Evaluating Operating Results
• Effectiveness – attaining the goal set for the
operation.
• Efficiency – wasting no resources.
Variance
Difference between operating result and the budgeted or
standard amount.
•
•
Favorable variance (F) - increases operating income
relative to the budgeted or standard amount.
Unfavorable variance (U) - decreases operating
income relative to the budgeted or standard
amount.
Operating Income Variance – A measure of effectiveness
Difference in operating income between the amount earned and
the amount in the master budget.
Operating
Income Earned
Master Budget
Operating Income
Operating Income Variance
Standard Cost
A measure of how much it should cost to manufacture a
product or provide a service.
Types of Standards
• Ideal standard – A standard that demands perfect
implementation and maximum efficiency in every aspect of the
operation and is not easily attainable.
• Currently attainable standard – A standard that workers with
proper training and experience can attain most of the time
without extraordinary effort.
Sources of Standards
•
•
•
•
•
Activity Analysis
Historical Data
Benchmarking
Market Expectations
Strategic Decision
Handout
Standard Cost Sheet
Product: Widget-A
Direct materials
Direct labor
Variable overhead
Fixed overhead
Standard cost per unit
Unit:
2 lbs. @
0.5 hrs. @
0.5 hrs. @
0.5 hrs. @
$ 4.00
$20.00
$ 3.00
$25.00
Additional data:
Variable selling, general, and administration
Fixed selling, general, and administration
1
$
8.00
10.00
1.50
12.50
$32.00
$3.00
$2.00
Operating Data
Budgeted units of production and sales
Actual units manufactured and sold
Selling price per unit (budgeted and actual)
Direct materials purchased and used
Direct labor
Variable overhead
Fixed overhead
Total manufacturing cost
Variable SG&A
Fixed SG&A
Total SG&A
10,000
8,000
$60 per unit
18,000 lbs. @ $4.50
3,800 hrs. @$22.00
$81,000
83,600
11,800
128,000
$304,400
$ 24,000
16,000
$ 40,000
Example 1
Assume that McMillan manufactures and sells computer cases.
Budgeted variable costs per suit are as follows:
Direct materials cost
Direct manufacturing labor
Variable manufacturing overhead
Total variable costs
$ 10
6
8
$ 24
• Budgeted selling price is $40 per unit.
• Fixed manufacturing costs are expected to be $52,000.
• Budgeted selling costs are $5 per unit (variable) and $10,000 per
month (fixed).
• The Master budget for July is based on selling 10,000 units.
Actual Results:
Units
Revenues
Variable Costs
Direct Materials
Direct Labor
Variable Overhead
Variable Selling
Total Variable Costs
Contribution Margin
Fixed Costs
Fixed Overhead
Fixed Selling
Total Fixed Costs
Operating Income
11,000
$423,500
108,000
70,000
81,000
65,000
324,000
99,500
53,000
9,500
62,500
37,000
The budgeted breakdown of manufacturing costs per unit is as
follows:
Direct Materials
Direct Labor
Variable OH
2 Lb @
.25 Hrs @
2 Lb @
$5.00
$24.00
$4.00
$10.00
$6.00
$8.00
For the production (and sale) of 11,000 units, McMillan required
24,000 Lb of Direct Materials costing $4.50 per Lb (a total of
$108,000). McMillan required 2,800 Direct Labor Hours costing
$25.00 per DLH (a total of $70,000). Variable OH is driven by
the materials usage.
Example 2 (working backwards)
Nelson Company uses a standard cost system. During the past
month, the manufacturing operation had the following direct
labor variances:
Direct labor rate variance
Direct labor efficiency variance
$11,600 F
$24,000 U
The firm allows 2 standard direct labor hours per unit 2 standard
direct labor-hours per unit
Its standard direct labor-hour rate is $30 per hour
During the month, Nelson spent 16 percent more in direct laborhours than the total standard hours for the units manufactured.
Determine the following for Nelson Company:
1. The total standard hours allowed for the units manufactured.
2. The total direct labor-hours worked.
3. The actual direct labor wage rate per hour.
4. The number of units manufactured.
Background
Pokeman Bunch, Inc., manufactures PokeMonster figures and has the following data
from its operation for the year just completed:
Problem Information
Actual
Result
Units
Revenues
Flexible
Budget
Variance
Flexible
Budget
Master
Budget
1,200
1,000
$69,600
$60,000
Variable costs
40,000
Contribution margin
$11,200
Fixed costs
Operating income
Sales
Volume
Variance
U
5,000
$5,800