Chapter 8Performance Evaluation

Standard vs. Actual

• To evaluate managerial performance you compare standard vs. actual

• Standard Amount – amount mgmt expects to exist; Companies establish standards for many different variables including the number of units made, the sales price of the units, the costs of the units, and the cost of the resources used to make the units

Standard vs. Actual

• Actual Amount – the amount that did, in fact, exist; Companies identify many different variables for which there are actual amounts

• Standard – Budgeted Expectation

• Actual – Historical Result

Standard – Actual = Variance• Variance – Difference between a standard

amount and an actual amount

• A variance can be either favorable or unfavorable

• Favorable – Did better than you thought you would

• Unfavorable – Did worse than you thought you would

Variances

• When actual sales exceed expected sales– Favorable

• When actual sales are less than expected– Unfavorable

• When actual costs exceed budgeted costs– Unfavorable

• When actual costs are less then budgeted costs– Favorable

Let’s Try It

  Budget Actual VarianceF orUF

Selling & Admin $ 29,000.00 $ 27,000.00

Sales Revenue $ 310,000.00 $ 325,000.00    

Materials Price 2.00 per lb 2.10 per lb    

Cost of Goods Sold $ 125,000.00 $ 100,000.00    

Let’s Try It

  Budget Actual VarianceF orUF

Selling & Admin $ 29,000.00 $ 27,000.00 $2,000 F

Sales Revenue $ 310,000.00 $ 325,000.00  $15,000  F

Materials Price 2.00 per lb 2.10 per lb  $0.10 / lb  UF

Cost of Goods Sold $ 125,000.00 $ 100,000.00  $25,000 F 

Budgets

• Static Budget – Remains unchanged even if the actual volume of activity differs from planned volume= Standard Prices(Costs) * Expected Volume

• Flexible Budget – Show expected revenues and costs at a variety of volume levels = Standard Prices(Costs) * Actual Volume

• Actual Result = Actual Prices(Costs) * Actual Volume

• Activity (Volume) Variance = Difference between static budget and flexible budget

• Flexible Budget Variance = Difference between flexible budget and the actual results

Static Flexible Actual

Budget Budget Results

Standard Standard Actual

Prices/Costs Prices/Costs Prices/Costs

X X X

Expected Units Actual Units Actual Units

Activity (Volume Variance) Price (Rate) Variance

Sales Volume Variance

• Difference between the static budget and the flexible budget

• Static = Budgeted Volume

• Flexible = Actual Volume

Sales Price Variance

• Difference between budgeted and actual sales price or cost

For Example• Company expects to sell 18,000 units for

$80 per unit.• At the end of the quarter, the company

sold 19,000 units for $78 per unit.• Sales Price Variance

– $80 vs. $78– Unfavorable

• Sales Volume Variance– 18,000 vs. 19,000– Favorable

Static Flexible Actual

Budget Budget Results

Standard Standard Actual

Prices/Costs Prices/Costs Prices/Costs

X X X

Expected Units Actual Units Actual Units

$80 * 18,000 $80 * 19,000 $78 * 19,000

$1,440,000 $1,520,000 $1,482,000

Activity (Volume Variance) Flexible Budget Variance

$80,000 – Favorable $38,000 – Unfavorable

$42,000 - Favorable

For Example

Total Sales Variance:

Actual Sales (19,000 * $78) $1,482,000

Expected Sales (18,000 * $80) 1,440,000

Total Sales Variance $ 42,000

Favorable

Formulas

• Materials Price Variance:= Actual Price – Standard Price * Actual Quantity

• Materials Usage Variance:=Actual Quantity – Standard Quantity * Standard Price

• Labor Rate Variance:= Actual Rate – Standard Rate * Actual Quantity

Example

Standard / Budgeted information:

• Labor: 20 min per painting; $7 wage cost per hour

• Material: ½ quart of paint per painting; $5 per quart

• Overhead: $3 per labor hour

Actual

• 2010 paintings

• Labor: 700 hrs; $6.90 cost per hour

• Material: 1,100 quarts purchased @ $6; 975 quarts used

Direct Labor Variance

S.P. * S.Q. S.P. * A.Q. A.P. * A.Q.$7 * 670 hrs $7 * 700 hrs $6.90*700

hrs $4,690 $4,900 $4,830

$210 $70 Unfavorable Favorable

Quantity Price

$140Unfavorable

Material Variance FormatStandard Price Standard PriceStandard Quantity Actual Quantity

Standard Price Actual PriceActual Quantity Actual Quantity

***The actual quantitiesare different. One is actualquantity purchased, the other is actual quantity used.

Quantity Inventory

Price

Material VarianceStandard Price Standard PriceStandard Quantity Actual Quantity$5 * 1005 qts $5 * 975 qts$5,025 $4,875

Standard Price Actual PriceActual Quantity Actual Quantity

***The actual quantities $5 * 1100 $6 * 1100are different. One is actual $5,500 $6,600quantity purchased, the other is actual quantity used.

Quantity Inventory

Price

Total Material Variance

• Material - $5,025 - $4,875 = $150 Favorable

• Price - $5,500 - $6,600 = $1,100 Unfavorable

• Inventory - $4,875 - $5,500 = $625

Unfavorable

Total Variance = $1,575 Unfavorable