chapter 22 performance evaluation using variances from standard costs accounting, 21 st edition...
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Chapter Chapter 2222Performance Evaluation Performance Evaluation
Using Variances from Using Variances from Standard CostsStandard Costs
Accounting, 21st Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University
© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.
Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.
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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. Calculate and interpret direct labor rate and time variances.
ObjectivesObjectivesObjectivesObjectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
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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.
ObjectivesObjectivesObjectivesObjectives
5. Calculate and interpret factory overhead controllable and volume variances.
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Standards—Performance BenchmarksStandards—Performance BenchmarksStandards—Performance BenchmarksStandards—Performance Benchmarks
Requires joint efforts of accountants, engineers, and other management personnel
Setting StandardsSetting Standards
Reviewing and Revising StandardsReviewing and Revising Standards
Should be revised when they no longer reflect operating conditions they intended to measure
Types of StandardsTypes of StandardsTheoretical or ideal (world record) standards
Currently attainable standards (normal standards)
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Western Rider Inc., a manufacturer of blue jeans, uses standard manufacturing costs
in its budgets.
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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 = 4.80Total standard cost per pair $19.50
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Western Rider Inc.Budget Performance Report
For the Month Ended June 30, 2006
Direct materials $ 40,150 $37,500 $2,650
Standard Cost Costat Actual Variance
Actual Volume (favorable) Manufacturing Costs Costs (5,000 units) Unfavorable
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
5,000 x 5,000 x $7.50 per $7.50 per
pairpair
5,000 x 5,000 x $7.50 per $7.50 per
pairpair
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TotalTotalManufacturingManufacturingCost VarianceCost Variance
TotalTotalManufacturingManufacturingCost VarianceCost Variance
Direct Materials Price Variance
Direct Materials Price Variance
Direct Materials Price Variance
Direct Materials Price Variance
Direct Labor Rate Variance
Direct Labor Rate Variance
Direct Labor Time Variance
Direct Labor Time Variance
Variable Factory Overhead Controllable Variance
Variable Factory Overhead Controllable Variance
Fixed Factory Overhead Volume Variance
Fixed Factory Overhead Volume Variance
Direct Direct MaterialsMaterialsCost VarianceCost Variance
Direct Direct MaterialsMaterialsCost VarianceCost Variance
Direct Direct LaborLaborCost VarianceCost Variance
Direct Direct LaborLaborCost VarianceCost Variance
FactoryFactoryOverheadOverheadCost VarianceCost Variance
FactoryFactoryOverheadOverheadCost VarianceCost Variance
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Direct Materials Price VarianceDirect Materials Price VarianceDirect Materials Price VarianceDirect 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
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Direct Materials Quantity VarianceDirect Materials Quantity VarianceDirect Materials Quantity VarianceDirect Materials Quantity Variance
Actual quantity used 7,300 sq. yds.Standard quantity at actual production 7,500Quantity variance (favorable) (200) sq. yds.
(200) square yards times the standard price of $5.00 = ($1,000) favorable
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Direct Materials Direct Materials Variance RelationshipsVariance Relationships
Direct Materials Direct Materials Variance RelationshipsVariance 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
$3,650 U
Material Price Variance
Standard quantity x Standard price 7,500 x $5.00 =
$37,500
($1,000) F
Material Quantity Variance
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Direct Materials Direct Materials Variance RelationshipsVariance Relationships
Direct Materials Direct Materials Variance RelationshipsVariance Relationships
$2,650 U
Total Direct Materials Cost Variance
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
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Direct Labor VariancesDirect Labor VariancesDirect Labor VariancesDirect Labor Variances
Standard direct labor hours per of XL jeans 0.80 direct labor hour
Actual units produced x 5,000 pairs of jeansStandard direct labor hours budgeted for actualproduction 4,000 direct labor hoursStandard rate per DLH x $9.00Standard direct labor cost
at actual production $36,000
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Direct Labor VariancesDirect Labor VariancesDirect Labor VariancesDirect Labor Variances
Actual direct labor hoursused in production 3,850 direct labor hours
Actual rate per direct laborhour x $10.00
Total actual direct labor cost $ 38,500
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Direct Labor Rate VarianceDirect Labor Rate VarianceDirect Labor Rate VarianceDirect Labor Rate Variance
Actual rate $10.00Standard rate 9.00Rate variance (unfavorable) $1.00 per DLH
$1.00 times the actual time of 3,850 hours = $3,850 unfavorable
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Direct Labor Time VarianceDirect Labor Time VarianceDirect Labor Time VarianceDirect Labor Time Variance
Actual hours 3,850 DLHStandard hours at actual
production 4,000Time variance (150) DLH
(150) Direct labor hours times the standard rate of $9.00 = ($1,350) favorable
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Direct Labor Variance Direct Labor Variance RelationshipsRelationships
Direct Labor Variance Direct Labor Variance RelationshipsRelationships
Actual hours x Standard rate
3,850 x $9.00 = $34,650
Actual hours x Actual rate 3,850 x $10 =
$38,500
$3,850 U
Direct Labor Rate Variance
Standard hours x Standard rate
4,000 x $9.00 = $36,000
($1,350) F
Direct Labor Time Variance
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Direct Labor Variance Direct Labor Variance RelationshipsRelationships
Direct Labor Variance Direct Labor Variance RelationshipsRelationships
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
$2,500 U
Total Direct Labor Cost Variance
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Overhead is applied at $6.00 per direct labor hour based on estimated 5,000 total hours.
