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Chapter 8

Chapter 8. Performance Evaluation. Standard vs. Actual. To evaluate managerial performance you compare standard vs. actual

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Chapter 8

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  1. Chapter 8 Performance Evaluation

  2. 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

  3. 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

  4. 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

  5. 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

  6. Let’s Try It

  7. Let’s Try It

  8. 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

  9. 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

  10. Static Flexible Actual Budget BudgetResults Standard Standard Actual Prices/Costs Prices/Costs Prices/Costs X X X Expected Units Actual Units Actual Units Activity (Volume Variance) Price (Rate) Variance

  11. Sales Volume Variance • Difference between the static budget and the flexible budget • Static = Budgeted Volume • Flexible = Actual Volume

  12. Sales Price Variance • Difference between budgeted and actual sales price or cost

  13. 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

  14. Static Flexible Actual Budget BudgetResults 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

  15. 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

  16. 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

  17. 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

  18. Actual • 2010 paintings • Labor: 700 hrs; $6.90 cost per hour • Material: 1,100 quarts purchased @ $6; 975 quarts used

  19. 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 $140 Unfavorable

  20. Material Variance Format Standard Price Standard Price Standard QuantityActual Quantity Standard Price Actual Price Actual Quantity Actual Quantity ***The actual quantities are different. One is actual quantity purchased, the other is actual quantity used. Inventory Quantity Price

  21. Material Variance Standard Price Standard Price Standard Quantity Actual Quantity $5 * 1005 qts $5 * 975 qts $5,025 $4,875 Standard Price Actual Price Actual Quantity ActualQuantity ***The actual quantities $5 * 1100 $6 * 1100 are different. One is actual $5,500 $6,600 quantity purchased, the other is actual quantity used. Inventory Quantity Price

  22. 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

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