Standard Costs and the Balanced Scorecard

Chapter 10

 

Performance measurement is essential in a well-run organization.  It can provide critical information as to what works and what doesn’t; it is a way to evaluate and motivate employees; and it can provide a means of carrying out the basic strategy of the company.   Most companies use some combination of financial and non-financial performance measures to gauge performance.  In this course we will focus on two common types of performance measurement—standard costing and the balanced scorecard.

 

A standard is a benchmark or norm for measuring performance.  We encounter standards in many facets of daily life, i.e., standard to obtain a driver’s license, standard to get into an MBA program at a particular university, etc.  Many successful companies make extensive use of standards.  Standards are set for various cost and quantity inputs such as direct material, direct labor, and overhead. Actual quantities purchased and used are compared to standard.  Any significant difference between actual and standard cost creates a variance and can be investigated by management.  Likewise management focuses on the quantity of the input used to make a product or offer a service.  Again, differences between the actual quantity used and the standard quantity creates a variance that can be investigated further.

 

There are two broad types of standards.  An ideal or perfection standard is the absolute minimum cost under ideal conditions.  Practical standards can be described as a  “tight  but attainable” standard and they allow for normal downtime and employee rest periods.  As you can imagine, most of us operate better when practical standards are in place.  That's the standard we'll use in this course.

 

In managerial accounting we deal with standards related to both price and quantity.  A price standard is the amount that should be paid for some input--direct material, direct labor, or overhead.  A quantity standard relates to how much of the input should be used--direct material, direct labor, overhead.  After setting price and quantity standards, the organization compares actual results to standard cost and calculates a variance--either favorable or unfavorable.  This process facilitates management by exception--depending on the significance of the variance, management takes appropriate action.  Insignificant variances are disregarded.

  

A general model for use in calculating cost variances appears on page 436 of the text.  Study this general model and note its use in calculating variances for direct materials, direct labor, and variable manufacturing overhead on pages 431-445.  Note that we use different terms when describing the price and quantity variances of direct material, direct labor and variable manufacturing overhead. 

 

As noted above, many companies use a combination of financial and non-financial measurements to evaluate performance.  One method of non-financial measurement and evaluation is the balanced scorecard.

 

The balanced scorecard is an integrated set of performance measures that is derived from and supports the organization’s basic strategy.  Study the diagram on page 450 which describes the balanced scorecard approach.  Examples of performance measures for a balanced scorecard system are shown on page 451.  Note that most of these measures are non-financial in nature.  Several measures of internal business process performance are introduced including delivery cycle time, throughput time, and manufacturing cycle efficiency (MCE).   Value and non-value time are discussed.  A value added activity is any unit of work that contributes to a product’s ability to satisfy customer needs.