Performance Evaluation Using Variances from Standard Costs

1
Chapter 21
Performance Evaluation Using Variances from
Standard Costs
Financial and Managerial Accounting 8th
Edition Warren Reeve Fess
2
Objectives
1. Describe the types of standards and how they
are established for businesses. 2. Explain and
illustrate how standards are used in
budgeting. 3. Calculate and interpret direct
materials price and quantity variances. 4. Calcula
te and interpret direct labor rate and time
variances.
3
Objectives
5. Calculate and interpret factory overhead
controllable and volume variances.
6. Journalize the entries for recording standards
in the accounts and prepare an income statement
that includes variances from standards. 7. Explain
how standards may be used for nonmanufacturing
expenses. 8. Explain and provide examples of
nonfinancial performance measures.
4
StandardsPerformance Benchmarks
Setting Standards

• Requires joint efforts of accountants, engineers,
  and other management personnel

Types of Standards
Theoretical or ideal (world record)
standards Currently attainable standards (normal
standards)
Reviewing and Revising Standards
Should be revised when they no longer reflect
operating conditions they intended to measure
5
Western Rider Inc., a manufacturer of blue jeans,
uses standard manufacturing costs in its budgets.
6
Western Rider Inc. Standard Cost per Pair of XL
Jeans
Direct materials 5.00 per square yard x 1.5
square yards 7.50 Direct labor 9.00 per
hour x 0.80 hour per pair 7.20 Factory
overhead 6.00 per hour x 0.80 hour per pair
4.80 Total standard cost per pair 19.50
7
Western Rider Inc. Budget Performance Report For
the Month Ended June 30, 2006
Standard Cost Cost at Actual Variance Actual
Volume (favorable) Manufacturing
Costs Costs (5,000 units) Unfavorable

• Direct materials 40,150 37,500 2,650

Direct labor 38,500 36,000 2,500 Factory
overhead 22,400 24,000 (1,600) Total
mfg. costs 101,050 97,500 3,550
8
Total Manufacturing Cost Variance
9
Direct Materials
10
Direct Materials Price Variance
Actual price per unit 5.50 per sq. yd. Standard
price per unit 5.00 per sq. yd. Price variance
(unfavorable) 0.50 per sq. yd.
0.50 times the actual quantity of 7,300 sq. yds.
3,650 unfavorable
11
Direct Materials Quantity Variance
Actual quantity used 7,300 sq. yds. Standard
quantity at actual production 7,500 Quantity
variance (favorable) (200) sq. yds.
(200) square yards times the standard price of
5.00 (1,000) favorable
12
Direct Materials Variance Relationships
Actual quantity x Standard price 7,300 x 5.00
36,500
Actual quantity x Actual price 7,300 x 5.50
40,150
Standard quantity x Standard price 7,500 x 5.00
37,500
Material Price Variance
Material Quantity Variance
3,650 U
(1,000) F
13
Direct Materials Variance Relationships
Total Direct Materials Cost Variance
2,650 U
14
Direct Labor
15
Direct Labor Variances
Standard direct labor hours per of XL
jeans 0.80 direct labor hour Actual units
produced x 5,000 pairs of jeans Standard direct
labor hours budgeted for actual production
4,000 direct labor hours Standard rate per DLH x
9.00 Standard direct labor cost at actual
production 36,000
16
Direct Labor Variances
17
Direct Labor Rate Variance
Actual rate 10.00 Standard rate 9.00 Rate
variance (unfavorable) 1.00 per DLH
1.00 times the actual time of 3,850 hours
3,850 unfavorable
18
Direct Labor Time Variance
Actual hours 3,850 DLH Standard hours at
actual production 4,000 DLH Time
variance (150) DLH
(150) Direct labor hours times the standard rate
of 9.00 (1,350) favorable
19
Direct Labor Variance Relationships
Actual hours x Standard rate 3,850 x 9.00
34,650
Actual hours x Actual rate 3,850 x 10
38,500
Standard hours x Standard rate 4,000 x 9.00
36,000
Direct Labor Rate Variance
Direct Labor Time Variance
3,850 U
(1,350) F
20
Total Direct Labor Cost Variance
2,500 U
21
Factory Overhead
22
(No Transcript)
23
(No Transcript)
24
Variances from standard for factory overhead
result from

• 1. Actual variable factory overhead cost greater
  or less than budgeted variable factory overhead
  for actual production.
• 2. Actual production at a level above or below
  100 of normal capacity.

