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? ?

Budget Performance Evaluation


The need for standards

Standard Norm

Cost Quantity

Distinguishing between Standards and budgets

Standards Budgets Costs, Quantities and Revenues.

Standard Unit amount budget Total amount $10 5,000 $50,000($50,000 of direct labor is the budget labor cost)

The advantages of standard costs

Standard costs

  • Standard Costs

  • Variance

  • ( )

Setting Standard Costs

(Standards Costs) (Quality Controls Engineers) (Payroll Department) Industrials Engineers

2.1.( A Case Study)

  • Direct Materials Direct Labor Manufacturing overhead (Standard Prices to be Paid )(Standard Quantity to be used)

  • Mekong (Standard Cost) ?

  • Direct Materials

  • Direct Materials Prices Standards and Direct Materials Quantity

  • Standard

  • Direct Materials Prices Standards

  • (Purchase Department) pound Mekong

  • Table 1: Setting Direct Materials Prices standards

  • Direct Materials Quantity Standard

Kg, Pound, Barrels Allowances for Unavoidable waste and Normal Spoilage

Table 2: Setting Direct Materials Quantities Standards

  • Mekong $34pound=$12

  • Direct Labor

  • Direct Labor Prices Standard and Direct labor Quantity

  • Standard

  • Direct labor price Standard

  • (Current Wage Rate)

  • employer Payroll Taxes and Fringe benefit, such as paid holiday and vocations Mekong

  • Table 3: Setting Direct Labor Prices Standards

  • Direct Labor Quantity(Hours)Standard

? Rest period, Cleanup, Machine Set up and Machine Downtime Megkong

Table 4: Setting Direct Labor Quantity Standards

Mekong $102h=$20

Manufacturing Overhead


Predetermined Overhead Rate)

(Budgeted Overhead Costs) (Expected

Standard Activity)

(Standard Direct

Labor Hour or Standard Machine Hours)


() 26,400h$132,000 $79,200 (Variable Cost)$52,800 (Fixed Costs)

Table 5: Computing Predetermine Overhead Rates



Total Standard Cost per unit

(Total Standard Costs)

Total standard cost per unit is $42

Table 6: Standard cost per unit

2.2. Variances from Standards

(Variance)(Variances)(Total actual costs) (Total actual costs)

Mekong 1,000

1,000$42=$42,000 Total actual costs Total standard costs.

Table7: Computation of total variance

(Actual Costs) (Standard costs) (Unfavorable) (Actual costs) (Standard costs) (Favorable) Mekong $2,500 (Standard Costs) $42,000 $44,500

2.2.1. Analyzing Variances

(Prices Variance) (Quantity Variance)

Figure 2: Relationship of Variances

Materials Price Variance

Direct Material


Materials Price Quantity


Labor Rate Variance

Direct Labor


Labor Time Variance

Variable Spending Variance

Direct Overhead


Variable Efficiency Variance

Direct Materials Variances


4,200 pounds $3.10



AQ: Actual QuantityAP: Actual Price

SP: Standard Price TMV: Total Material Variance


  • The Total Materials Variance is Computed From The Following Formula:

Actual Quantity

Actual Price

(AQ) (AP)

Standard Quantity

Standard Price

(SQ) (SP)

Total Materials



  • TMV=(AQAP)-(SQSP)=(4,200$3.10)-(4,000$3.00)=$1,020U

  • (Materials Price Variance) (Materials Quantity Variance)

  • -=

  • Mekong

Actual Quantity

Actual Price


Actual Quantity

Standard Price


Materials Price



  • Mekong

  • MPV=(AQAP)-(AQSP)=(4,200$3.10)-(4,200$3.00)=$420U

  • Actual Quantity

  • MPV=AQ(AP-SP)=4,200($3.10-$3.00)=$420U

  • Materials Quantity Variance


Mekong: MQV=(AQSP)-(SQSP)=(4,200$3.00)-(4,000$3.00) =$600U


  • The Materials Quantity Variance is determined From the following Formula:

Actual Quantity Standard Price (AQ) (SP)

Standard Quantity Standard Price (SQ) (SP)

Materials Quantity Variance


  • Table 8: Summary of Materials Variance

  • Materials Variances

  • Maria Company Produces a laundry detergent know as Clean-Up. The firm used a standard cost system to control costs. The standard direct materials required for one box of Clean-Up are as follows:

  • Chemical compound 5 pounds at $1.10 per pound

  • Container 1 box at $0.05 per box

During August, the company purchase and used 110,000 pounds of chemical compound at $1.25 each and 22,000 containers at $0.04 each. The actual production of Clean-Up amounted to 21,200 boxes.


Compute the materials price Variance for chemical and container.

Compute the materials Quantity Variance for chemical and container.

Materials Variance

Bandar Industries Berhad of Malaysia manufacturing sporting equipment.