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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.
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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.
Direct Labor Hours4,000 5,000 5,500
Total variable costs $14,400 $18,000 $19,800
Percentage of capacity 80% 100% 110%
Actual variable overhead 10,400 Variable overhead
variance—favorable $(4,000) F
Controllable variance based on variable costs
Controllable variance based on variable costs
Level of activity
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Direct Labor Hours4,000 5,000 5,500
Percentage of capacity 80% 100% 110%Total fixed costs 12,000 12,000 12,000Fixed cost per DLH $3.00 $2.40 $2.18
Desired Desired capacitycapacityStandard hours Standard hours
at at actualactual production production
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.
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Direct Labor Hours4,000 5,000 5,500
Percentage of capacity 80% 100% 110%Total fixed costs 12,000 12,000 12,000Fixed cost per DLH $3.00 $2.40 $2.18
100% of normal capacity 5,000 DLHStandard hours at actual production 4,000 DLHCapacity not used 1,000 DLHStandard fixed overhead rate at 100% x $2.40Fixed overhead volume variance $ 2,400 U
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.
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Western Rider Inc.Factory Overhead Cost Variance Report
For the Month Ended June 30, 2006Productive capacity for the month (100% of normal) 5,000 hoursActual production for the month 4,000 hours Budget (at Actual Variances Production) Actual Favorable Unfavorable Variable factory overhead costs $14,400 $10,400 $4,000Fixed factory overhead costs 12,000 12,000Total factory overhead costs $26,400 $22,400Total controllable variances $4,000 $ 0Net controllable variances—
favorable $4,000Volume variance—unfavorable:
Capacity not used at the standard rate for fixed factory overhead—1,000 x $2.40 2,400
Total factory overhead cost variance--favorable $1,600
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Fixed Overhead Variances and the Fixed Overhead Variances and the Factory Overhead AccountFactory Overhead Account
Fixed Overhead Variances and the Fixed Overhead Variances and the Factory Overhead AccountFactory Overhead Account
Factory Overhead
Actual factory overhead $22,400
$10,400 + $12,000
$10,400 + $12,000
Applied factory overhead $24,000
4,000 hours x $6.00 per hour
4,000 hours x $6.00 per hour
Balance, June 30 1,600
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Fixed Overhead Variances and the Fixed Overhead Variances and the Factory Overhead AccountFactory Overhead Account
Fixed Overhead Variances and the Fixed Overhead Variances and the Factory Overhead AccountFactory Overhead Account
Factory Overhead
Actual factory overhead $22,400
Applied factory overhead $24,000
Balance, June 30 1,600Controllable
Variance: $4,000 F
$22,400 – $26,400$22,400 – $26,400
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Fixed Overhead Variances and the Fixed Overhead Variances and the Factory Overhead AccountFactory Overhead Account
Fixed Overhead Variances and the Fixed Overhead Variances and the Factory Overhead AccountFactory Overhead Account
Factory Overhead
Actual factory overhead $22,400
Applied factory overhead $24,000
Balance, June 30 1,600
Volume Variance: $2,400 U
$26,400 – $24,000$26,400 – $24,000
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Fixed Overhead Variances and the Fixed Overhead Variances and the Factory Overhead AccountFactory Overhead Account
Fixed Overhead Variances and the Fixed Overhead Variances and the Factory Overhead AccountFactory Overhead Account
Total Factory Overhead Variance
Controllable variance $4,000 FVolume variance 2,400 U Total $1,600 F
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Fixed Overhead Variances and the Fixed Overhead Variances and the Factory Overhead AccountFactory Overhead Account
Fixed Overhead Variances and the Fixed Overhead Variances and the Factory Overhead AccountFactory Overhead Account
Controllable variance $14,400Fixed factory overhead 12,000 Total $26,400
Budgeted Factory Overhead for Amount Produced
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Recording and
Reporting Variances
from Standards
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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
On August 1, Western Rider Inc. On August 1, Western Rider Inc. purchased, on account, the 7,300 square purchased, on account, the 7,300 square yards of blue denim at $5.50 per square yards of blue denim at $5.50 per square
yard. Recall, the standard price was $5.00.yard. Recall, the standard price was $5.00.
