Chapter

13
Standard Costs and
Operating Performance
Measures

Standard Costs
Based on carefully
predetermined amounts.

Standard
Costs are

Used for planning labor, material

and overhead requirements.
The expected level
of performance.
Benchmarks for
measuring performance.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Standard Costs

Amount

Managers focus on quantities and costs

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

Standard

Direct
Labor

Direct
Material

Manufacturing
Overhead

Type of Product Cost

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Setting Standard Costs

Accountants, engineers, personnel
administrators, and production managers
combine efforts to set standards based on
experience and expectations.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Setting Standard Costs

Should we use
practical standards
or ideal standards?

Engineer
Irwin/McGraw-Hill

Managerial
Accountant

The McGraw-Hill Companies, Inc., 2000

Setting Standard Costs

Practical standards
should be set at levels
that are currently
attainable with
reasonable and
efficient effort.

Production
manager
Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Setting Standard Costs

I agree. Ideal standards,
that are based on
perfection, are
unattainable and
discourage most
employees.

Irwin/McGraw-Hill

Human
Resources
Manager

The McGraw-Hill Companies, Inc., 2000

Setting Direct Material Standards

Price
Standards

Final, delivered
cost of materials,
net of discounts.

Irwin/McGraw-Hill

Quantity
Standards

Use product
design specifications.

The McGraw-Hill Companies, Inc., 2000

Setting Direct Labor Standards

Rate
Standards

Time
Standards

Use wage
surveys and
labor contracts.

Use time and

motion studies for
each labor operation.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Setting Variable Overhead

Standards
Rate
Standards

Activity
Standards

The rate is the

variable portion of the
predetermined overhead
rate.

The activity is the

base used to calculate
the predetermined
overhead.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Standard Cost Card Variable

Production Cost
A standard cost card for one unit of product
might look like this:

Inputs
Direct materials
Direct labor
Variable mfg. overhead
Total standard unit cost
Irwin/McGraw-Hill

AxB

Standard
Quantity
or Hours

Standard
Price
or Rate

Standard
Cost
per Unit

3.0 lbs.
2.5 hours
2.5 hours

$ 4.00 per lb.

$
14.00 per hour
3.00 per hour
$

12.00
35.00
7.50
54.50

The McGraw-Hill Companies, Inc., 2000

Standards vs. Budgets

Are standards the

same as budgets?

Irwin/McGraw-Hill

A standard is the
expected cost for one
unit.
A budget is the
expected cost for all
units.
The McGraw-Hill Companies, Inc., 2000

Standard Cost Variances

A standard cost variance is the amount by which
an actual cost differs from the standard cost.

Product Cost

Standard

Irwin/McGraw-Hill

This variance is unfavorable

because the actual cost
exceeds the standard cost.

The McGraw-Hill Companies, Inc., 2000

Standard Cost Variances

I see that there
is an unfavorable
variance.
But why are
variances
important to me?

Irwin/McGraw-Hill

First, they point to causes of

problems and directions
for improvement.
Second, they trigger
investigations in departments
having responsibility
for incurring the costs.

The McGraw-Hill Companies, Inc., 2000

Variance Analysis Cycle

Identify
questions

Receive
explanations

Conduct next
periods
operations

Analyze
variances

Begin

Irwin/McGraw-Hill

Take
corrective
actions

Prepare standard
cost performance
report
The McGraw-Hill Companies, Inc., 2000

Standard Cost Variances

Standard Cost Variances

Price Variance

Quantity Variance

The difference between

the actual price and the
standard price

The difference between

the actual quantity and
the standard quantity

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

A General Model for Variance

Analysis
Actual Quantity

Actual Price

Actual Quantity

Standard Price

Price Variance

Standard Quantity

Standard Price

Quantity Variance

Standard price is the amount that should

have been paid for the resources acquired.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

A General Model for Variance

Analysis
Actual Quantity

Actual Price

Actual Quantity

Standard Price

Price Variance

Standard Quantity

Standard Price

Quantity Variance

Standard quantity is the quantity allowed for

the actual good output.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

A General Model for Variance

Analysis
Actual Quantity

Actual Price

Actual Quantity

Standard Price

Standard Quantity

Standard Price

Price Variance

Quantity Variance

AQ(AP - SP)

SP(AQ - SQ)

AQ = Actual Quantity
AP = Actual Price
Irwin/McGraw-Hill

SP = Standard Price
SQ = Standard Quantity
The McGraw-Hill Companies, Inc., 2000

Standard Costs

Lets use the

general model to
calculate standard
cost variances,
starting with
direct material.
Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Material Variances Example

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.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Material Variances

