Chapter 09

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Standard Costs and
the Balanced Scorecard

Chapter 10

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Standard Costs

Standards are benchmarks or “norms”

for measuring performance. Two types
of standards are commonly used.

Quantity standards Cost (price)

specify how much of an standards specify
input should be used to how much should be
make a product or paid for each unit
provide a service. of the input.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Standard Costs

Standard
Amount

Direct
Material
Direct Manufacturing
Labor Overhead

Type of Product Cost

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Exh.

Variance Analysis Cycle

10-1

Take
Identify Receive corrective
questions explanations actions

Conduct next
Analyze period’s
variances operations

Prepare standard
Begin
cost performance
report

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Setting Standard Costs

Accountants, engineers, purchasing

agents, and production managers
combine efforts to set standards that encourage
efficient future production.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Setting Standard Costs

Should we use I recommend using practical

ideal standards that standards that are currently
require employees to attainable with reasonable and
work at 100 percent efficient effort.
peak efficiency?

Engineer Managerial
Accountant
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Setting Direct Material Standards

Price Quantity
Standards Standards

Summarized in
Final, delivered a Bill of Materials.
cost of materials

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Setting Direct Labor Standards

Rate Time
Standards Standards

Often a single Use time and

rate is used that reflects motion studies for
the mix of wages earned. each labor operation.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Setting Variable Overhead Standards

Rate Activity
Standards Standards

The rate is the The activity is the

variable portion of the base used to calculate
predetermined overhead the predetermined
rate. overhead.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Standard Cost Card – Variable
Production Cost

A standard cost card for one unit

of product might look like this:
A B AxB
Standard Standard Standard
Quantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. $ 4.00 per lb. $ 12.00
Direct labor 2.5 hours 14.00 per hour 35.00
Variable mfg. overhead 2.5 hours 3.00 per hour 7.50
Total standard unit cost $ 54.50

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Standards vs. Budgets

Are standards the A standard is a per

same as budgets? unit cost.
A budget is set for Standards are often
used when
total costs. preparing budgets.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 A General Model for Variance Analysis

Variance Analysis

Price Variance Quantity Variance

Difference between Difference between

actual price and actual quantity and
standard price standard quantity

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 A General Model for Variance Analysis

Variance Analysis

Price Variance Quantity Variance

Materials price variance Materials quantity variance

Labor rate variance Labor efficiency variance
VOH spending variance VOH efficiency variance

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Actual quantity is the amount of direct

materials, direct labor, and variable
manufacturing overhead actually used.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Standard quantity is the standard quantity

allowed for the actual output for the period.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Actual price is the amount actually

paid for the for the input used.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Standard price is the amount that should

have been paid for the input used.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)

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

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 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.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 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

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Material Variances Summary

Actual Quantity Actual Quantity Standard Quantity

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

Price variance Quantity variance

$21 favorable $50 unfavorable

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Material Variances Summary

Actual Quantity Actual Quantity Standard Quantity

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

Price variance Quantity variance

$21 favorable $50 unfavorable

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Material Variances:
Using the Factored Equations

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

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Quick Check  Zippy

Hanson Inc. has the following direct material

standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound

Last week 1,700 pounds of material were

purchased and used to make 1,000 Zippies.
The material cost a total of $6,630.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Quick Check  Zippy

Hanson’s
Hanson’s material
material price
price variance
variance (MPV)
(MPV)
for
for the
the week
week was:
was:
a.
a. $170$170 unfavorable.
unfavorable.
b.
b. $170$170 favorable.
favorable.
c.
c. $800$800 unfavorable.
unfavorable.
d.
d. $800$800 favorable.
favorable.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Quick Check  Zippy

Hanson’s
Hanson’s material
material price
price variance
variance (MPV)
(MPV)
for
for the
the week
week was:
was:
a.
a. $170$170 unfavorable.
unfavorable.
b.
b. $170$170 favorable.
favorable.
c.
c. $800$800 unfavorable.
unfavorable.
MPV = AQ(AP - SP)
d. MPV = 1,700 lbs. × ($3.90 - 4.00)
d. $800$800 favorable.
favorable.
MPV = $170 Favorable

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Quick Check  Zippy

Hanson’s
Hanson’s material
material quantity
quantity variance
variance (MQV)
(MQV)
for
for the
the week
week was:
was:
a.
a. $170$170 unfavorable.
unfavorable.
b.
b. $170$170 favorable.
favorable.
c.
c. $800$800 unfavorable.
unfavorable.
d.
d. $800$800 favorable.
favorable.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Quick Check  Zippy

