poor performance on the part of the manager Copyright © Houghton Mifflin Company. All rights reserved. 22–96
97. 97. Discussion Q. What items should be included in an effective managerial performance report? A. Summarization of all cost data Variances for direct materials, direct labor, and manufacturing overhead Identification of the causes of the variances, personnel involved, and any corrective actions taken Copyright © Houghton Mifflin Company. All rights reserved. 22–97
98. 98. Time for Review 1. Define standard costs and describe how managers use standard costs in the management cycle 2. Explain how standard costs are developed and compute a standard unit cost 3. Prepare a flexible budget and describe how variance analysis is used to control costs Copyright © Houghton Mifflin Company. All rights reserved. 22–98
99. 99. And Finally… 4. Compute and analyze direct materials variances 5. Compute and analyze direct labor variances 6. Compute and analyze manufacturing overhead variances 7. Explain how variances are used to evaluate managers’ performance Copyright © Houghton Mifflin Company. All rights reserved. 22–99