Performance Evaluation Using Variances From Standard Costs

1. 0 22 Performance Evaluation Using Variances From Standard Costs

2. 0 22-1 Objective 1 Describe the types of standards and how they are established for businesses.

3. 0 22-1 Standards Standards are performance goals. Manufacturers normally use standard costs for each of the three manufacturing costs: • Direct materials • Direct labor • Factory overhead

4. 0 22-1 Accounting systems that use standards for direct materials, direct labor, and factory overhead are called standard costs systems.

5. 0 22-1 When actual costs are compared with standard costs, the differences between them are referred to as variances.

6. 0 22-2 Relationship of Variances to the Total Manufacturing Cost Variances 6

7. 0 22-1 Types of Standards Unrealistic standards that can be achieved only under perfect operating conditions (such as no idle time, no machine breakdowns, no materials spoilage) are called ideal standards or theoretical standards.

8. 0 22-1 Currently attainable standardsor normal standardscan beattained with reasonable effort. Standards set at this level allow for disruptions, such as material spoilage and machine breakdowns.

9. 0 22-1 Reviewing and Revising Standards Standard costs should be continuously reviewed and should be revised when they no longer reflect operating conditions.

10. 0 22-2 Objective 2 Explain and illustrate how standards are used in budgeting.

11. 0 22-2 Standard Cost for XL Jeans 11

12. 0 22-2 Budget Performance Report The budget performance report summarizes the actual costs, the standard amounts for the actual level of production achieved, and the differences between the two amounts (called cost variances).

13. 0 22-2 A favorablecost variance occurs when the actual cost is less than the standard cost (at actual volumes). An unfavorablecost variance occurs when the actual cost exceeds the standard cost (at actual volumes).

14. 0 22-2 Budget Performance Report 14

15. 0 22-3 Objective 3 Compute and interpret direct material and direct labor variances.

16. 22-2 Common Direct Material Variance Abbreviations SQ = “Standard Quantity” SP = “Standard Price” AQ = “Actual Quantity” AP = “Actual Price”

17. 0 22-3 Direct Materials Standard square yards per pair of jeans 1.50 sq. yards Actual units produced x 5,000 pairs of jeans Standard square yards of denim budgeted for actual production 7,500 sq. yards Standard price per sq. yd. x $5.00 Standard direct materials cost at actual production $37,500 17

18. 0 22-3 Direct Materials Price Variance Actual price per unit $5.50 per sq. yd. Standard price per unit 5.00 per sq. yd. Price variance (unfavorable) $0.50 per sq. yd. $0.50 times the actual quantity of 7,300 sq. yds. =$3,650 unfavorable 18

19. 0 22-3 Direct Materials Price Variance A short-hand way to remember this is: DMPV = (AP – SP) * AQ 19

20. 0 22-3 Direct Materials Quantity Variance Actual quantity used 7,300 sq. yds. Standard quantity at actual production 7,500 Quantity variance (favorable) (200) sq. yds. (200) square yards times the standard price of $5.00 = ($1,000) favorable 20

21. 0 22-3 Direct Materials Quantity Variance A short-hand way to remember this is: DMQV = (AQ – SQ) * SP 21

22. 0 22-3 Direct Materials Variance Relationships Actual cost: Standard cost: Standard quantity x Standard price 7,500 x $5.00 = $37,500 Actual quantity x Actual price 7,300 x $5.50 = $40,150 Actual quantity x Standard price 7,300 x $5.00 = $36,500 Materials price variance Material quantity variance $3,650 U ($1,000) F 22

23. Standard quantity x Standard price 7,500 x $5.00 = $37,500 Actual quantity x Actual price 7,300 x $5.50 = $40,150 Actual quantity x Standard price 7,300 x $5.00 = $36,500 0 22-3 Direct Materials Variance Relationships Actual cost: Standard cost: Total direct materials cost variance $2,650 U 23

24. 0 22-3 Direct Labor Variances Standard direct labor hours per pair 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 24

25. 22-2 Common Direct LaborVariance Abbreviations SH = “Standard Hours” SR = “Standard Rate” AH = “Actual Hours” AR = “Actual Rate”

26. 0 22-3 Direct Labor Rate Variance Actual rate $10.00 Standard rate 9.00 Rate variance—unfavorable $ 1.00 per hour $1.00 times the actual time of 3,850 hours =$3,850 unfavorable 26

27. 0 22-3 Direct Labor Rate Variance A short-hand way to remember this is: DLRV = (AR – SR) * AH 27

28. 0 22-3 Direct Labor Time Variance Actual hours 3,850 DLH Standard hours at actual production 4,000 Time variance—favorable (150) DLH (150) Direct labor hours times the standard rate of $9.00 =($1,350) favorable 28

29. 0 22-3 Direct Labor Time Variance A short-hand way to remember this is: DLTV = (AH – SH) * SR 29

30. 4 0 22-3 Direct Labor Variance Relationships Actual cost: Standard cost: 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 30

31. 4 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 0 22-3 Direct Labor Variance Relationships Actual cost: Standard cost: Total direct labor cost variance $2,500 U 31

32. 0 22-4 Objective 4 Compute and interpret factory overhead controllable and volume variances.