25
Western Rider Inc. produced 5,000 pairs of XL
jeans in June. Each pair requires 0.80 standard
labor hours for production. The firm operated at
80 of capacity.
Actual variable overhead 10,400 Variable
overhead variancefavorable (4,000) F
26
Western Rider Inc. produced 5,000 pairs of XL
jeans in June. Each pair requires 0.80 standard
labor hours for production. The firm operated at
80 of capacity.
Actual variable overhead 10,400 Variable
overhead variancefavorable (4,000) F
Controllable variance based on variable costs
27
Western Rider Inc. produced 5,000 pairs of XL
jeans in June. Each pair requires 0.80 standard
labor hours for production. The firm operated at
80 of capacity.
Desired capacity
Standard hours at actual production
28
Western Rider Inc. produced 5,000 pairs of XL
jeans in June. Each pair requires 0.80 standard
labor hours for production. The firm operated at
80 of capacity.
100 of normal capacity 5,000 DLH Standard hours
at actual production 4,000 DLH Capacity not
used 1,000 DLH Standard fixed overhead rate at
100 x 2.40 Fixed overhead volume variance
2,400 U
29
Western Rider Inc. Factory Overhead Cost Variance
Report For the Month Ended June 30, 2006
Productive capacity for the month (100 of
normal) 5,000 hours Actual production for the
month 4,000 hours

Budget
(at Actual
Variances

Production) Actual Favorable Unfavorable

Variable factory overhead costs 14,400 10,400 4
,000 Fixed factory overhead costs 12,000
12,000 Total factory overhead costs 26,400 22,40
0 Total controllable variances 4,000
0 Net controllable variances favorable 4
,000 Volume varianceunfavorable Capacity not
used at the standard rate for fixed factory
overhead1,000 x 2.40 2,400 Total factory
overhead cost variance--favorable 1,600
30
Fixed Overhead Variances and the Factory Overhead
Account
Factory Overhead
Actual factory overhead 22,400
Applied factory overhead 24,000
10,400 12,000
4,000 hours x 6.00 per hour
31
Fixed Overhead Variances and the Factory Overhead
Account
Controllable Variance 4,000 F
22,400 26,400
32
Fixed Overhead Variances and the Factory Overhead
Account
Volume Variance 2,400 U
26,400 24,000
33
Fixed Overhead Variances and the Factory Overhead
Account
Total Factory Overhead Variance
Controllable variance 4,000 F Volume variance
2,400 U Total 1,600 F
34
Fixed Overhead Variances and the Factory Overhead
Account
Budgeted Factory Overhead for Amount Produced
Controllable variance 14,400 Fixed factory
overhead 12,000 Total 26,400
35
Recording and Reporting Variances from Standards
36
On August 1, Western Rider Inc. purchased, on
account, the 7,300 square yards of blue denim at
5.50 per square yard. Recall, the standard
price was 5.00.
Aug. 1 Materials (7,300 sq. yds. X 5.00)
36 500 00 Direct Materials Price Variance 3
650 00
Accounts Payable 40 150 00
37
Western Rider Inc. used 7,300 square yards of
blue denim to produce 5,000 pairs of XL jeans,
compared to the standard of 7,500 square yards.
Date the entry August 31.
Aug. 31 Work in Process (7,500 x 5.00) 37
500 00
Direct Materials Quantity Variance 1 000 00
Materials (7,300 x 5.00) 36 500 00
38
For the month of August, Western Rider Inc.
accrued wages of 38,500 (3,850 hours at 10 per
hour) in producing 5,000 XL Jeans. The standard
rate is 9 per hour and each pair of jeans had a
time standard of 0.8 hr.
Aug. 31 Work in Process 36 000
00 Direct Labor Rate Variance 3 850 00
Direct Labor Time Variance 1 350 00 Wages
Payable 38 500 00
This entry is not shown in the textbook.
39
Western Rider Inc. Income Statement For the Month
Ended June 30, 2006
Sales 140,000 Cost of goods
sold.. 97,500 Gross profit--at
standard. 42,500
Favorable Unfavorable
Less variances from standard cost Direct
materials price.. 3,650 Direct materials
quantity. 1,000 Direct labor
rate.. 3,850 Direct labor
time. 1,350 Factory overhead
controllable. 4,000 Factory overhead
volume 2,400 3,550 Gross
profit. 38,950 Operating
expenses. 25,725 Income before income
tax.. 13,225
40
Nonfinancial Performance Measures

• Inventory turnover
• On-time delivery
• Elapsed time between a customer order and product
  delivery
• Customer preference rankings compared to
  competitors
• Response time to a service call
• Time to develop new products
• Employee satisfaction
• Number of customer complaints

41
Nonfinancial Performance Measures (Fast Food
Restaurant)
Inputs Employee training Employee
experience Number of new menu items Number of
employees Fryer reliability Fountain supply
availability
Outputs Line wait Percent order accuracy Friendly
service score
Activity Counter service