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Paolo Perego
Management Accounting
IBA 2005-2006
Program
Standard Actual
performance performance
level level
Comparison between
Chapter 10
Cost
variance
Standard costs
Based on carefully
predetermined
amounts:
- Historical data
- Task analysis
Used for planning labor
Standard
Chapter 10
Benchmarks for
measuring performance.
Management by Exception
Standard
Amount
Direct
Material
Direct
Labor
Standard price is the amount that should have been paid for the
resources acquired
Standard quantity is the quantity allowed for the actual good output
× ×
$3.90 per lb. $4.00 per lb.
$10,920 $11,200
Actual Quantity
Used Standard Quantity
× ×
Standard Price Standard Price
Quantity variance is
Quantity variance unchanged because actual
$800 unfavorable and standard quantities
are unchanged
Labor variances: Example
Control
Charts
Chapter 10
•
Favorable Limit •
• • •
•
Chapter 10
Desired Value •
•
Unfavorable Limit
•
1 2 3 4 5 6 7 8 9
Variance Measurements
Evaluation of Standard Costing
Advantages:
• Sensible Cost Comparisons
• Management by Exception
• Performance Evaluation
• Employee Motivation
Criticisms:
Chapter 10
Manufacturing
Process Time
Cycle =
Efficiency Manufacturing Cycle Time
1.16
1.14
1.12
1.1
1.08
1.06
1.04
0 20 40 60 80 100
Customer Satisfaction in Year 1
Non-financial “Leading” Indicators
Customer
Recommendations
Attitude Service
About the
Job Helpfulness
Return on Assets
Employee Customer
Operating Margin
Behavior Impression
Revenue Growth
Attitude Merchandise
About the
Company Value
Employee Customer
Retention Retention
Strategy
concepts. Customer Perspective
Chapter 10
"To achieve my vision,
how must I look to my
Measurement is used customers?”
On-time Lowest
Service prices
Ground crew
alignment
A Complete Scorecard is a Program for Action
Strategy Map
Strategic
Strategic Theme:
Theme: Objectives Measures Targets Initiatives
Operations Excellence
Operating Efficiency
Profits and
Financial RONA • Profitability • 30% CAGR
Grow
Fewer planes • Grow Revenues • 20% CAGR
Revenues
Chapter 10
STRATEGY
60% of 85% of management
organizations don’t update the test the teams spend less
link strategy & strategy Strategic Learning hypotheses than one hour per
budgets Loop month on strategy
issues
BALANCED
SCORECARD
BUDGET
78% of organizations
lock budgets to an reporting 92% of
funding Management Control Loop
annual cycle organizations do
20% of organizations not report on lead
PERFORMANCE
take more than 16 weeks indicators
to prepare a budget Initiatives &
Input Programs Output
(Resources) (Results)
Balanced Scorecard and Strategy
Manager Bonus
budget.
Static Actual
Budget Results Variances
Machine hours 10,000 8,000 2,000 U
Variable costs
Indirect labor $ 40,000 $ 34,000 $6,000 F
Chapter 11
to the
actual level of activity.
Central Concept
Fixed costs
Depreciation $12,000 $ 12,000 $ 12,000 $ 12,000
Insurance 2,000 2,000 2,000 2,000
Total fixed cost $ 14,000 $ 14,000 $ 14,000
Total overhead costs $ 74,000 $ 89,000 $ 104,000
Flexible Budget Report
at 8,000 actual machine hours
Variable Total
Cost Fixed Flexible Actual
Per Hour Costs Budget Results Variances
Machine hours 8,000 8,000 0
Chapter 11
Variable costs
Indirect labor $ 4.00 $ 32,000 $ 34,000 $ 2,000 U
Indirect material 3.00 24,000 25,500 1,500 U
Power 0.50 4,000 3,800 200 F
Total variable costs $ 7.50 $ 60,000 $ 63,300 $ 3,300 U
Fixed Expenses
Depreciation $12,000 $ 12,000 $ 12,000 0
Insurance 2,000 2,000 2,000 0
Total fixed costs $ 14,000 $ 14,000 0
Total overhead costs $ 74,000 $ 77,300 $ 3,300 U
Variable Overhead Variances
Actual Flexible Budget Flexible Budget
Variable for Variable for Variable
Overhead Overhead at Overhead at
Incurred Actual Hours Standard Hours
AH × AR AH × SVR SH × SVR
Chapter 11
Flexible budget
Total budgeted
=
overhead cost
Chapter 11
Budget Volume
Variance Variance
$9,000
Chapter 11