33. 0 22-4 Factory Overhead Cost Budget Indicating Standard Factory Overhead Rate 33

34. 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. 0 Variances from standard for factory overhead result from: 22-4 The Factory Overhead Flexible Budget

35. It has been assumed that the factory will run at 100% of normal capacity. At 100%, 6,250 units will be produced, using 5,000 direct labor hours. At 5,000 DL hours factory variable costs are budged at $18,000. So the variable factory overhead rate is $18,000 / 5,000 hours = $3.60 / DL hour. The fixed factory costs are $12,000 / 5,000 DL hours = $2.40 / DL hour. 0 Notice from slide 33 that the pre-determined factory overhead rate for the company is $6.00 per direct labor hour: 22-4 The Factory Overhead Flexible Budget

36. 0 22-4 Variable Factory Overhead Controllable Variance Actual variable factory overhead $ 10,400 Budgeted variable factory overhead for actual amount produced (4,000 hrs.* x $3.60) 14,400 Controllable variance— favorable $ (4,000) F * 4,000 hours = 5,000 pairs of jeans actually produced @ .80 DL hour standard per pair. 36

37. 0 22-4 Fixed Factory Overhead Volume Variance 100% of normal capacity 5,000 direct labor hours Standard hours at actual production 4,000 Capacity not used 1,000 direct labor hours Standard fixed overhead rate x $2.40 Volume variance—unfavorable $ 2,400 U 37

38. 0 22-4 Reporting Factory Overhead Variances Total actual factory overhead $22,400 Factory overhead applied (4,000 hours x $6.00 per hour) 24,000 Total factory overhead cost variance—favorable $(1,600) F 38

39. 0 22-4 Factory Overhead Cost Variance Report 39

40. 4,000 hours x $6.00 per hour $10,400 + $12,000 0 22-4 Factory Overhead Variances and the Factory Overhead Account Factory Overhead Actual factory overhead 22,400* Applied factory overhead 24,000 40 * From slide 39

41. Factory Overhead Actual factory overhead 22,400 Applied factory overhead 24,000 Balance, June 30 1,600 0 22-4 Factory Overhead Variances and the Factory Overhead Account Overapplied factory overhead 41

42. Factory Overhead Actual factory OH 22,400 Applied factory OH 24,000 Budgeted Factory Overhead for Amount Produced Variable factory OH $14,000* Fixed factory OH 12,000 Total $26,400 0 22-4 * From slide 36 Applied Factory Overhead $24,000 Actual Factory Overhead $22,400 Volume Variance Controllable Variance 42 $(4,000) F $2,400 U

43. Factory Overhead Actual factory OH 22,400 Applied factory OH 24,000 Budgeted Factory Overhead for Amount Produced Actual Factory Overhead $22,400 Variable factory OH $14,000 Fixed factory OH 12,000 Total $26,400 0 22-4 Applied Factory Overhead $24,000 $(1,600) F Total Factory Overhead Cost Variance 43

44. 0 22-5 Objective 5 Journalize the entries for recording standards in the accounts and prepare an income statement that includes variances from standard.

45. 0 22-5 Recording and Reporting Variances from Standards You don’t need to know how to do the journal entries for variances, but recognize that some companies will incorporate them, and they will appear on income statements, as on the next slide.

46. 0 22-5 Variances from Standards in Income Statement 46

47. 0 22-6 Objective 6 Explain and provide examples of nonfinancial performance measures.

48. 0 22-6 Nonfinancial Performance Measures A nonfinancial performancemeasure is a performance measure expressed in units other than dollars.

49. Inventory turnover 0 22-6 Nonfinancial Performance Measures • Percent 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

50. 0 22-6 Nonfinancial Performance Measures for the Counter Service Activity of a Fast Food Restaurant Inputs Employee training Employee experience Number of new menu items Number of employees Fryer reliability Fountain supply availability Outputs Line wait Percent order accuracy Friendly service score Activity Counter service 50