Chapter 21
Performance Evaluation Using
Variances from Standard Costs
Financial and Managerial Accounting
8th Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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Objectives
1. Describe the types of standards and
After
studying this
how they are
established
for
chapter, you should
businesses.
be able to:
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.
Objectives
5. Calculate and interpret factory overhead
controllable and volume variances.
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.
Standards—Performance Benchmarks
Setting Standards
Requires joint efforts of accountants, engineers,
and other management personnel
Types of Standards
Theoretical or ideal (world record) standards
Currently attainable standards (normal standards)
Reviewing and Revising Standards
Should be revised when they no longer reflect
operating conditions they intended to measure
Western Rider Inc., a
manufacturer of blue
jeans, uses standard
manufacturing costs
in its budgets.
Western Rider Inc.
Standard Cost per Pair of XL Jeans
Direct materials:
$5.00 per square yard x 1.5 square yards =
Direct labor:
$9.00 per hour x 0.80 hour per pair =
Factory overhead:
$6.00 per hour x 0.80 hour per pair =
Total standard cost per pair
$ 7.50
7.20
4.80
$19.50
Western Rider Inc.
Budget Performance Report
For the Month Ended June 30, 2006
Manufacturing Costs
Direct materials
Direct labor
Factory overhead
Total mfg. costs
Actual
Costs
$ 40,150
38,500
22,400
$101,050
Standard Cost
Cost
at Actual
Variance
Volume
(favorable)
(5,000 units) Unfavorable
5,000
$37,500
36,000
24,000
$97,500
x
$2,650
$7.50 per
2,500
pair
(1,600)
$3,550
Direct
Materials
Cost Variance
Total
Manufacturing
Cost Variance
Direct
Labor
Cost Variance
Factory
Overhead
Cost Variance
Direct Materials Price
Variance
Direct Materials Price
Variance
Direct Labor Rate
Variance
Direct Labor Time
Variance
Variable Factory Overhead
Controllable Variance
Fixed Factory Overhead
Volume Variance
Direct Materials Price Variance
Actual price per unit
Standard price per unit
Price variance (unfavorable)
$5.50 per sq. yd.
5.00 per sq. yd.
$0.50 per sq. yd.
$0.50 times the actual quantity of 7,300 sq. yds.
= $3,650 unfavorable
Direct Materials Quantity Variance
Actual quantity used
Standard quantity at
actual production
Quantity variance (favorable)
7,300 sq. yds.
7,500
(200) sq. yds.
(200) square yards times the standard price of
$5.00 = ($1,000) favorable
Direct Materials
Variance Relationships
Actual quantity x
Actual price
7,300 x $5.50 =
$40,150
Actual quantity x
Standard price
7,300 x $5.00 =
$36,500
Standard quantity
x Standard price
7,500 x $5.00 =
$37,500
Material Price
Variance
Material Quantity
Variance
$3,650 U
($1,000) F
Direct Materials
Variance Relationships
Actual quantity x
Actual price
7,300 x $5.50 =
$40,150
Actual quantity x
Standard price
7,300 x $5.00 =
$36,500
Standard quantity
x Standard price
7,500 x $5.00 =
$37,500
Total Direct Materials Cost Variance
$2,650 U
Direct Labor Variances
Standard direct labor hours per
of XL jeans
0.80 direct labor hour
Actual units produced
x 5,000 pairs of jeans
Standard direct labor hours
budgeted for actual
production
4,000 direct labor hours
Standard rate per DLH
x $9.00
Standard direct labor cost
at actual production
$36,000
Direct Labor Variances
Actual direct labor hours
used in production
3,850 direct labor hours
Actual rate per direct labor
hour
x $10.00
Total actual direct labor cost $ 38,500
Direct Labor Rate Variance
Actual rate
$10.00
Standard rate
9.00
Rate variance (unfavorable) $ 1.00 per DLH
$1.00 times the actual time of 3,850 hours =
$3,850 unfavorable
Direct Labor Time Variance
Actual hours
Standard hours at actual
production
Time variance
3,850 DLH
4,000 DLH
(150) DLH
(150) Direct labor hours times the standard rate
of $9.00 = ($1,350) favorable
Direct Labor Variance
Relationships
Actual hours x
Actual rate
3,850 x $10 =
$38,500
Actual hours x
Standard rate
3,850 x $9.00 =
$34,650
Standard hours x
Standard rate
4,000 x $9.00 =
$36,000
Direct Labor
Rate Variance
Direct Labor
Time Variance
$3,850 U
($1,350) F
Direct Labor Variance
Relationships
Actual hours x
Actual rate
3,850 x $10 =
$38,500
Actual hours x
Standard rate
3,850 x $9.00 =
$34,650
Standard hours x
Standard rate
4,000 x $9.00 =
$36,000
Total Direct Labor Cost Variance
$2,500 U
Overhead is applied at $6.00 per direct labor hour
based on estimated 5,000 total hours.
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.
