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Chapter 21

Chapter 21. Performance Evaluation Using Variances from Standard Costs. Financial and Managerial Accounting 8th Edition Warren Reeve Fess. Objectives. 1. Describe the types of standards and how they are established for businesses.

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Chapter 21

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  1. Chapter 21 Performance Evaluation Using Variances from Standard Costs Financial and Managerial Accounting 8th Edition Warren Reeve Fess

  2. Objectives 1.Describe the types of standards and how they are established for businesses. 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.

  3. 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.

  4. Standards—Performance Benchmarks Setting Standards Requires joint effortsof 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

  5. Western Rider Inc., a manufacturer of blue jeans, uses standard manufacturing costs in its budgets.

  6. Western Rider Inc. Standard Cost per Pair of XL Jeans Direct materials: $5.00 per square yard x 1.5 square yards = $ 7.50 Direct labor: $9.00 per hour x 0.80 hour per pair = 7.20 Factory overhead: $6.00 per hour x 0.80 hour per pair = 4.80 Total standard cost per pair $19.50

  7. Western Rider Inc. Budget Performance Report For the Month Ended June 30, 2006 Direct materials $ 40,150 $37,500 $2,650 Standard Cost Cost at Actual Variance Actual Volume (favorable) Manufacturing Costs Costs (5,000 units) Unfavorable Direct labor 38,500 36,000 2,500 Factory overhead 22,400 24,000(1,600) Total mfg. costs $101,050 $97,500 $3,550

  8. Direct Materials Price Variance Direct Materials Cost Variance Direct Materials Qty Variance Direct Labor Rate Variance Direct Labor Cost Variance Direct Labor Time Variance Variable Factory Overhead Controllable Variance Factory Overhead Cost Variance Fixed Factory Overhead Volume Variance Total Manufacturing Cost Variance

  9. Direct Materials

  10. 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

  11. 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

  12. 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

  13. 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 Direct Materials Variance Relationships Total Direct Materials Cost Variance $2,650 U

  14. Direct Labor

  15. 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

  16. 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 Variances

  17. 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

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

  19. 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

  20. 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

  21. Factory Overhead

  22. Overhead is applied at $6.00 per direct labor hour based on estimated 5,000 total hours.

  23. 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.

  24. Direct Labor Hours 4,000 5,000 5,500 Percentage of capacity 80% 100% 110% Total variable costs $14,400 $18,000 $19,800 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. Actual variable overhead 10,400 Variable overhead variance—favorable $(4,000) F

  25. Direct Labor Hours 4,000 5,000 5,500 Percentage of capacity 80% 100% 110% Total variable costs $14,400 $18,000 $19,800 Level of activity 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. Actual variable overhead 10,400 Variable overhead variance—favorable $(4,000) F Controllable variance based on variable costs

  26. Direct Labor Hours 4,000 5,000 5,500 Percentage of capacity 80% 100% 110% Total fixed costs 12,000 12,000 12,000 Fixed cost per DLH $3.00 $2.40 $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. Desired capacity Standard hours at actual production

  27. Direct Labor Hours 4,000 5,000 5,500 Percentage of capacity 80% 100% 110% Total fixed costs 12,000 12,000 12,000 Fixed cost per DLH $3.00 $2.40 $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. 100% of normal capacity 5,000 DLH Standard hours at actual production 4,000 DLH Capacity not used 1,000 DLH Standard fixed overhead rate at 100% x $2.40 Fixed overhead volume variance $ 2,400 U

  28. 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 Variances Production) Actual Favorable Unfavorable Variable factory overhead costs $14,400 $10,400 $4,000 Fixed factory overhead costs 12,000 12,000 Total factory overhead costs $26,400 $22,400 Total controllable variances $4,000 $ 0 Net controllable variances— favorable $4,000 Volume variance—unfavorable: Capacity not used at the standard rate for fixed factory overhead—1,000 x $2.40 2,400 Total factory overhead cost variance--favorable $1,600

  29. Balance, June 30 1,600 Fixed Overhead Variances and the Factory Overhead Account Factory Overhead Actual factory overhead $22,400 Applied factory overhead $24,000 $10,400 + $12,000 4,000 hours x $6.00 per hour

  30. Factory Overhead Actual factory overhead $22,400 Applied factory overhead $24,000 Balance, June 301,600 Fixed Overhead Variances and the Factory Overhead Account Controllable Variance: $4,000 F $22,400 – $26,400

  31. Factory Overhead Actual factory overhead $22,400 Applied factory overhead $24,000 Balance, June 301,600 Fixed Overhead Variances and the Factory Overhead Account Volume Variance: $2,400 U $26,400 – $24,000

  32. Fixed Overhead Variances and the Factory Overhead Account Total Factory Overhead Variance Controllable variance $4,000 F Volume variance 2,400 U Total $1,600 F

  33. Fixed Overhead Variances and the Factory Overhead Account Budgeted Factory Overhead for Amount Produced Controllable variance $14,400 Fixed factory overhead 12,000 Total $26,400

  34. Recording and Reporting Variances from Standards

  35. $3,650 U Direct materials price variance x x = $40,150 $5.50 7,300 = $36,500 $5.00 7,300 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) 36 500 00 Direct Materials Price Variance 3 650 00 Accounts Payable 40 150 00

  36. $1,000 F Direct Materials quantity variance Standard price x Actual quantity = $36,500 $5.00 7,300 Standard price x Standard quantity = $37,500 $5.00 7,500 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 1 000 00 Materials (7,300 x $5.00) 36 500 00

  37. Actual rate x Actual hours Standard rate x Actual hours = $38,500 $10.00 3,850 $3,850 U (rate) Standard rate x Standard quantity = $34,650 $9.00 3,850 $1,350 F (time) = $36,000 $9.00 4,000 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 36 000 00 Direct Labor Rate Variance 3 850 00 Direct Labor Time Variance 1 350 00 Wages Payable 38 500 00 This entry is not shown in the textbook.

  38. Western Rider Inc. Income Statement For the Month Ended June 30, 2006 Sales…………………………………… $140,000 Cost of goods sold…………………….. 97,500 Gross profit--at standard………………. $ 42,500 FavorableUnfavorable Less variances from standard cost: Direct materials price……………….. $3,650 Direct materials quantity……………. $1,000 Direct labor rate…………………….. 3,850 Direct labor time……………………. 1,350 Factory overhead controllable………. 4,000 Factory overhead volume…………… 2,400 3,550 Gross profit……………………………. $38,950 Operating expenses……………………. 25,725 Income before income tax…………….. $13,225

  39. 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

  40. Nonfinancial Performance Measures (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

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