10-1

Standard Costs Predetermined.

Chapter 10 Standard Costs and the Balanced Scorecard

Standard Costs are

Used for planning labor, material and overhead requirements. Benchmarks for measuring performance. Used to simplify the accounting system. © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Standard Costs

Setting Standard Costs

Amount

Managers focus on quantities and costs that exceed standards, a practice known as management by exception.

Standard

Direct Labor

Direct Material

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

Manufacturing Overhead

Type of Product Cost © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Setting Standard Costs

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

Should we use practical standards or ideal standards?

Engineer McGraw-Hill/Irwin

Managerial Accountant

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McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Production manager

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10-2

Setting Standard Costs I agree. Ideal standards, based on perfection, are unattainable and discourage most employees.

Note The argument that ideal standards are discouraging has been persuasive for many years. So “normal” defects and waste were built into the standards. In recent years, TQM and other initiatives have sought to eliminate all defects and waste.

McGraw-Hill/Irwin

Human Resources Manager© The McGraw-Hill Companies, Inc., 2003

z

Ideal standards, that allow for no waste, have become more popular.

z

The emphasis is on improvement over time, not attaining the ideal standards right now.

Setting Direct Material Standards Price Standards

Final, delivered cost of materials, net of discounts.

McGraw-Hill/Irwin

Quantity Standards

Use product design specifications.

© The McGraw-Hill Companies, Inc., 2003

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.

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Setting Direct Labor Standards Rate Standards

Time Standards

Use wage surveys and labor contracts.

Use time and motion studies for each labor operation.

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

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 McGraw-Hill/Irwin

A

B

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., 2003

10-3

Standards vs. Budgets

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

Are standards the same as budgets? A budget is set for total costs.

A standard is a per unit cost. Standards are often used when preparing budgets. © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

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

First, they point to causes of problems and directions for improvement.

Cost

Standard

This variance is unfavorable because the actual cost exceeds the standard cost.

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Variance Analysis Cycle Identify questions

Second, they trigger investigations in departments having responsibility for incurring the costs.

© The McGraw-Hill Companies, Inc., 2003

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

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

Take corrective actions

Conduct next period’s operations

Analyze variances

Begin

McGraw-Hill/Irwin

Receive explanations

Prepare standard cost performance report © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

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.

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

10-4

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. Standard input per unit of output times amount of good output. © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

A General Model for Variance Analysis Actual Quantity × Actual Price

Actual Quantity × Standard Price

Price Variance

Standard Quantity × Standard Price

Quantity Variance

AQ(AP - SP)

SP(AQ - SQ)

AQ = Actual Quantity AP = Actual Price

SP = Standard Price SQ = Standard Quantity © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Material Variances Example

Standard Costs Let’s use the general model to calculate standard cost variances for direct material.

Glacier Peak Outfitters has the following direct material standard for the fiberfill in its mountain parka. 0.1 kg. of fiberfill per parka at $5.00 per kg.

Last month 210 kgs of fiberfill were purchased and used to make 2,000 parkas. The material cost a total of $1,029.

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Material Variances Summary Actual Quantity × Actual Price

Actual Quantity × Standard Price

210 kgs. × $4.90 per kg.

210 kgs. × $5.00 per kg.

= $1,029

Price variance $21 favorable

McGraw-Hill/Irwin

= $1,050

Material Variances Summary

Standard Quantity × Standard Price 200 kgs. × $5.00 per kg. = $1,000

Actual Quantity × Actual Price 210 kgs. × $4.90 per kg.

210 kgs. $1,029 ÷ × 210 kgs $5.00per perkg kg. = $4.90

= $1,029

Quantity variance $50 unfavorable

© The McGraw-Hill Companies, Inc., 2003

Actual Quantity × Standard Price

Price variance $21 favorable

McGraw-Hill/Irwin

= $1,050

Standard Quantity × Standard Price 200 kgs. × $5.00 per kg. = $1,000

Quantity variance $50 unfavorable

© The McGraw-Hill Companies, Inc., 2003

10-5

Material Variances Summary Actual Quantity × Actual Price

Actual Quantity × Standard Price

Standard Quantity × Standard Price

210 kgs. 210 kgs. × × 0.1 kg per parka × 2,000 $4.90 per kg. $5.00 per kg. parkas = 200 kgs = $1,029 = $1,050