Hanson’s
Hanson’s material
material quantity
quantity variance
variance (MQV)
(MQV)
for
for the
the week
week was:
was:
a.
a. $170$170 unfavorable.
unfavorable.
b.
b. $170$170 favorable.
favorable.
c.
c. $800$800 unfavorable.
unfavorable.
d.
d. $800$800 favorable.
favorable.
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs - 1,500 lbs)
MQV = $800 unfavorable
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Quick Check  Zippy

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price
1,700 lbs. 1,700 lbs. 1,500 lbs.
× × ×
$3.90 per lb. $4.00 per lb. $4.00 per lb.
= $6,630 = $ 6,800 = $6,000

Price variance Quantity variance

$170 favorable $800 unfavorable
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Quick Check  Continued Zippy

Hanson Inc. has the following material standard

to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound

Last week 2,800 pounds of material were

purchased at a total cost of $10,920, and 1,700
pounds were used to make 1,000 Zippies.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Quick Check  Continued Zippy

Actual Quantity Actual Quantity

Purchased Purchased
× ×
Actual
2,800Price
lbs. Standard Price
2,800 lbs.
× ×
$3.90 per lb. $4.00 per lb.
= $10,920 = $11,200

Price variance increases

Price variance because quantity
$280 favorable purchased increases.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Quick Check  Continued Zippy

Actual Quantity
Used Standard
Quantity
× ×
Standard Price Standard Price
1,700 lbs. 1,500 lbs.
× ×
$4.00 per lb. $4.00 per lb.
= $6,800 = $6,000
Quantity variance is
unchanged because
actual and standard Quantity variance
quantities are unchanged. $800 unfavorable
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Labor Variances Example

Glacier Peak Outfitters has the following direct

labor standard for its mountain parka.
1.2 standard hours per parka at $10.00 per hour

Last month employees actually worked 2,500

hours at a total labor cost of $26,250 to make
2,000 parkas.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Labor Variances Summary

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× × ×
$10.50 per hour $10.00 per hour. $10.00 per hour
= $26,250 = $25,000 = $24,000

Rate variance Efficiency variance

$1,250 unfavorable $1,000 unfavorable

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Labor Variances Summary

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× $26,250×  2,500 hours ×
$10.50 per hour $10.00 per hour.
= $10.50 per hour $10.00 per hour
= $26,250 = $25,000 = $24,000

Rate variance Efficiency variance

$1,250 unfavorable $1,000 unfavorable

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Labor Variances Summary

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× ×
1.2 hours per parka  2,000 ×
$10.50 per hour parkas
$10.00 per hour.
= 2,400 hours $10.00 per hour
= $26,250 = $25,000 = $24,000

Rate variance Efficiency variance

$1,250 unfavorable $1,000 unfavorable

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Labor Variances:
Using the Factored Equations

Labor rate variance

LRV = AH (AR - SR)
= 2,500 hours ($10.50 per hour – $10.00 per hour)
= 2,500 hours ($0.50 per hour)
= $1,250 unfavorable
Labor efficiency variance
LEV = SR (AH - SH)
= $10.00 per hour (2,500 hours – 2,400 hours)
= $10.00 per hour (100 hours)
= $1,000 unfavorable

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Quick Check  Zippy

Hanson Inc. has the following direct labor

standard to manufacture one Zippy:
1.5 standard hours per Zippy at $12.00 per
direct labor hour

Last week 1,550 direct labor hours were

worked at a total labor cost of $18,910
to make 1,000 Zippies.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Quick Check  Zippy

Hanson’s
Hanson’s labor
labor rate
rate variance
variance (LRV)
(LRV) for
for
the
the week
week was:
was:
a.
a. $310
$310 unfavorable.
unfavorable.
b.
b. $310
$310 favorable.
favorable.
c.
c. $300
$300 unfavorable.
unfavorable.
d.
d. $300
$300 favorable.
favorable.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Quick Check  Zippy

Hanson’s
Hanson’s labor
labor rate
rate variance
variance (LRV)
(LRV) for
for
the
the week
week was:
was:
a.
a. $310
$310 unfavorable.
unfavorable.
b.
b. $310
$310 favorable.
favorable.
c. LRV = AH(AR - SR)
c. $300
$300 unfavorable.
unfavorable.
LRV = 1,550 hrs($12.20 - $12.00)
d.
d. $300
$300 favorable.
favorable.
LRV = $310 unfavorable

