Chapter Summary

A standard is a benchmark or "norm" for measuring performance. In business organizations, standards are set for both the cost and the quantity of inputs needed to manufacture goods or to provide services. Quantity standards indicate how much of a cost element, such as labour time or raw materials, should be used in manufacturing a unit of product or in providing a unit of service. Cost standards indicate what the cost of the time or the materials should be.

Standards are normally practical in nature, meaning that they can be attained by reasonable, though highly efficient, efforts. Such standards are generally felt to have a favourable motivational impact on employees.

When standards are compared to actual performance, the difference is referred to as a variance. Variances are computed and reported to management on a regular basis for both the price and the quantity elements of materials, labour, and overhead. Price and rate variances for inputs are computed by taking the difference between the actual and standard prices of the inputs and multiplying the result by the amount of input purchased. Quantity and efficiency variances are computed by taking the difference between the actual amount of the input used and the amount of input that is allowed for the actual output, and then multiplying the result by the standard price of the input.

Not all variances require management time or attention. Only unusual or particularly significant variances should be investigated-otherwise a great deal of time would be spent investigating unimportant matters. Additionally, it should be emphasized that the point of the investigation should not be to find someone to blame. The point of the investigation is to pinpoint the problem so that it can be fixed and operations improved.

Traditional standard cost variance reports should often be supplemented with other performance measures. Overemphasis on standard cost variances may lead to problems in other critical areas such as product quality, inventory levels, and on-time delivery.

The balanced scorecard is a promising approach to managing organizations. A balanced scorecard consists of an integrated system of performance measures that are derived from and support the company's strategy. Different companies will have different balanced scorecards because they have different strategies. A well-constructed balanced scorecard provides a means for guiding the company and also provides feedback concerning the effectiveness of the company's strategy.