The Portable MBA in Finance and Accounting, 3rd Edition

Measuring Productivity 209

rates themselves are also known as standards. They are typically established by
engineers.”
As before, Jane began sketching out a numerical illustration of the points
that she was making. Her sketches appear in Exhibit 7.3. “These are the stan-
dards,” she said, “that determine the variable portion of the budget for pro-
duction. Note the assumption here that variable overhead is a function of
machine hours, or how long the machine runs. Other assumptions are possible
but we will stick with this one in our example.
“Fixed overhead is a little different because it does not really have a pro-
ductivity rate. Let’s just put down the fixed overhead on a budgeted and an ac-
tual basis, and we can come back and discuss the details later.” From these
standards she began to derive the standard variable cost of the product; also its
actual variable cost:

Standard Cost Material Cost Labor Cost Variable Overhead Cost

pages per page) hours $5.00 per hour)

(. hours $. per hour)

per ream

Actual Cost Material Cost Labor Cost Variable Overhead Cost

pages per page) hours $6.00 per hour)

(. hours $. per hour)

=++

=× + ×

+×

=++

=

=++

=× + ×

+×

=+

($. (.

$. $. $.

$.

($. (.

$. $

500 0 008 0 30

010 1500

400 150 150

700

500 0 007 0 25

0 125 10 00

350 1150 125

625

.$.

$.

+

= per ream

EXHIBIT 7.3 Standards and actuals for letterhead paper.

Budgeted Actual

Material:

Productivity rate (pages per ream) 500 500

Cost per unit of input (per page) $0.008 $0.007

Cost per unit of output (per ream) $4.00 $3.50

Labor:

Productivity rate (labor hours per ream) 0.30 0.25

Wage per unit of input (per labor hour) $5.00 $6.00

Wage per unit of output (per ream) $1.50 $1.50

Variable Overhead:

Productivity rate (machine hours per ream) 0.10 0.125

Cost per unit of input (per machine hour) $15.00 $10.00

Cost per unit of output (per ream) $1.50 $1.25