On August 1, Western Rider Inc. On August 1, Western Rider Inc. purchased, on account, the 7,300 square purchased, on account, the 7,300 square yards of blue denim at $5.50 per square yards of blue denim at $5.50 per square
yard. Recall, the standard price was $5.00.yard. Recall, the standard price was $5.00.
$5.50 7,300 = $40,150
$5.00 7,300 = $36,500
$3,650 U Direct materials price variance
x x
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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
Western Rider Inc. used 7,300 square yards Western Rider Inc. used 7,300 square yards of blue denim to produce 5,000 pairs of XL of blue denim to produce 5,000 pairs of XL
jeans, compared to the standard of 7,500 jeans, compared to the standard of 7,500 square yards. Date the entry August 31.square yards. Date the entry August 31.
Western Rider Inc. used 7,300 square yards Western Rider Inc. used 7,300 square yards of blue denim to produce 5,000 pairs of XL of blue denim to produce 5,000 pairs of XL
jeans, compared to the standard of 7,500 jeans, compared to the standard of 7,500 square yards. Date the entry August 31.square yards. Date the entry August 31.
Standard price x Actual quantityStandard price x Standard quantity
$5.00 7,300 = $36,500
$5.00 7,500 = $37,500
$1,000 F Direct Materials quantity variance
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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
For the month of August, Western Rider Inc. accrued For the month of August, Western Rider Inc. accrued wages of $38,500 (3,850 hours at $10 per hour) in wages of $38,500 (3,850 hours at $10 per hour) in
producing 5,000 XL Jeans. The standard rate is $9 per 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.hour and each pair of jeans had a time standard of 0.8 hr.
For the month of August, Western Rider Inc. accrued For the month of August, Western Rider Inc. accrued wages of $38,500 (3,850 hours at $10 per hour) in wages of $38,500 (3,850 hours at $10 per hour) in
producing 5,000 XL Jeans. The standard rate is $9 per 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.hour and each pair of jeans had a time standard of 0.8 hr.
Actual rate x Actual hoursStandard rate x Actual hours
Standard rate x Standard quantity
= $38,500
= $34,650
= $36,000
$10.00 3,850
$9.00 3,850$3,850 U (rate)
$9.00 4,000$1,350 F (time)
This entry is not shown in the textbook.
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Western Rider Inc.Income Statement
For the Month Ended June 30, 2006
Sales…………………………………… $140,000Cost of goods sold…………………….. 97,500Gross profit--at standard………………. $ 42,500
Less variances from standard cost:Direct materials price……………….. $3,650Direct materials quantity……………. $1,000Direct labor rate…………………….. 3,850Direct labor time……………………. 1,350Factory overhead controllable………. 4,000Factory overhead volume…………… 2,400 3,550
Gross profit……………………………. $38,950Operating expenses……………………. 25,725Income before income tax…………….. $13,225
Favorable Unfavorable
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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
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Nonfinancial Performance Measures (Fast Food
Restaurant)InputsInputs
Employee trainingEmployee trainingEmployee experienceEmployee experienceNumber of new menu Number of new menu itemsitems
Number of employeesNumber of employeesFryer reliabilityFryer reliabilityFountain supply Fountain supply availabilityavailability
InputsInputsEmployee trainingEmployee trainingEmployee experienceEmployee experienceNumber of new menu Number of new menu itemsitems
Number of employeesNumber of employeesFryer reliabilityFryer reliabilityFountain supply Fountain supply availabilityavailability
OutputsOutputsLine waitLine waitPercent order Percent order accuracyaccuracy
Friendly service Friendly service scorescore
OutputsOutputsLine waitLine waitPercent order Percent order accuracyaccuracy
Friendly service Friendly service scorescore
Activity
Counter service
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The EndThe End
Chapter 22Chapter 22