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Performance
Evaluation Using
Variances From
Standard Costs
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Standards
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7-1
Standards are performance
goals. Manufacturers normally
use standard costs for each of
the three manufacturing costs:
 Direct materials
 Direct labor
 Factory overhead
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Standard Cost for XL Jeans
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7-2
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Budget Performance Report
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7-2
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Relationship of Variances to the Total
Manufacturing Cost Variances
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7-2
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Direct Materials
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Standard square yards per
pair of jeans
Actual units produced
Standard square yards of
denim budgeted for
actual production
Standard price per sq. yd.
Standard direct materials cost
at actual production
7-3
1.50 sq. yards
x 5,000 pairs of jeans
7,500 sq. yards
x $5.00
$37,500
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Direct Materials Price Variance
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7-3
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 Variance
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Actual quantity used
Standard quantity at
actual production
Quantity variance (favorable)
7-3
7,300 sq. yds.
7,500
(200) sq. yds.
(200) square yards times the standard
price of $5.00 = ($1,000) favorable
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7-3
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Example Exercise 7-1
Tip Top Corp. produces a product that requires
six standard pounds per unit. The standard
price is $4.50 per pound. If 3,000 units
required 18,500 pounds, which were purchased
at $4.35 per pound, what is the direct materials
(a) price variance, (b) quantity variance, and (c)
cost variance?
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7-3
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Follow My Example 7-1
a. Direct materials price variance (favorable)
($2,775) [($4.35 – $4.50) x 18,500 pounds]
b. Direct materials quantity variance (unfavorable)
$2,250 [(18,500 pounds – 18,000 pounds) x
$4.50]
c. Direct materials cost variance (favorable)
($525) [($2,775) + $2,250] or[($4.35 x 18,500
pounds) – ($4.50 x 18,000 pounds)] = $80,475 –
$81,000
1028
For Practice: PE7-1A, PE7-1B
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Direct Labor Variances
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Standard direct labor hours
per pair of XL jeans
Actual units produced
Standard direct labor hours
budgeted for actual
production
Standard rate per DLH
Standard direct labor cost
at actual production
7-3
0.80 direct labor hour
x 5,000 pairs of jeans
4,000 direct labor hours
x $9.00
$36,000
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Direct Labor Rate Variance
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7-3
Actual rate
$10.00
Standard rate
9.00
Rate variance—unfavorable $ 1.00 per hour
$1.00 times the actual time of 3,850
hours = $3,850 unfavorable
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Direct Labor Time Variance
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Actual hours
Standard hours at actual
production
Time variance—favorable
7-3
3,850 DLH
4,000
(150)DLH
(150) Direct labor hours times the standard
rate of $9.00 = ($1,350) favorable
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7-3
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Example Exercise 7-2
Tip Top Corp. produces a product that requires
2.5 standard hours per unit at a standard hourly
rate of $12 per hour. If 3,000 units required
7,420 hours at an hourly rate of $12.30 per
hour, what is the direct labor (a) rate variance,
(b) time variance, and (c) cost variance?
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7-3
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Follow My Example 7-2
a. Direct labor rate variance (unfavorable)
$2,226 [($12.30 – $12.00) x 7,420 hours]
b. Direct labor time variance (favorable)
($960) [7,420 hours – 7,500 hours) x $12.00]
c. Direct labor cost variance (favorable)
($1,266) [$2,226 + ($960)] or [($12.30 x 7,420
hours) – ($12.00 x 7,500 hours)] = $91,266 –
$90,000
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For Practice: PE7-2A, PE7-2B
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The Factory Overhead Flexible Budget
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7-4
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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Variable Factory Overhead
Controllable Variance
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7-4
Actual variable factory overhead
$ 10,400
Budgeted variable factory overhead
for actual amount produced
(4,000 hrs. x $3.60)
14,400
Controllable variance—
favorable
$ (4,000) F
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7-4
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Example Exercise 7-3
Tip Top Corp. produced 3,000 units of product
that required 2.5 standard hours per unit. The
standard variable overhead cost per unit is
$2.20 per hour. The actual variable factory
overhead was $16,850. Determine the variable
factory overhead controllable variance.
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7-4
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Follow My Example 7-3
$350 unfavorable
$16,850 – [$2.20 x (3,000 units x 2.5 hours)]
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For Practice: PE7-3A, PE7-3B
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7-4
Fixed Factory Overhead Volume
Variance
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100% of normal capacity
5,000 direct labor hours
Standard hours at actual
production
4,000
Capacity not used
1,000 direct labor hours
Standard fixed overhead rate
x $2.40
Volume variance—unfavorable $ 2,400 U
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7-4
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Example Exercise 7-4
Tip Top Corp. produced 3,000 units of product
that required 2.5 standard hours per unit. The
standard fixed overhead cost per unit is $0.90
per hour at 8,000 hours, which is 100% of
normal capacity. Determine the fixed factory
overhead volume variance.
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7-4
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Follow My Example 7-4
$450 unfavorable
$0.90 x [8,000 hours – (3,000 units x 2.5
hours)]
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For Practice: PE7-4A, PE7-4B
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Reporting Factory Overhead Variances
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Total actual factory overhead
Factory overhead applied (4,000
hours x $6.00 per hour)
Total factory overhead cost
variance—favorable
7-4
$22,400
24,000
$(1,600) F
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