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Quick Check  Zippy

Hanson’s
Hanson’s labor
labor efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was:
was:
a.
a. $590
$590 unfavorable.
unfavorable.
b.
b. $590
$590 favorable.
favorable.
c.
c. $600
$600 unfavorable.
unfavorable.
d.
d. $600
$600 favorable.
favorable.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Quick Check  Zippy

Hanson’s
Hanson’s labor
labor efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was:
was:
a.
a. $590
$590 unfavorable.
unfavorable.
b.
b. $590
$590 favorable.
favorable.
c.
c. $600
$600 unfavorable.
unfavorable.
d.
d. $600
$600 favorable.
favorable.
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Quick Check  Zippy

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
1,550 hours 1,550 hours 1,500 hours
× × ×
$12.20 per hour $12.00 per hour $12.00 per hour
= $18,910 = $18,600 = $18,000

Rate variance Efficiency variance

$310 unfavorable $600 unfavorable
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Variable Manufacturing Overhead
Variances Example

Glacier Peak Outfitters has the following direct

variable manufacturing overhead labor standard
for its mountain parka.
1.2 standard hours per parka at $4.00 per hour

Last month employees actually worked 2,500

hours to make 2,000 parkas. Actual variable
manufacturing overhead for the month was
$10,500.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Variable Manufacturing Overhead
Variances Summary

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× × ×
$4.20 per hour $4.00 per hour $4.00 per hour
= $10,500 = $10,000 = $9,600

Spending variance Efficiency variance

$500 unfavorable $400 unfavorable

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Variable Manufacturing Overhead
Variances Summary

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× $10,500× 2,500 hours ×
$4.20 per hour $4.00 per per
= $4.20 hourhour $4.00 per hour
= $10,500 = $10,000 = $9,600

Spending variance Efficiency variance

$500 unfavorable $400 unfavorable

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Variable Manufacturing Overhead
Variances Summary

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× ×
1.2 hours per parka  2,000 ×
$4.20 per hour parkas$4.00 per hour
= 2,400 hours $4.00 per hour
= $10,500 = $10,000 = $9,600

Spending variance Efficiency variance

$500 unfavorable $400 unfavorable

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Variable Manufacturing Overhead
Variances: Using Factored Equations

Variable manufacturing overhead spending variance

VMSV = AH (AR - SR)
= 2,500 hours ($4.20 per hour – $4.00 per hour)
= 2,500 hours ($0.20 per hour)
= $500 unfavorable
Variable manufacturing overhead efficiency variance
VMEV = SR (AH - SH)
= $4.00 per hour (2,500 hours – 2,400 hours)
= $4.00 per hour (100 hours)
= $400 unfavorable

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Quick Check  Zippy

Hanson Inc. has the following variable

manufacturing overhead standard to
manufacture one Zippy:
1.5 standard hours per Zippy at $3.00 per
direct labor hour

Last week 1,550 hours were worked to make

1,000 Zippies, and $5,115 was spent for
variable manufacturing overhead.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Quick Check  Zippy

Hanson’s
Hanson’s spending
spending variance
variance (VOSV)
(VOSV) for
for
variable
variable manufacturing
manufacturing overhead
overhead for
for
the
the week
week was:
was:
a.
a. $465
$465 unfavorable.
unfavorable.
b.
b. $400
$400 favorable.
favorable.
c.
c. $335
$335 unfavorable.
unfavorable.
d.
d. $300
$300 favorable.
favorable.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Quick Check  Zippy

Hanson’s
Hanson’s spending
spending variance
variance (VOSV)
(VOSV) for
for
variable
variable manufacturing
manufacturing overhead
overhead for
for
the
the week
week was:
was:
a.
a. $465
$465 unfavorable.
unfavorable.
b.
b. $400
$400 favorable.
favorable.
VOSV = AH(AR - SR)
c.
c. $335
$335 unfavorable.
unfavorable.
VOSV = 1,550 hrs($3.30 - $3.00)
d. VOSV = $465 unfavorable
d. $300
$300 favorable.
favorable.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Quick Check  Zippy

Hanson’s
Hanson’s efficiency
efficiency variance
variance (VOEV)
(VOEV) forfor
variable
variable manufacturing
manufacturing overhead
overhead for
for the
the
week
week was:
was:
a.
a. $435
$435 unfavorable.
unfavorable.
b.
b. $435
$435 favorable.
favorable.
c.
c. $150
$150 unfavorable.
unfavorable.
d.
d. $150
$150 favorable.
favorable.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Quick Check  Zippy