Zippy

What
What is
is the
the actual
actual price
price per
per pound
pound
paid
paid for
for the
the material?
material?
a.
a. $4.00
$4.00 per
per pound.
pound.
b.
b. $4.10
$4.10 per
per pound.
pound.
c.
c. $3.90
$3.90 per
per pound.
pound.
d.
d. $6.63
$6.63 per
per pound.
pound.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Material Variances

Zippy

What
What is
is the
the actual
actual price
price per
per pound
pound
paid
paid for
for the
the material?
material?
a.
a. $4.00
$4.00 per
per pound.
pound.
b.
b. $4.10
$4.10 per
per pound.
pound.
AP = $6,630 1,700 lbs.
c.
c. $3.90
$3.90 per
per pound.
pound. AP = $3.90 per lb.
d.
d. $6.63
$6.63 per
per pound.
pound.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Material Variances

Zippy

Hansons
Hansons 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.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Material Variances

Zippy

Hansons
Hansons 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

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Material Variances

Zippy

The
The standard
standard quantity
quantity of
of material
material that
that
should
should have
have been
been used
used to
to produce
produce
1,000
1,000 Zippies
Zippies is:
is:
a.
a. 1,700
1,700 pounds.
pounds.
b.
b. 1,500
1,500 pounds.
pounds.
c.
c. 2,550
2,550 pounds.
pounds.
d.
d. 2,000
2,000 pounds.
pounds.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Material Variances

Zippy

The
The standard
standard quantity
quantity of
of material
material that
that
should
should have
have been
been used
used to
to produce
produce
1,000
1,000 Zippies
Zippies is:
is:
a.
a. 1,700
1,700 pounds.
pounds.
b.
b. 1,500
1,500 pounds.
pounds.
c.
c. 2,550
2,550 pounds.
pounds.
SQ = 1,000 units 1.5 lbs per unit
d.
d. 2,000
2,000 pounds.
pounds.
SQ = 1,500 lbs

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Material Variances

Zippy

Hansons
Hansons 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.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Material Variances

Zippy

Hansons
Hansons 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
Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Material Variances Summary

Actual Quantity

Actual Price

Actual Quantity

Standard Price

Zippy

Standard Quantity

Standard Price

1,700 lbs.

$3.90 per lb.

1,700 lbs.

$4.00 per lb.

1,500 lbs.

$4.00 per lb.

= $6,630

= $ 6,800

= $6,000

Price variance
$170 favorable
Irwin/McGraw-Hill

Quantity variance
$800 unfavorable
The McGraw-Hill Companies, Inc., 2000

Material Variances

Hanson purchased and

used 1,700 pounds.
How are the variances
computed if the amount
purchased differs from
the amount used?
Irwin/McGraw-Hill

The price variance is

computed on the entire
quantity purchased.
The quantity variance is
computed only on the
quantity used.
The McGraw-Hill Companies, Inc., 2000

Material Variances 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.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Material Variances Continued

Actual Quantity
Purchased

Actual Quantity
Purchased

2,800Price
lbs.
Actual

$3.90 per lb.

2,800 lbs.
Standard
Price

$4.00 per lb.

= $10,920

= $11,200

Price variance
$280 favorable
Irwin/McGraw-Hill

Zippy

Price variance increases

because quantity
purchased increases.
The McGraw-Hill Companies, Inc., 2000

Material Variances Continued

Quantity

Actual Quantity
Used

Standard Price
1,700 lbs.

$4.00 per lb.

= $6,800

Quantity variance is
unchanged because
actual and standard
quantities are unchanged.
Irwin/McGraw-Hill

Zippy

Standard

Standard Price
1,500 lbs.

$4.00 per lb.

= $6,000

Quantity variance
$800 unfavorable
The McGraw-Hill Companies, Inc., 2000

Isolation of Material Variances

I need the price variance
sooner so that I can better
identify purchasing problems.
You accountants just dont
understand the problems that
purchasing managers have.

Irwin/McGraw-Hill

Ill start computing

the price variance
when material is
purchased rather than
when its used.

The McGraw-Hill Companies, Inc., 2000

Responsibility for Material

You used too much material
Variances
I am not responsible for
this unfavorable material
quantity variance.
You purchased cheap
material, so my people
had to use more of it.

Irwin/McGraw-Hill

because of poorly trained

workers and poorly
maintained equipment.
Also, your poor scheduling
sometimes requires me to
rush order material at a
higher price, causing
unfavorable price variances.

