Performance Evaluation Using Variances from Standard Costs

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Performance Evaluation Using Variances from
Standard Costs
Student Version
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Describe the types of standards and how they are
established.
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Types of Standards
Unrealistic standards that can be achieved only
under perfect operating conditions (such as no
idle time, no machine breakdowns, no materials
spoilage) are called ideal standards or
theoretical standards.
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Currently attainable standards, sometimes called
normal standards, can be attained with reasonable
effort. Standards set at this level allow for
disruptions, such as material spoilage and
machine breakdowns.
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Describe and illustrate how standards are used in
budgeting.
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The standard cost per unit for direct materials,
direct labor, and factory overhead is computed as
follows
Standard Cost per Unit Standard Price
Standard Quantity
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Budget Performance Report
The report that summarizes actual costs, standard
cost, and the differences for the units produced
is called a budget performance report.
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• A favorable cost variance occurs when the actual
  cost is less than the standard cost (at actual
  volumes).

• An unfavorable cost variance occurs when the
  actual cost exceeds the standard cost (at actual
  volumes).

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Direct Materials Variance
The total direct materials variance is separated
into price and quantity variances.
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Direct Labor Variance
The total direct labor variance is separated into
rate and time variances.
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Compute and interpret direct materials and direct
labor variances.
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Direct Materials Variances
Actual Direct Materials Cost Actual Price
Actual Quantity Actual Direct Materials Cost
5.50 (7,300 sq. yards.) Actual Direct
Materials Cost 40,150
Standard Direct Materials Cost Standard
Standard Quantity Standard Direct Materials Cost
5.00 (7,300 sq. yards.) Standard Direct
Materials Cost 37,150
Actual costs (40,150) Standard costs (37,500)
2,650
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Direct Materials Price Variance
Direct Materials Price Variance (Actual Price
Standard Price) Actual Quantity Direct
Materials Price Variance (5.50 5.00)
7,300 sq. yds. Direct Materials Price Variance
3,650 Unfavorable Variance
Western Rider paid 0.50 more per square yard of
material than the standard.
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Direct Materials Quantity Variance
Direct Materials Quantity Variance (Actual
Quantity Standard Quantity) Standard
Price Direct Materials Quantity Variance (7,300
sq. yds. 7,500 sq. yds. 5.00 Direct
Materials Price Variance (1,000) Favorable
Variance
Western Rider used 200 less square yards of
material than the standard.
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Direct Materials Variance Relationships
Exhibit 4
Actual cost
Standard cost
Standard quantity Standard price 7,500 5.00
37,500
Actual quantity Standard price 7,300 5.00
36,500
Actual quantity Actual price 7,300 5.50
40,150
Materials price variance
Material quantity variance
3,650 U
(1,000) F
Total direct materials cost variance
40,150 37,500 2,650 U
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Direct Labor Variances
Actual Direct Labor Cost Actual Rate per Hour
Actual Time Actual Direct Labor Cost 10.00 per
hr. 3,850 hrs. Actual Direct Labor Cost
38,500
Standard Direct Labor Cost Standard Rate per
Hour Standard Time Standard Direct Labor Cost
9.00 per hr. 4,000 hrs. Standard Direct Labor
Cost 36,000
Actual costs (38,500) Standard costs (36,000)
2,500
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Direct Labor Rate Variance
Direct Labor Rate Variance (Actual Rate per
Hour Standard Rate per Hour) Actual
Hours Direct Labor Rate Variance (10.00
9.00) 3,850 hours Direct Labor Rate Variance
3,850 Unfavorable Variance
If the actual direct labor rate for the units
produced is less than the standard direct labor
rate, the variance is favorable.
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Direct Labor Time Variance
Direct Labor Time Variance (Actual Direct Labor
Hours Standard Direct Labor Hours) Standard
Rate per Hour Direct Labor Time Variance (3,850
hours 4,000 direct labor hours) 9.00 Direct
Labor Time Variance (1,350) Favorable Variance
If the actual direct hours for the units produced
exceeds the standard direct labor hours, the
variance is unfavorable.
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Direct Labor Variance Relationships
Exhibit 5
Standard cost
Actual cost
Actual hours Standard rate 3,850 9 34,650
Actual hours Actual rate 3,850 10
38,500
Standard hours Standard rate 4,000 9
36,000
Direct labor rate variance
Direct labor time variance
3,850 U
(1,350) F
Total direct labor cost variance
38,500 36,000 2,500 U
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Compute and interpret factory overhead
controllable and volume variances.
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The Factory Overhead Flexible Budget
Budgeted Factory Overhead at Normal
Capacity Normal Productive Capacity
Factory Overhead Rate
Factory Overhead Rate 6.00 per direct labor
hour
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Fixed Factory Overhead Rate
Budgeted Fixed Overhead at Normal Capacity Normal
Productive Capacity
Fixed Factory Overhead Rate
Fixed Factory Overhead Rate 2.40 per direct
labor hour
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Variable Factory Overhead Rate
Budgeted Fixed Overhead at Normal Capacity Normal
Productive Capacity
Variable Factory Overhead Rate
Variable Factory Overhead Rate 3.60 per
direct labor hour
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Variable Factory Overhead Variances
Actual Variable Factory Overhead
Budgeted Variable Factory Overhead
Variable Factory Overhead Controllable Variance


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Variable Factory Overhead Variances
Actual Variable Factory Overhead
Budgeted Variable Factory Overhead
Variable Factory Overhead Controllable Variance


4,000 direct labor hours 3.60
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Variable Factory Overhead Variances
Actual Variable Factory Overhead
Variable Factory Overhead Controllable Variance


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Fixed Factory Overhead Variances
Fixed Factory Overhead Rate
Standard Hours for 100 of Normal Capacity
Standard Hours for Actual Units Produced
Fixed Factory Overhead Volume Variance



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Actual Factory Overhead
Applied Factory Overhead
Total Factory Overhead Cost Variance


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24,000
5,000 jeans x 0.80 direct labor hr. per pair of
jeans
6.00

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Actual Factory Overhead
Applied Factory Overhead
Total Factory Overhead Cost Variance


5,000 jeans x 0.80 direct labor hr. per pair of
jeans
6.00

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24,000
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Factory Overhead Variances and the Factory
Overhead Account
Factory Overhead
Actual factory overhead 22,400
Applied factory overhead 24,000
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Factory Overhead
Actual factory overhead 22,400
Applied factory overhead 24,000
Applied Factory Overhead 24,000
Actual Factory Overhead 22,400
(4,000) F
2,400 U
Controllable Variance
Volume Variance
(1,600) F
Total Factory Overhead Cost Variance
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Journalize the entries for recording standards in
the accounts and prepare an income statement that
includes variances from standards.
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Recording and Reporting Variances from Standards
Western Rider Inc. purchased, on account, the
7,300 square yards of blue denim at 5.50 per
square yard. The standard price was 5.00 per
square yard.
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Western Rider Inc.s Purchase of Materials Entry
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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.
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Western Rider Inc.s Use of Materials Entry
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Describe and provide examples of nonfinancial
performance measures.
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Nonfinancial Performance Measures

• Inventory turnover
• Percent 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

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Nonfinancial measures can be linked to either the
inputs or outputs of an activity or process. A
process is a sequence of activities linked
together for performing a particular task.
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