Price variance $21 favorable

McGraw-Hill/Irwin

Note: Using the formulas

200 kgs. × $5.00 per kg. = $1,000

Quantity variance $50 unfavorable

© The McGraw-Hill Companies, Inc., 2003

Materials price variance MPV = AQ (AP - SP) = 210 kgs ($4.90/kg - $5.00/kg) = 210 kgs (-$0.10/kg) = $21 F

Materials quantity variance MQV = SP (AQ - SQ) = $5.00/kg (210 kgs-(0.1 kg/parka× 2,000 parkas)) = $5.00/kg (210 kgs - 200 kgs) = $5.00/kg (10 kgs) = $50 U

Quick Check 9 Suppose only 190 kgs of fiberfill were used to make 2,000 parkas. What is the materials quantity variance? Remember that the standards call for 0.1 kg of fiberfill per parka at a cost of $5 per kg of fiberfill. a. $50 F b. $50 U c. $100 F d. $100 U McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

Quick Check 9 Suppose only 190 kgs of fiberfill were used to make 2,000 parkas. What is the materials quantity variance? Remember that the standards call for 0.1 kg of fiberfill per parka at a cost of $5 per kg of fiberfill. a. $50 F b.MQV $50= U SP (AQ - SQ) = $5.00/kg (190 kgs-(0.1 kg/parka× 2,000 parkas)) c. $100 F = $5.00/kg (190 kgs - 200 kgs) = $5.00/kg (-10 kgs) d. $100 U = $50 F

McGraw-Hill/Irwin

Quick Check 9 If the material quantity standard specifies exactly how much material should be in the final product without any wastage, is a favorable (F) materials quantity variance a good thing? a. Yes b. No

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

Quick Check 9 If the material quantity standard specifies exactly how much material should be in the final product without any wastage, is a favorable (F) materials quantity variance a good thing? a. Yes b. No

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

10-6

Material Variances Example

Standard Costs Let’s use the general model to calculate all standard cost variances, starting with direct material.

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.

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

Quick Check 9

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

© The McGraw-Hill Companies, Inc., 2003

Quick Check 9

Zippy

Hanson’s material price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. McGraw-Hill/Irwin

Zippy

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

© The McGraw-Hill Companies, Inc., 2003

Quick Check 9

© The McGraw-Hill Companies, Inc., 2003

Quick Check 9

Zippy

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

McGraw-Hill/Irwin

Zippy

Hanson’s material price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. MPV = AQ(AP - SP) MPV = 1,700 lbs. × ($3.90 - 4.00) d. $800 favorable. MPV = $170 Favorable

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

10-7

Quick Check 9

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

Quick Check 9

Zippy

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

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Quick Check 9

Zippy

Quick Check 9

Zippy

Hanson’s material quantity variance (MQV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Zippy

Hanson’s material quantity variance (MQV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Material Variances Summary Actual 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 McGraw-Hill/Irwin

Material Variances

Zippy

Actual Quantity × Actual Price

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Standard Quantity × Standard Price

Quantity variance $800 unfavorable © The McGraw-Hill Companies, Inc., 2003

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

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., 2003

10-8

Material Variances Continued

Material Variances Continued

Zippy

Actual Quantity Purchased × Actual Price

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.

Actual Quantity Purchased × Standard Price

2,800 lbs. × $3.90 per lb.

2,800 lbs. × $4.00 per lb.

= $10,920

= $11,200

Price variance $280 favorable © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Material Variances Continued Actual Quantity Used × Standard Price 1,700 lbs. × $4.00 per lb.

1,500 lbs. × $4.00 per lb.

= $6,800

= $6,000

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

Isolation of Material Variances I need the price variance sooner so that I can better identify purchasing problems. You accountants just don’t understand the problems that purchasing managers have.

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

McGraw-Hill/Irwin

Now let’s calculate standard cost variances for direct labor.

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

© The McGraw-Hill Companies, Inc., 2003

© The McGraw-Hill Companies, Inc., 2003

Standard Costs

because of poorly trained workers and poorly maintained equipment.

You purchased cheap material, so my people had to use more of it.

I’ll start computing the price variance when material is purchased rather than when it’s used.

Quantity variance $800 unfavorable

Responsibility for Material Variances You used too much material I am not responsible for this unfavorable material quantity variance.