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 Hours
4,000
5,000
5,500
Percentage of capacity
Total variable costs
Actual variable overhead
Variable overhead
variance—favorable
80%
$14,400
10,400
100%
110%
$18,000
$19,800
$(4,000)F
Level of activity
Controllable variance
based on variable costs
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 Hours
4,000
5,000
5,500
Percentage of capacity
Total fixed costs
Fixed cost per DLH
80%
12,000
$3.00
100%
12,000
$2.40
Desired
Standard hours
capacity
at actual
production
110%
12,000
$2.18
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 Hours
4,000
5,000
5,500
Percentage of capacity
Total fixed costs
Fixed cost per DLH
80%
12,000
$3.00
100% of normal capacity
Standard hours at actual production
Capacity not used
Standard fixed overhead rate at 100%
Fixed overhead volume variance
100%
12,000
$2.40
110%
12,000
$2.18
5,000
4,000
1,000
x $2.40
$ 2,400
DLH
DLH
DLH
U
Western Rider Inc.
Factory Overhead Cost Variance Report
For the Month Ended June 30, 2006
Productive capacity for the month (100% of normal) 5,000 hours
Actual production for the month
4,000 hours
Budget
(at Actual
Production)
Actual
Variable factory overhead costs
$14,400 $10,400
Fixed factory overhead costs
12,000
12,000
Total factory overhead costs
$26,400 $22,400
Total controllable variances
Net controllable variances—
favorable
Volume variance—unfavorable:
Capacity not used at the standard rate for fixed
factory overhead—1,000 x $2.40
Total factory overhead cost variance--favorable
Variances
Favorable Unfavorable
$4,000
$4,000
$
0
$4,000
2,400
$1,600
Fixed Overhead Variances and the
Factory Overhead Account
Factory Overhead
Actual factory
overhead
Applied factory
$22,400
overhead
Balance, June 30
$10,400 +
$12,000
$24,000
1,600
4,000 hours x
$6.00 per hour
Fixed Overhead Variances and the
Factory Overhead Account
Factory Overhead
Actual factory
overhead
Applied factory
$22,400
overhead
Balance, June 30
Controllable
Variance:
$4,000 F
$22,400 – $26,400
$24,000
1,600
Fixed Overhead Variances and the
Factory Overhead Account
Factory Overhead
Actual factory
overhead
Applied factory
$22,400
overhead
$24,000
Balance, June 30
Volume
Variance:
$2,400 U
$26,400 – $24,000
1,600
Fixed Overhead Variances and the
Factory Overhead Account
Total Factory Overhead Variance
Controllable variance
Volume variance
Total
$4,000 F
2,400 U
$1,600 F
Fixed Overhead Variances and the
Factory Overhead Account
Budgeted Factory Overhead for Amount Produced
Controllable variance
Fixed factory overhead
Total
$14,400
12,000
$26,400
Recording
and
Reporting
Variances
from
Standards
On August 1, Western Rider Inc.
purchased, on account, the 7,300 square
yards of blue denim at $5.50 per square
yard. Recall, the standard price was $5.00.
Aug. 1 Materials (7,300 sq. yds. X $5.00)
Direct Materials Price Variance
Accounts Payable
$5.50
$5.00
x
x
7,300
7,300
36 500 00
3 650 00
40 150 00
$3,650 U
= $40,150 Direct
= $36,500 materials
price
variance
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. Date the entry August 31.
Aug. 31 Work in Process (7,500 x $5.00)
37 500 00
Direct Materials Quantity Variance
Materials (7,300 x $5.00)
Standard
quantity
$5.00price x Actual7,300
Standard
quantity
$5.00price x Standard
7,500
1 000 00
36 500 00
$1,000 F
= $36,500 Direct
= $37,500 Materials
quantity
variance
For the month of August, Western Rider Inc. accrued
wages of $38,500 (3,850 hours at $10 per hour) in
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.
Aug. 31 Work in Process
Direct Labor Rate Variance
Direct Labor Time Variance
Wages Payable
36 000 00
3 850 00
1 350 00
38 500 00
$10.00
Actual
rate
x Actual3,850
hours
= $38,500
$3,850 U (rate)
Standard
hours
$9.00rate x Actual3,850
= $34,650
$1,350 F (time)
Standard
rate
x
Standard
quantity
$9.00
4,000
= $36,000
This entry is not shown in the textbook.
Western Rider Inc.
Income Statement
For the Month Ended June 30, 2006
Sales……………………………………
Cost of goods sold……………………..
Gross profit--at standard……………….
$140,000
97,500
$ 42,500
Favorable Unfavorable
Less variances from standard cost:
Direct materials price………………..
Direct materials quantity……………. $1,000
Direct labor rate……………………..
Direct labor time……………………. 1,350
Factory overhead controllable………. 4,000
Factory overhead volume……………
Gross profit…………………………….
Operating expenses…………………….
Income before income tax……………..
$3,650
3,850
2,400
3,550
$38,950
25,725
$13,225
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
Nonfinancial Performance
Measures (Fast Food Restaurant)
Inputs
Employee training
Employee experience
Number of new menu
items
Number of employees
Fryer reliability
Fountain supply
availability
Activity
Counter
service
Outputs
Line wait
Percent order
accuracy
Friendly service
score
Chapter 21
The End