Hanson’s
Hanson’s efficiency
efficiency variance
variance (VOEV)
(VOEV) for for
variable
variable manufacturing
manufacturing overhead
overhead for for the
the
week
week was:
was:
a.
a. $435
$435 unfavorable.
unfavorable.
b.
b. $435
$435 favorable.
favorable. 1,000 units × 1.5 hrs per unit
c.
c. $150
$150 unfavorable.
unfavorable.
d.
d. $150
$150 favorable.
favorable.
VOEV = SR(AH - SH)
VOEV = $3.00(1,550 hrs - 1,500 hrs)
VOEV = $150 unfavorable
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Quick Check  Zippy

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
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 The Balanced Scorecard: From Exh.
10-11

Strategy to Performance Measures

Performance Measures
Financial What are our
Has our financial
financial goals?
performance improved?

Customer What customers do Vision

we want to serve and
Do customers recognize that
how are we going to and
we are delivering more value? win and retain them? Strategy

Internal Business Processes What internal busi-

Have we improved key business ness processes are
processes so that we can deliver critical to providing
more value to customers? value to customers?

Learning and Growth

Are we maintaining our ability
to change and improve?
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Examples of Performance Measures

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Examples of Performance Measures

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 The Balanced Scorecard:
Non-financial Measures

The balanced scorecard relies on non-financial measures

in addition to financial measures for two reasons:


 Financial
Financial measures
measures are are lag
lag indicators
indicators that
that summarize
summarize
the
the results
results of
of past
past actions.
actions. Non-financial
Non-financial measures
measures are
are
leading
leading indicators
indicators of
of future
future financial
financial performance.
performance.


 Top
Top managers
managers are
are ordinarily
ordinarily responsible
responsible forfor financial
financial
performance
performance measures
measures –– not
not lower
lower level
level managers.
managers.
Non-financial
Non-financial measures
measures are
are more
more likely
likely to
to be
be
understood
understood and
and controlled
controlled by
by lower
lower level
level managers.
managers.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
The Balanced Scorecard for Individuals

The entire organization Each individual should

should have an overall have a personal
balanced scorecard. balanced scorecard.

AA personal
personal scorecard
scorecard should
should contain
contain measures
measures that
that can
can be
be
influenced
influenced by
by the
the individual
individual being
being evaluated
evaluated and
and that
that
support
support the
the measures
measures in in the
the overall
overall balanced
balanced scorecard.
scorecard.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 The Balanced Scorecard

A balanced scorecard should have measures

that are linked together on a cause-and-effect basis.

If we improve Another desired

Then
one performance performance measure
measure . . . will improve.

The balanced scorecard lays out concrete

actions to attain desired outcomes.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 The Balanced Scorecard Exh.
10-13

Jaguar Example
Profit
Financial
Contribution per car

Number of cars sold

Customer
Customer satisfaction

Internal
Business Number of Time to
options available install option
Processes

Learning Employee skills in

and Growth installing options
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Delivery Performance Measures

Order Production Goods

Received Started Shipped

Process Time + Inspection Time

Wait Time + Move Time + Queue Time

Throughput Time

Delivery Cycle Time

Process time is the only value-added time.

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 Delivery Performance Measures

Order Production Goods

Received Started Shipped

Process Time + Inspection Time

Wait Time + Move Time + Queue Time

Throughput Time

Delivery Cycle Time

Manufacturing
Value-added time
Cycle =
Efficiency Manufacturing cycle time
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 Solve the following problem (A)

Solution-Performance.docx
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 Solve the following problem (B)

SkyChefs, Inc., prepares in-flight meals for a number

of major airlines. One of the company’s products is
grilled salmon in dill sauce with baby new potatoes
and spring vegetables. During the most recent week,
the company prepared 4,000 of these meals using
960 direct labor-hours. The company paid these direct
labor workers a total of $9,600 for this work, or $10.00
per hour.

According to the standard cost card for this meal, it

should require 0.25 direct labor-hours at a cost of
$9.75 per hour.

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 Problem (B) continued

1. What direct labor cost should have been incurred to

prepare 4,000 meals? How much does this differ from
the actual direct labor cost?
2. Break down the difference computed in (1) above
into a labor rate variance and a labor efficiency
variance.

Sol-LaborVariance.JPG

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 End of Chapter 9

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