Price variance increases because quantity purchased increases. © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Zippy

Standard Quantity × Standard Price

Zippy

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

10-9

Note

Labor Variances Example

Zippy

Materials variances: z

z

Material price variance z MPV = AQ (AP - SP) Material quantity variance z MQV = SP (AQ - SQ)

Hanson Inc. has the following direct labor standard to manufacture one Zippy:

Actual hours

1.5 standard hours per Zippy at $12.00 per direct labor hour

Actual rate

Labor variances: z

z

Labor rate variance z LRV = AH (AR - SR) Labor efficiency variance z LEV = SR (AH - SH)

McGraw-Hill/Irwin

Standard rate Standard hours allowed for the actual good output © The McGraw-Hill Companies, Inc., 2003

Quick Check 9

Quick Check 9

McGraw-Hill/Irwin

Zippy

© The McGraw-Hill Companies, Inc., 2003

© The McGraw-Hill Companies, Inc., 2003

Quick Check 9

Zippy

Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable.

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

What was Hanson’s actual rate (AR) for labor for the week? AR = $18,910 ÷ 1,550 hours a. $12.20 per hour. AR = $12.20 per hour b. $12.00 per hour. c. $11.80 per hour. d. $11.60 per hour.

© The McGraw-Hill Companies, Inc., 2003

Quick Check 9

McGraw-Hill/Irwin

Zippy

What was Hanson’s actual rate (AR) for labor for the week? a. $12.20 per hour. b. $12.00 per hour. c. $11.80 per hour. d. $11.60 per hour.

McGraw-Hill/Irwin

Last week 1,550 direct labor hours were worked at a total labor cost of $18,910 to make 1,000 Zippies.

Zippy

Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. LRV = AH(AR - SR) c. $300 unfavorable. LRV = 1,550 hrs($12.20 - $12.00) d. $300 favorable. LRV = $310 unfavorable

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

10-10

Quick Check 9 The standard hours (SH) of labor that should have been worked to produce 1,000 Zippies is: a. 1,550 hours. b. 1,500 hours. c. 1,700 hours. d. 1,800 hours.

Quick Check 9

Zippy

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

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Quick Check 9

Zippy

McGraw-Hill/Irwin

Quick Check 9

Zippy

Hanson’s labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable.

© The McGraw-Hill Companies, Inc., 2003

Zippy

Hanson’s labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. LEV = SR(AH - SH) LEV = $12.00(1,550 hrs - 1,500 hrs) LEV = $600 unfavorable

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Labor Variances Summary Actual Hours × Actual Rate

Actual Hours × Standard Rate

1,550 hours × $12.20 per hour

1,550 hours × $12.00 per hour

= $18,910

= $18,600

Rate variance $310 unfavorable McGraw-Hill/Irwin

Zippy

McGraw-Hill/Irwin

Labor Rate Variance – A Closer Look Using highly paid skilled workers to perform unskilled tasks results in an unfavorable rate variance.

Standard Hours × Standard Rate 1,500 hours × $12.00 per hour

© The McGraw-Hill Companies, Inc., 2003

High skill, high rate

Low skill, low rate

= $18,000

Efficiency variance $600 unfavorable © The McGraw-Hill Companies, Inc., 2003

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

© The McGraw-Hill Companies, Inc., 2003

10-11

Labor Efficiency Variance – A Closer Look Insufficient demand

Poorly trained workers

Poor quality materials

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.

Unfavorable Efficiency Variance Poor supervision of workers

Poorly maintained equipment © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

McGraw-Hill/Irwin

Responsibility for Labor Variances

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Now let’s calculate standard cost variances for the last of the variable production costs – variable manufacturing overhead.

McGraw-Hill/Irwin

z

Labor rate variance z LRV = AH (AR - SR) Labor efficiency variance z LEV = SR (AH - SH)

Actual hours of the allocation base Actual variable overhead rate

Variable overhead variances: z

z

© The McGraw-Hill Companies, Inc., 2003

Quick Check 9

Note Labor variances:

© The McGraw-Hill Companies, Inc., 2003

Standard Costs

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

z

You used too much time because of poorly trained workers and poor supervision.

Standard variable overhead rate

Variable overhead spending variance z VOSV = AH (AR - SR) Variable overhead efficiency variance z VOEV = SR (AH Quick Check 9 Standard hours allowed

Zippy

Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was: a. $465 unfavorable. b. $400 favorable. c. $335 unfavorable. d. $300 favorable.

for the actual good output McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

10-12

Quick Check 9

Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was: a. $465 unfavorable. b. $400 favorable. SV = AH(AR - SR) c. $335 unfavorable. SV = 1,550 hrs($3.30 - $3.00) d. $300 favorable. SV = $465 unfavorable

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

Quick Check 9

Zippy

Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was: a. $435 unfavorable. b. $435 favorable. 1,000 units × 1.5 hrs per unit c. $150 unfavorable. d. $150 favorable. EV = SR(AH - SH) EV = $3.00(1,550 hrs - 1,500 hrs) EV = $150 unfavorable McGraw-Hill/Irwin

Quick Check 9

Zippy

© The McGraw-Hill Companies, Inc., 2003

Variable Manufacturing Overhead Variances – A Closer Look

Zippy

Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was: a. $435 unfavorable. b. $435 favorable. c. $150 unfavorable. d. $150 favorable.