The McGraw-Hill Companies, Inc., 2000

Standard Costs

Now lets calculate

standard cost
variances for
direct labor.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Labor Variances Example

Zippy

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.
Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Labor Variances

Zippy

What
What was
was Hansons
Hansons actual
actual rate
rate (AR)
(AR)
for
for labor
labor for
for the
the week?
week?
a.
a. $6.20
$6.20 per
per hour.
hour.
b.
b. $6.00
$6.00 per
per hour.
hour.
c.
c. $5.80
$5.80 per
per hour.
hour.
d.
d. $5.60
$5.60 per
per hour.
hour.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Labor Variances

Zippy

What
What was
was Hansons
Hansons actual
actual rate
rate (AR)
(AR)
for
for labor
labor for
for the
the week?
week?
AR = $9,610 1,550 hours
a.
$6.20
per
hour.
a. $6.20 per hour.
AR = $6.20 per hour
b.
b. $6.00
$6.00 per
per hour.
hour.
c.
c. $5.80
$5.80 per
per hour.
hour.
d.
d. $5.60
$5.60 per
per hour.
hour.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Labor Variances

Zippy

Hansons
Hansons 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.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Labor Variances

Zippy

Hansons
Hansons 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.
LRV = AH(AR - SR)
c.
c. $300
$300 unfavorable.
unfavorable.
LRV = 1,550 hrs($6.20 - $6.00)
d.
$300
favorable.
d. $300 favorable.LRV = $310 unfavorable

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Labor Variances

Zippy

The
The standard
standard hours
hours (SH)
(SH) of
of labor
labor that
that
should
should have
have been
been worked
worked to
to produce
produce
1,000
1,000 Zippies
Zippies is:
is:
a.
a. 1,550
1,550 hours.
hours.
b.
b. 1,500
1,500 hours.
hours.
c.
c. 1,700
1,700 hours.
hours.
d.
d. 1,800
1,800 hours.
hours.
Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Labor Variances

Zippy

The
The standard
standard hours
hours (SH)
(SH) of
of labor
labor that
that
should
should have
have been
been worked
worked to
to produce
produce
1,000
1,000 Zippies
Zippies is:
is:
a.
a. 1,550
1,550 hours.
hours.
b.
b. 1,500
1,500 hours.
hours.
c.
c. 1,700
1,700 hours.
hours.
d.
d. 1,800
1,800 hours.
hours.
SH = 1,000 units 1.5 hours per unit
SH = 1,500 hours
Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Labor Variances

Zippy

Hansons
Hansons labor
labor efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was:
was:
a.
a. $290
$290 unfavorable.
unfavorable.
b.
b. $290
$290 favorable.
favorable.
c.
c. $300
$300 unfavorable.
unfavorable.
d.
d. $300
$300 favorable.
favorable.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Labor Variances

Zippy

Hansons
Hansons labor
labor efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was:
was:
a.
a. $290
$290 unfavorable.
unfavorable.
b.
b. $290
$290 favorable.
favorable.
c.
c. $300
$300 unfavorable.
unfavorable.
d.
d. $300
$300 favorable.
favorable.
LEV = SR(AH - SH)
LEV = $6.00(1,550 hrs - 1,500 hrs)
LEV = $300 unfavorable
Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Labor Variances Summary

Actual Hours

Actual Rate

Zippy

Actual Hours

Standard Rate

Standard Hours

Standard Rate

1,550 hours

$6.20 per hour

1,550 hours

$6.00 per hour

1,500 hours

$6.00 per hour

= $9,610

= $9,300

Rate variance
$310 unfavorable
Irwin/McGraw-Hill

= $9,000

Efficiency variance
$300 unfavorable
The McGraw-Hill Companies, Inc., 2000

Labor Rate Variance

A Closer Look
Using highly paid skilled workers to
perform unskilled tasks results in an
unfavorable rate variance.
High skill,
high rate

Low skill,
low rate

Production
Production managers
managers who
who make
make work
work assignments
assignments
are
are generally
generally responsible
responsible for
for rate
rate variances.
variances.
Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Labor Efficiency Variance

A Closer Look
Poorly
trained
workers

Poor
quality
materials

Unfavorable
Efficiency
Variance
Poor
supervision
of workers
Irwin/McGraw-Hill

Poorly
maintained
equipment
The McGraw-Hill Companies, Inc., 2000

Responsibility for Labor Variances

I am not responsible for
the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
time to process it.

Irwin/McGraw-Hill

You used too much

time because of poorly
trained workers and
poor supervision.

The McGraw-Hill Companies, Inc., 2000

Responsibility for Labor Variances

Maybe I can attribute the labor
and material variances to personnel
for hiring the wrong people
and training them poorly.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Standard Costs

Now lets calculate

standard cost
variances for the
last of the variable
production costs
variable
manufacturing
overhead.
Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Variable Manufacturing
Overhead Variances Example

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.
Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Variable Manufacturing
Overhead Variances

Zippy

What
What was
was Hansons
Hansons actual
actual rate
rate (AR)
(AR) for
for
variable
variable manufacturing
manufacturing overhead
overhead rate
rate
for
for the
the week?
week?
a.
a. $3.00
$3.00 per
per hour.
hour.
b.
b. $3.19
$3.19 per
per hour.
hour.
c.
c. $3.30
$3.30 per
per hour.
hour.
d.
d. $4.50
$4.50 per
per hour.
hour.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Variable Manufacturing
Overhead Variances

