Performance Evaluation and Using VariancesChapter M6

Standards• Performance goals used for all three

manufacturing costs– Direct materials– Direct labor– Factory overhead

• Standard cost systems– Allows management to determine how

much of a product should cost and how much it does cost and the difference

Terms•Standard cost

–What it should cost•Actual cost

–What it does cost

•Variance–Difference–Favorable or unfavorable

•Standards–Theoretical–Currently attainable or normal standards

•Budgetary performance evaluation

–Summarizes actual cost, standard amounts at current production level and differences

Example Mfg Costs Actual Cost Standard

cost at actual volume

Variance- favorable or unfavorable

Direct materials

$40,150 $37,500 $2,650

Direct Labor

$38,500 $36,000 $2,500

Factory overhead

$22,400 $24,000 ($1,600)

Actual volume is 5,000 units

Direct Materials Variance• Price variance =

– (actual price – std price) X actual Quantity• Quantity variance =

– (Actual quantity – std quantity) X std price• Total direct materials variance =

– Price variance + quantity variance

Example 2• Material used in the production of

Product Z has a standard cost of $3 per lb. And standard use of 10,000lbs. Actual records show 15,000 lbs. used with an actual cost of $2.50 per lb. Computer the variance

Example 2:• Price variance =

– (AP – SP) X AQ– (2.50 – 3.00) X 15,000lbs– $(7,250) favorable variance

• Quantity variance = – (AQ – SQ) X SP– (15,000 -10,000) X $3– $15,000 unfavorable variance

• Total variance– $(7250) + $15,000 = $7,750

Example 3• Material used in the production of

product D has a standard cost of $5 per lb. and a standard use of 2 lbs per units produced. Production of 5,000 units occurred during the period. Actual records show 9,000 lbs. used with an actual cost of $6 per lb. Compute the direct material variances

Example 3:• Price variance = (AP-SP) X AQ• (6 – 5) X 9,000 = $9,000 unfavorable• Quantity variance = (AQ-SQ) X SP• (9000 – 10,000) X $5 = $5,000

favorable• Total

– Unfavorable $9,000– Favorable 5,000– Total $4,000 unfavorable

Direct Labor Variances• Rate variance

– (Actual rate – Std rate ) x Actual hours• Time variance

– (actual hrs – std hrs) X Std rate• Total variance

– Time + Rate

Example 4• Factory records show that each

product produced requires 3 direct labor hours. Production during the period consisted of 10,000 units with 29,500 hours of labor used. Labor has a standard cost of $10 per hour and actual cost of $11 per hour. Compute the direct labor variances

Example 4:• Rate variance = (AR – SR) X Ahrs

– (11 – 10) X ( 29,500)– $29,500 unfavorable

• Time variance + (Ahr – Shr) X SR– (29,500 – 30,000) X 10– $5,000 favorable

• Total– $29,500 unfavorable + $5,000 favorable– $24,500 unfavorable

Factory overhead variance• Determine the impact of changing

the production on fixed and variable factory overhead cost

• Standard factory overhead cost rate = Total budget cost at 100% capacity/Standard hours at 100% capacity

• Variable costs per unit– Total variable factory overhead– Total hours

Example 5:Percent of normal capacity 80% 90% 100% 110%Units produced 5000 5625 6250 6875

DLH (.8 per unit) 4000 4500 5000 5500

Budgeted F/O Variable costs Indirect factory wages $8,000 $9,000 $10,000 $11,000

Power and light $4,000 $4,500 $5,000 $5,500

Indirect materials $2,400 $2,700 $3,000 $3,300

Total variable costs $14,400 $16,200 $18,000 $19,800

Fixed costs Supervisory salaries $5,500 $5,500 $5,500 $5,500

Depreciation $4,500 $4,500 $4,500 $4,500

Insurance $2,000 $2,000 $2,000 $2,000

Total Fixed cost $12,000 $12,000 $12,000 $12,000

Total factory overhead $26,400 $28,200 $30,000 $31,800

Example 5: Factory overhead variance• Step 1: get the following information

– Standard F/O cost rate = • Total budget cost at 100% capacity• Standard hrs at 100% capacity• $30,000/5,000 = $6 per hour

– Variable cost per unit at 100%• $18,000/5,000 = $3.60 per hour

– Fixed costs per unit at 100%• $12,000/5,000 = $2.40 per hour

Variances for Factory Overhead• Controllable variance

– Deals with variable cost– Actual variable F/O– Minus Budget Variable F/O at actual– Equals Variance

• Volume Variance– Deals with fixed costs

Example 5:• Using the information in the table

assume that actual production is 80% of capacity. Actual variable costs are $16,000

• Actual Var F/O $16,000• Budget 14,400• Variance 1,600

Volume variance• 100% capacity direct labor hours• -standard direct labor hours at

actual• Unused capacity• X standard fixed overhead rate• Volume variance

Example 7:• Using the information on Western

Rider assume actual production is 80% capacity and compute volume variance

• 5,000 DLH• -4,000 DLH• 1,000 DLH• X $2.40 per DLH• $2,400 volume variance