W. BentzEMBA 8021 Agenda for October 27, 1999 Comments on Copeland Wellesley Paint Co. Case On...

W. Bentz EMBA 802 1

Agenda for October 27, 1999Agenda for October 27, 1999

• Comments on Copeland

• Wellesley Paint Co. Case

• On measuring capacity

• Standards for Toledo Tool

W. Bentz EMBA 802 2

StandardStandard

“That which is established by authority, custom, or general consent, as a model or example; criterion; test; in general, a definite level, degree, material, character, quality, or the like, viewed as that which is proper and adequate for a given purpose.”

W. Bentz EMBA 802 3

StandardStandard

“In business, a carefully thought-out method of performing a task, a carefully drawn specification covering material or equipment.”

Webster’s New International Dictionary

W. Bentz EMBA 802 4

Relevance to Standard CostsRelevance to Standard Costs

These dictionary definitions are quite consistent with the salient features of a standard costing system. An important point is to remember that costing systems exist within a management structure, not as independent entities.

W. Bentz EMBA 802 5

ContextContext

Standard costs reflect a comprehensive plan of managing in which studies are used to predetermine the desired magnitude of every expense, performance is compared with these standards, and attention is focused on variances. For simplicity and clarity, performance is expressed in dollars.

W. Bentz EMBA 802 6

The management cycleThe management cycle

Evaluate

Plan

By identifying important variances from plan--sliced & diced--one can zero in on significant variances.

Plan

OperateEvaluate

W. Bentz EMBA 802 7

ObjectiveObjective

• In developing standard cost systems, the objective is to determine what should be the material, labor and support activity costs of activities, operations, products, and services. The process begins with activity costs.

W. Bentz EMBA 802 8

Overview of UsesOverview of Uses

The major uses of standard costs include:– Information for decision-making– Control of costs– Performance measurement– Projection of financial consequences

W. Bentz EMBA 802 9

Info. for Decision-makingInfo. for Decision-making

• C-V-P analysis• Product-mix and special-order decisions• Pricing and bidding are facilitated by the

availability of a file of contemporary standards from which estimates can be developed

• Outsourcing decisions

W. Bentz EMBA 802 10

Cost ControlCost Control

• Standard cost represent desired levels of cost per unit of activity, product or service at the level of operations.

• Standard costs communicate cost targets for people to use as reference points in their efforts to control costs.


Cost Control vs. ReductionCost Control vs. Reduction

• Cost reduction arises from changes in the product, inputs, production processes, or support activities that lead to a reduction in the costs expected. A new cost level is achieved because the cost environment has improved.


Cost ControlCost Control

Cost control, on the other hand, takes place within a production context as it now exists. The objective is to achieve the level of efficiency and cost that is inherent in current operations, inputs, etc. Control means achievement of plan.


Performance MeasurementPerformance Measurement

• Price and quantity standards represent plans concerning desired cost efficiency under specified conditions.

• As plans, standards define and communicate to associates the performance expected.


Performance Measurement IIPerformance Measurement II

• Standards serve as benchmarks for use in evaluating relative performance in terms of both efficiency and productivity.

• Standards help decompose any differences between actual and standard cost by entity, product, activity, territory, market, or responsible party.


Performance Measurement IIIPerformance Measurement III

• Standard costs facilitate the decomposition of differences between actual and planned costs by nature of the effect: price, quantity, yield, or mix.


Profit PlanningProfit Planning

The cost information reflected in standards is useful for– Pro-forma financial statements– Cost budgets– Cash budgets– Purchase budgets– Integrated profit plans


Account Structure IntegrationAccount Structure Integration

Standard cost systems can be an integral component of the financial accounting structure, or they can be “off-line,” and independent of the formal account structure. Modern enterprise systems integrate costing systems to better facilitate the full range of benefits of having standards.


Outline of an On-line SystemOutline of an On-line System

• Predetermined standard costs are set for each item of expense for each activity

• Materials and labor are charged to production at standard cost

• Work-in-process and Finished Goods are priced at standard cost


Outline of an On-line SystemOutline of an On-line System• Variances of actual cost from standard cost

are recorded for each element of expense by activity

• Costs can be tracked by cost centers (responsibility centers)

• Costs can be monitored by expense category, i.e. direct labor

• Costs can be monitored by activity or activity type


Subaccount No.

Expense Item No. Total 451 452 453 454 455

100 100300 310

316500 510

511550 551

552600 610

612613

700 711714717

Total

Std. hours earned

Activity No.

Expense Analysis ReportFor the Period Ending mm/dd/yy

Cost Center 450


Subacct.No. Description Total 410 420 430 440 450 460 470 480 490100 Direct Labor300 Materials Handling500 Inspection Labor550 Maintenance Supplies600 Equipment Operation700 Space CostsTotal Cost

Total Std. Hrs. Earned

Expense StatementFor the Period Ending mm/dd/yy

Fictional Enterprises, inc.

Cost Center Number

One can compareexpense categoriesacross cost centers.


Drill-down SequencesDrill-down Sequences

• Company costsfactory costscost center costsactivity costsactivity cost elementstransactions

• Company variancesfactory variancescost center variancesactivity variancesactivity cost element variances


Variances in DollarsVariances in Dollars

• Reporting variances in dollars is a way to determine the relative importance of diverse variances, and to combine the variances by activity, product, responsible manager, or performance entity. Adding the effects of physical measures would be nonsensical.


What is normal costing?What is normal costing?

• Normal costing refers to the allocation of support costs to production activities based on the level of driver activity volume that is forecast for one or more fiscal years.


Why Normal CostingWhy Normal Costing

• Represents an attempt to determine the basic cost of making products, excluding seasonal and other transitory effects on cost or volume.


Why Normal CostingWhy Normal Costing

• A key issue is to isolate the effect of volume changes on unit costs when costs are in line with budget, but volumes differ from projections. This discussion focuses on the volume issues, not cost issues.


Normal CostingNormal Costing

• Normal activity cost rate =

Cost of providing capacity

A measure of activity level

• Issues to resolve:

– What measure of capacity

– The costs to be included in the “regular” cost of providing capacity.


What Measure of CapacityWhat Measure of Capacity

• The issues is to decide the desired level of capacity at which one would consider the level of capacity that must be provided for the production of goods and services with uncertain demand.


What Utilization Rate?What Utilization Rate?

• Even if the committed resources in the form of facilities and skilled personnel are known for the period, we still have some choices. We still must decide what level of facility utilization to use to calculate support activity rates.


Causes of Unutilized CapacityCauses of Unutilized Capacity

• Errors in predicting demand

• Long lead times that make forecasting difficult

• Regulation and capacity regulation (hospitals)

• Actions of competitors


• Break for it!

W. BentzEMBA 8021 Agenda for October 27, 1999 Comments on Copeland Wellesley Paint Co. Case On...

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