Standard Cost &

Balanced Scorecard

Presented By

Din Islam (Din)

Assistant Professor in Accounting
Department of Management Studies
 Standard

 A standard is a benchmark or norm for measuring

performance. 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 management’s standard of
efficient operation & the relevant necessary
expenditure.
 Standard Costs

Predetermined.

Used for planning labor, material

Standard and overhead requirements.
Costs are
Benchmarks for
measuring performance.

Used to simplify the

accounting system.
 Standard Costs

Managers focus on quantities and costs

that exceed standards, a practice known as
management by exception.

Standard
Amount

Direct
Material
Direct Manufacturing
Labor Overhead

Type of Product Cost

 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
 Purpose of Standard Costing

 Establishing budgets.
 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
 Setting Standard

Practical standards should be

set at levels that are currently
Should we use attainable with reasonable and
practical standards efficient effort.
or ideal standards?

Engineer
Managerial
Accountant
 Practical Standard

 Practical standards are those standards that are tight but

attainable.
 Assumption:
• Allow for normal machine downtime
• Employee rest period.
 Practical standards are used in
• Using signaling abnormal condition
• Forecasting cash flows
• Planning inventory
 Setting Standard

I agree. Ideal standards, that are

based on perfection, are
unattainable and discourage
most employees.

Human
Resources
Manager
 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 •Operators work at predetermined
for waste & inefficient in any speed.
forms. •The available capacity is fully
•No material is wasted. utilized
•No units are spoiled.
•No idle time.
 Setting Standard

Accountants, engineers, personnel administrators, and

production managers combine efforts to set standards
based on experience and expectations.
 Setting Standard

 Past records of purchase prices and input usage can help

in 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 Material Labor Overhead

Price Price Rate Rate

Quantity Quantity Hour Hour

 Standards vs. Budgets

A standard is a per
unit cost.
Are standards the
Standards are often
same as budgets? used when putting
A budget is set for together a budget.
total costs.
 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 unfavorable or adverse
variance (U/A).
 Profit Variance

Selling and Total Production Sales Variance

Administrative Cost Variance
Cost Variance

Sales Variance Based Sales Variance

on Turnover Based on Margin

Materials Labor Variable Fixed

cost Cost Overhead Overhead
Variance Variance Variance Variance

Overhead Variance
 Materials Cost Variance
(AQ*AP – SQ*SP) Actual Units
Produced*SQ P/U

Material Price variance Material Usage Variance

AP*AQ – SP*AQ AQ*SP – SQ*SP
=AQ(AP-SP) =SP(AQ-SQ)

Mix Variance Yield Variance

 Labor Cost Variance
AH*AR – SH*SR Actual Units
Produced*SH P/U

Rate Variance Efficiency Variance

AH*AR – AH*SR AH*SR – SH*SR
AH(AR-SR) SR(AH-SH)
Idle Time Variance
SR*Hours Lost

Mix Variance Yield Variance

 Overhead Cost Variance

Variable Overhead Fixed Overhead

Variance Variance
 Variable Overhead Variance
(AH*AR – SH*SR)

VO Expenditure /Spending/ VO Efficiency

Budget Variance Variance
AH*AR – AH*SR AH*SR – SH*SR
AH(AR-SR) SR(AH-SH)
 Fixed Overhead variance

Fixed Expenditure variance Fixed Volume variance

Calender variance Efficiency variance Capacity Variance

 Material Variances Example

Glacier Peak Outfitters has the following direct material

standard for the fiberfill in its mountain parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month 210 kgs of fiberfill were purchased and used
to make 2,000 parkas. The material cost a total of $1,029.
 Material Variances Summary

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
× × ×
$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favorable $50 unfavorable
 Material Variances Summary

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
× $1,029 ×210 kgs ×
$4.90 per kg. $5.00 per kg
= $4.90 kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favorable $50 unfavorable
 Material Variances Summary

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
× 0.1 kg per parka× 2,000 parkas ×
$4.90 per kg. = 200 kgs
$5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favorable $50 unfavorable
 Note: Using the Formulas
Materials price variance
MPV = AQ (AP - SP)
= 210 kgs ($4.90/kg - $5.00/kg)
= 210 kgs (-$0.10/kg)
= $21 F
Materials quantity variance
MQV = SP (AQ - SQ)
= $5.00/kg (210 kgs-(0.1 kg/parka 2,000 parkas))
= $5.00/kg (210 kgs - 200 kgs)
= $5.00/kg (10 kgs)
= $50 U
 Reasons for Material 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 Materials 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
 Labor Variances Example Zipp
y

Hanson Inc. has the following direct labor standard to

manufacture one Zippy:
1.5 standard hours per Zippy at $6.00 per direct
labor hour
Last week 1,550 direct labor hours were worked at a total
labor cost of $9,610 to make 1,000 Zippies.
 Labor Variances Summary Zipp
y

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
1,550 hours 1,550 hours 1,500 hours
× × ×
$6.20 per hour $6.00 per hour $6.00 per hour
= $9,610 = $9,300 = $9,000

Rate variance Efficiency variance

$310 unfavorable $300 unfavorable
 Reasons for Labor 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 Labor 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
 Variable Overheads Variance

Variable overheads variance is the difference

between the standard variable overheads absorbed into
the actual output and the actual overheads incurred.
 Variable Manufacturing
Overhead Variances Example Zipp
y

Hanson Inc. has the following variable manufacturing

overhead standard to manufacture one Zippy:
1.5 standard hours per Zippy at $3.00 perdirect labor hour
Last week 1,550 hours were worked to make 1,000 Zippies,
and $5,115 was spent forvariable manufacturing overhead.
 Variable Manufacturing
Overhead Variances Zipp
y

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
1,550 hours 1,550 hours 1,500 hours
× × ×
$3.30 per hour $3.00 per hour $3.00 per hour
= $5,115 = $4,650 = $4,500

Spending variance Efficiency variance

$465 unfavorable $150 unfavorable
 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
company’s strategy & that support the company’s
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 Balanced Scorecard is a management system that

maps an organization's strategic objectives into
performance metrics in four perspectives:
• financial,
•internal processes,
•customers, and
•learning and growth.