learning objectives

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Learning Objectives

Power Notes

1. Standards

2. Budgetary Performance Evaluation

3. Direct Materials Variances

4. Direct Labor Variances

5. Factory Overhead Variances

6. Recording and Reporting Variances from Standards

7. Standards for Nonmanufacturing Expenses

8. Nonfinancial Performance Measures

Chapter M6

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Performance Evaluation, Variances from StandardsPerformance Evaluation, Variances from Standards

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• Standard Costs, Performance Reports

• Direct Materials Variances

• Direct Labor Variances

• Factory Overhead Variances

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Chapter M6


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Standards — Performance BenchmarksStandards — Performance Benchmarks

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

Theoretical standards (ideal standards).

Currently attainable standards (normal standards).

Should be revised when they no longer reflect operating conditions they intended to measure.

Setting StandardsSetting Standards

Reviewing and Revising StandardsReviewing and Revising Standards

Types of StandardsTypes of Standards

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Western Rider Inc.Standard Cost per Pair of XL Jeans

$5.00 per square yard x 1.5 square yards $7.50

$9.00 per hour x .80 hours per pair 7.20

$6.00 per hour x .80 hours per pair 4.80 Total standard cost per pair $19.50

Direct Materials:

Direct Labor:

Factory Overhead:

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Western Rider Inc.Budget Performance Report

For the Month Ended June 30, 2003

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

Actual Flexible Cost Manufacturing Costs Costs Budget Variance

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Direct Materials Variance ReportFor the Month Ended June 30, 2003

Square yards per unit 1.50 Total units produced x 5,000 Total yards 7,500 Price per yard x $5.00 Total dollars $37,500

Description Standard Actual Variance

The standard is based on the actual units produced.


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Square yards per unit 1.50 Total units produced x 5,000 Total yards 7,500 Price per yard x $5.00 Total dollars $37,500


$5.00$5.00

price

quantity

$37,500

7,5007,500

The total of this box is: $5.00 x 7,500 yards


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Square yards per unit 1.50 1.46 .04 F (quantity) Total units produced x 5,000 x 5,000Total yards 7,500 7,300 200 F (quantity)Price per yard x $5.00 x $5.50 $.50 U (price) Total dollars $37,500 $40,150 $2,650 U (total)


Actual results are:200 yards under standard$.50 per yard over standard$2,650 over standard

Actual results are:200 yards under standard$.50 per yard over standard$2,650 over standard

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Square yards per unit 1.50 1.46 .04 F (quantity) Total units produced x 5,000 x 5,000Total yards 7,500 7,300 200 F (quantity)Price per yard x $5.00 x $5.50 $.50 U (price) Total dollars $37,500 $40,150 $2,650 U (total)


$5.50

price

quantity

$40,150

7,300



Actual cost.Actual cost.

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Square yards per unit 1.50 1.46 .04 F (quantity) Total units produced x 5,000 x 5,000Total yards 7,500 7,300 200 F (quantity)Price per yard x $5.00 x $5.50 $.50 U (price)Total dollars $37,500 $40,150 $2,650 U (total)


$5.50

$5.00$5.00

price

quantity

$3,650

7,300 7,5007,500

Who is responsible for an unfavorable price variance?

Who is responsible for an unfavorable price variance?

Unfavorable price variance ($.50 x 7,300 yards)


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$5.50

$5.00$5.00

price

quantity

$1,000

7,300 7,5007,500

Who is responsible for a favorable quantity variance?

Who is responsible for a favorable quantity variance?

Favorable quantity variance (200 yards x $5.00)


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$5.50

$5.00$5.00

price

quantity

$3,650

$1,000

7,300 7,5007,500





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Direct Labor Variance ReportFor the Month Ended June 30, 2003

Hours per unit .80 Total units produced x 5,000 Total hours 4,000 Rate per hour x $9.00 Total dollars $36,000




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Hours per unit .80 Total units produced x 5,000 Total hours 4,000 Rate per hour x $9.00 Total dollars $36,000


$9.00$9.00

rates

hours

$36,000

4,0004,000

The total of this box is: $9.00 x 4,000 hours


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Hours per unit .80 .77 .03 F (time)Total units produced x 5,000 x 5,000 Total hours 4,000 3,850 150 F (time)Rate per hour x $9.00 x $10.00 $1.00 U (rate)Total dollars $36,000 $38,500 $2,500 U (total


Actual results are:150 hours under standard$1.00 per hour over standard$2,500 over standard

Actual results are:150 hours under standard$1.00 per hour over standard$2,500 over standard

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Hours per unit .80 .77 .03 F (time)Total units produced x 5,000 x 5,000 Total hours 4,000 3,850 150 F (time)Rate per hour x $9.00 x $10.00 $1.00 U (rate)Total dollars $36,000 $38,500 $2,500 U (total


$10.00

rates

hours

$38,500

3,850



Actual cost.Actual cost.