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

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 McGraw-Hill/Irwin

= $4,500

Efficiency variance $150 unfavorable © The McGraw-Hill Companies, Inc., 2003

Variance Analysis and Management by Exception

If variable overhead is applied on the basis of direct labor hours, the labor efficiency and variable overhead efficiency variances will move in tandem.

How do I know which variances to investigate?

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Larger variances, in dollar amount or as a percentage of the standard, are investigated first. © The McGraw-Hill Companies, Inc., 2003

10-13

Disadvantages of Standard Costs

Advantages of Standard Costs Management by exception

Possible reductions in production costs

Better Information for planning and decision making © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

The Balanced Scorecard

Continuous improvement may be more important than meeting standards.

Customers

Emphasizing standards may exclude other important objectives.

Incentives to build inventories.

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

The Balanced Scorecard

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

Financial

Favorable variances may be misinterpreted.

Potential Problems

Standard cost reports may not be timely.

Advantages Improved cost control and performance evaluation

Emphasis on negative may impact morale.

How do we look to the owners?

In which internal business processes must we excel?

How can we continually learn, grow, and improve?

Performance measures Internal business processes

Learning and growth © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

The Balanced Scorecard

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

Benefits of Balance Scorecard If implemented well:

Learning improves business processes.

Improved business processes improve customer satisfaction.

McGraw-Hill/Irwin

How do we look to customers?

Improving customer satisfaction improves financial results. © The McGraw-Hill Companies, Inc., 2003

z

Forces management to articulate a coherent strategy.

z

Strategy is communicated throughout organization.

z

Performance measures are more likely to be consistent with strategy and actionable.

z

Portfolio of measures reduces gaming problems.

z

Feedback loop makes strategy dynamic.

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

10-14

Some Possible Problems

Delivery Performance Measures Order Received

Cultural/behavioral z

Program fatigue.

z

Culture shock/resistance.

z

Every existing performance measure has a champion.

z

Gaming still possible.

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. © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

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

Value-added time Manufacturing cycle time © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Quick Check 9 A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Inspection 0.4 days Process 0.2 days

Wait 3.0 days Inspection 0.4 days Process 0.2 days

Move 0.5 days Queue 9.3 days

What is the throughput time? a. 10.4 days b. 0.2 time days= Process + Inspection + Move + Queue Throughput c. 4.1 days= 0.2 days + 0.4 days + 0.5 days + 9.3 days d. 13.4 days= 10.4 days McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

Move 0.5 days Queue 9.3 days

What is the throughput time? a. 10.4 days b. 0.2 days c. 4.1 days d. 13.4 days © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Quick Check 9 A TQM team at Narton Corp has recorded the following average times for production:

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Quick Check 9 A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Inspection 0.4 days Process 0.2 days

Move 0.5 days Queue 9.3 days

What is the MCE? a. 50.0% b. 1.9% c. 52.0% d. 5.1% McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

10-15

Quick Check 9 A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Inspection 0.4 days Process 0.2 days

Move 0.5 days Queue 9.3 days

What is the MCE? a. 50.0% MCE = Value-added time ÷ Throughput time b. 1.9% = Process time ÷ Throughput time c. 52.0% = 0.2 days ÷ 10.4 days d. 5.1% = 1.9% © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

Quick Check 9 A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Inspection 0.4 days Process 0.2 days

Move 0.5 days Queue 9.3 days

What is the delivery cycle time? a. 0.5 days b. 0.7 days c. 13.4 days d. 10.4 days McGraw-Hill/Irwin

Quick Check 9

Delivery cycle time = Wait time + Throughput time = 3.0 days + 10.4 days = 13.4 days

© The McGraw-Hill Companies, Inc., 2003

End of Chapter 10

A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Inspection 0.4 days Process 0.2 days

Move 0.5 days Queue 9.3 days

What is the delivery cycle time? a. 0.5 days b. 0.7 days c. 13.4 days d. 10.4 days McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003