The Portable MBA in Finance and Accounting, 3rd Edition

Measuring Productivity 213

Review

“One last question, Jane: Where do these variable overhead rates come from?”
“That’s another subject altogether,” said Jane. “Do you want a cup of cof-
fee? I’m bushed. But before we break, let’s summarize what we’ve learned.

1. The cost of a product consists of material, labor, and overhead.


2. Each of these components is made up of a productivity rate multiplied by
   a unit cost for that component.


3. Standard Costs=Standard Productivity Rates × Standard Unit Costs


4. Actual Costs=Actual Productivity Rates× Actual Unit Costs


5. Price Indices=Actual Unit Costs/Standard Costs


6. Activity Indices=Actual Productivity Rate/Standard Productivity Rate.”

COLLECTING STANDARDS

After their coffee break, Jane and Tom shifted their conversation to how to de-
velop these standard costs. Jane reminded Tom that standard costs are made up
of two parts:

1. A standard cost per unit times.


2. A standard usage, or quantity of units of input per unit of output.

She pointed out that he was responsible for defining the amount of mate-
rial and labor that should go into the product. The purchasing department was
responsible for determining the amount that should be paid for materials, the
personnel department determined wages. There are, as she explained, several
ways to determine the appropriate usage.

Engineering Studies

“First, one can do an engineering study. In other words, one can look at the
specifications of the product. Many products that are designed by engineers
have quite detailed and explicit instructions on what materials should go into
them. These standards often include an allowance for waste, though this
isn’t necessary. Where they do not include such an allowance they border on
the ideal.

EXHIBIT 7.4 Variance analysis.

Rate Variance Usage Variance Total Variance

Materials $600 F $0 $600 F

Labor 300 U 300 F 0

Variable overhead 450 U 750 F 300 F