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Hours per unit .80 .77 .03 F (time) Total units produced x 5,000 x 5,000Total hours 4,000 3,850 150 F (time)Rate per hour x $9.00 x $10.00 $1.00 U (rate)Total dollars $36,000 $38,500 $2,500 U (total)


$10.00

$9.00$9.00

rates

hours

$3,850

3,850 4,0004,000

Unfavorable rate variance ($1.00 x 3,850 hours)


Who is responsible for an unfavorable rate variance?

Who is responsible for an unfavorable rate variance?

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$10.00

$9.00$9.00

rates

hours 3,850 4,0004,000

Who is responsible for a favorable time variance?

Who is responsible for a favorable time variance?

$1,350Favorable time variance (150 hours x $9.00)

Favorable time variance (150 hours x $9.00)

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$10.00

$9.00$9.00

rates

hours

$3,850

$1,350

3,850 4,0004,000





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Western Rider Inc.Factory Overhead Cost Budget


Direct Labor Hours4,000 4,500 5,000

Overhead is applied at $6.00 per direct labor hour based on estimated 5,000 total hours.

Overhead is applied at $6.00 per direct labor hour based on estimated 5,000 total hours.

Total variable costs $14,400 $16,200 $18,000Variable costs per hour $ 3.60 $ 3.60$3.60Total fixed costs $12,000 $12,000 $12,000Fixed costs per hour $ 3.00 $ 2.67 $ 2.40Total costs per hour $ 6.60 $ 6.27 $ 6.00$ 6.00

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Western Rider Inc.Factory Overhead Variances


Variable costs $14,400 $10,400 $4,000 F ($3.60 x 4,000 hours)Fixed costs 9,600 12,000 2,400 U ($2.40 x 4,000 hours)Total costs $24,000 $22,400 $1,600 F

Revised ActualBudget Costs Variance

Factory overhead applied at $6.00 per direct labor hour based on 4,000 actual hours.

Factory overhead applied at $6.00 per direct labor hour based on 4,000 actual hours.

Actual factory overhead per general ledger.

Actual factory overhead per general ledger.

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Variable costs $14,400 $10,400 $4,000$4,000 FF ($3.60 x 4,000 hours)Fixed costs 9,600 12,000 2,400 U ($2.40 x 4,000 hours)Total costs $24,000 $22,400 $1,600 F

Controllable variance based on variable costs

Controllable variance based on variable costs

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Volume variance based on fixed costs

Volume variance based on fixed costs

Variable costs $14,400 $10,400 $4,000 F ($3.60 x 4,000 hours)Fixed costs 9,600 12,000 2,4002,400 UU ($2.40 x 4,000 hours)Total costs $24,000 $22,400 $1,600 F

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Variable Factory Overhead Controllable VarianceFor the Month Ended June 30, 2003

Actual variable overhead $10,400 Budgeted variable overhead 14,400 (4,000 actual hours x $3.60) Favorable controllable variance $(4,000)

Controllable variance measures the efficiency of using variable overhead resources.

Controllable variance measures the efficiency of using variable overhead resources.

A revised budget based on the actual hours used

A revised budget based on the actual hours used

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Fixed Factory Overhead Volume VarianceFor the Month Ended June 30, 2003

Budgeted volume (direct labor hours) 5,000Actual volume (direct labor hours) 4,000Capacity not used (direct labor hours) 1,000Standard fixed rate x $2.40Unfavorable volume variance $2,400

Volume variance measures the utilization of fixed overhead resources.

Volume variance measures the utilization of fixed overhead resources.

Rate based on 5,000 direct labor hours.

Rate based on 5,000 direct labor hours.

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