Zippy

What
What was
was Hansons
Hansons actual
actual rate
rate (AR)
(AR) for
for
variable
variable manufacturing
manufacturing overhead
overhead rate
rate
for
for the
the week?
week?
a.
a. $3.00
$3.00 per
per hour.
hour.
b.
b. $3.19
$3.19 per
per hour.
hour.
AR = $5,115 1,550 hours
c.
$3.30
per
hour.
c. $3.30 per hour.
AR = $3.30 per hour
d.
d. $4.50
$4.50 per
per hour.
hour.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Variable Manufacturing
Overhead Variances

Zippy

Hansons
Hansons spending
spending variance
variance (SV)
(SV) 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.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Variable Manufacturing
Overhead Variances

Zippy

Hansons
Hansons spending
spending variance
variance (SV)
(SV) 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.
SV = AH(AR - SR)
c.
c. $335
$335 unfavorable.
unfavorable.
SV = 1,550 hrs($3.30 - $3.00)
d.
d. $300
$300 favorable.
favorable. SV = $465 unfavorable

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Variable Manufacturing
Overhead Variances

Zippy

Hansons
Hansons efficiency
efficiency variance
variance (EV)
(EV) 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.
c.
c. $150
$150 unfavorable.
unfavorable.
d.
d. $150
$150 favorable.
favorable.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Variable Manufacturing
Overhead Variances

Zippy

Hansons
Hansons efficiency
efficiency variance
variance (EV)
(EV) 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.
EV = SR(AH - SH)
EV = $3.00(1,550 hrs - 1,500 hrs)
EV = $150 unfavorable
Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Variable Manufacturing
Overhead Variances

Zippy

Actual Hours

Actual Rate

Actual Hours

Standard Rate

Standard Hours

Standard Rate

1,550 hours

$3.30 per hour

1,550 hours

$3.00 per hour

1,500 hours

$3.00 per hour

= $5,115

= $4,650

Spending variance
$465 unfavorable
Irwin/McGraw-Hill

= $4,500

Efficiency variance
$150 unfavorable
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Variable Manufacturing Overhead

Variances A Closer Look
IfIf variable
variable overhead
overhead is
is applied
applied on
on the
the basis
basis
of
of direct
direct labor
labor hours,
hours, the
the labor
labor efficiency
efficiency
and
and variable
variable overhead
overhead efficiency
efficiency variances
variances
will
will move
move in
in tandem.
tandem.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Variance Analysis and Management

by Exception

How do I know which

variances to
investigate?

Irwin/McGraw-Hill

Larger variances, in
dollar amount or as
a percentage of the
standard, are
investigated first.
The McGraw-Hill Companies, Inc., 2000

Advantages of Standard Costs

Possible reductions
in production costs

Management by
exception

Advantages
Improved cost control
and performance
evaluation
Irwin/McGraw-Hill

Better Information
for planning and
decision making
The McGraw-Hill Companies, Inc., 2000

Emphasis on negative
may impact morale.

Standard cost
reports may
not be timely.

Favorable variances
may be misinterpreted.

Potential
Problems

Labor quantity standards

and efficiency variances
may not be appropriate.
Irwin/McGraw-Hill

Continuous
improvement
may be more
important than
meeting standards.

Emphasizing standards
may exclude other
important objectives.
The McGraw-Hill Companies, Inc., 2000

The Balanced Scorecard

Management
Management translates
translates its
its strategy
strategy into
into
performance
performance measures
measures that
that employees
employees
understand
understand and
and accept.
accept.
Customers

Financial

Performance
measures
Internal
business
processes
Irwin/McGraw-Hill

Learning
and growth
The McGraw-Hill Companies, Inc., 2000

The Balanced Scorecard

How do we look
to the owners?

In which internal
business processes
must we excel?

How can we
continually learn,
grow, and improve?

How do we look
to customers?
Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

The Balanced Scorecard

Learning improves
business processes.

Improved business
processes improve
customer satisfaction.

Improving customer
satisfaction improves
financial results.
Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Delivery Performance Measures

Order
Received

Wait Time

Goods
Shipped

Production
Started

Process Time + Inspection Time

+ Move Time + Queue Time
Throughput Time
Delivery Cycle Time

Process time is the only value-added time.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

Delivery Performance Measures

Order
Received

Wait Time

Goods
Shipped

Production
Started

Process Time + Inspection Time

+ Move Time + Queue Time
Throughput Time
Delivery Cycle Time

Manufacturing
Cycle
=
Efficiency
Irwin/McGraw-Hill

Value-added time
Manufacturing cycle time
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End of Chapter 10

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000