One of the companys products, a football helmet for the North American

market, required a special plastic. During the quarter ending June30, the

Company manufactured 35,000 helmets using 22,500kg of plastic in the

Process . The plastic cost the company RM 171,000. (The currency in Maylasia is the ringgit, which is denote here by RM) According to the standard cost

Card, each helmet should require 0.6Kg of plastic, at a cost of RM8 per Kg.


What cost for plastic should have been incurred in the manufacture of the

35,000 helmets? How much greater or less is this than the cost that was


Break down the differences computed in (1) above into a materials price

variance and material quantity variance.

Direct Labor Variances



2,100 $9.80

2 (Standard Direct Labor per unit)

  • The Total labor variance is obtained from the following formula:

Actual Hours

Actual Rate

(AH) (AR)

Standard Hours

Standard Rate

(SH) (SR)

Total Labor


  • 2 (Standard Direct Labor per unit, Table)

  • TLV=(AHAR)-(SHSR)=(2,100$9.80)-(2,000$10)=$580U

  • (Labor price or rate Variances) (Labor Rate or Efficiency Variances)

  • (Labor Rate Variances)

  • Cont

  • -=

  • Mekong: LPV=(AHAR)-(AHSR)=(2,100$9.80)-(2,100$10)=

  • -$420F

  • Labor Quantity or Efficiency Variances (Labor Quantity or Efficiency Variances)

  • The Formula for the labor price Variances is as follows:

Actual Hours Actual Rate(AH) (AR)

Actual Hours Standard Rate

(AH) (SR)

Labor Price Variance(LPV)


Mekong LQV=(AHSR)-(SHSR)=(2,100$10)-(2,000$10)=$1,000U

  • The Labor Quantity Variances is derived from the following formula:

Actual Hours Standard Rate (AH) (SR)

Standard Hours Standard Rate

(SH) (SR)

Labor Quantity Variances (LQV)


Table9: Summary of labor Variances

1.Labor Variances

Maxwell Company has decided that the labor standards for each unit produced are 3 hours of assembly labor at $9 per hours and 2.50 hours of finishing labor at $9.50 per hour. During May, the company produc

Produced 700units using 1,890 hours of assembly labor and 2,100 hours of finishing labor. The companys direct labor payroll was $18,210 for assembly labor and $20,160 for finishing labor.

Required: Calculate the labor rate and efficiency variance for the assembly labor and $20,160 for finishing labor.

2.Direct Labor Variances

Global, Inc.., prepares in-flight meals for a number of major airlines. One of the companys product is grilled salmon in dill sauce with baby new potatoes and spring vegetables. During the most recent week, the company prepared 4,000 of these meals using 940 direct labor-hours. The company paid these direct labor workers a total of $9,600 for this work, or $10.00 per hour. According to the standard cost card of this meal, it should required 0.25 direct labor-hours at a cost of $9.75 per hour.


What direct labor cost should have been incurred to prepare the 4,000 meals? How much greater or less is this than the direct labor cost that was incurred?

Break Down the differences computed in(1) above into a labor rate variance and a labor efficiency variance.

  • Variable Manufacturing Overhead Variances

  • Variance Overhead Spending Variance and Variable Overhead Efficiency

  • Variance

  • (Variable Overhead Spending Variance

  • -=

Actual Hours Actual Rate

(AH) (AR)

Actual Hours Standard Rate (AH) (AR)

Variable Spending Variance(VSV)


Applies Mekong 2,000h $3 2,000

Variable Overhead$6,500

Fixed Overhead4,400

Total Actual Overhead$10,900

Variable Overhead$6,000

Fixed Overhead4,400

Total Overhead Budgeted$10,400

  • AH=2,100h AR=$6,500/2,100h=$3.0952, SH=2,000h

  • SR=$3(See table5) VSV=(AHAR)-(AHSR)=(2,100$3.0952)-(2,100$3)= $199.92U

  • Variable Overhead Efficiency Variance Variable Overhead efficiency Variance

  • -=

  • VEV=(AH)(SR)-(SHSR)=(2,100$3)-(2,0003)=$300U

Actual Hours Standard Rate (AH) (SR)

Standard Hours Standard Rate (SH) (SR)


Efficiency Variance (VEV)

Total VMOV=VSV+VEV=$199.92+$300=$499.92U

(Variable and Fixed Overhead Costs) (Flexible Bduget Preparation)

Variable Overhead Variance

Logistic Solution Provides order fulfillment service for merchant

Merchants. The company maintains warehouse that stock item carried by its clients. When a client receives an order from a customer, the order is forwarded to Logistics Solution, which pulls the items from storage, packs it, and ships it to the customer. The company uses a predetermine variable overhead rate base on direct labor-hour.

In the most recent month, 120,000 items were shipped to customer using 2,300 direct labor-hours. The company incurred a total of $7,360 in variable overhead costs. According to the companys standard, 0.02 direct labor-hours are required to fulfill and order for one item and the variable overhead rate is $3.25 per direct labor-Hours.


What variable Overhead cost should have been incurred to fill the order for the 120,000 items? How much greater or less is this than the variable overhead cost that was incurred?

Break down the difference computed in (1) above into a variable overhead spending variance and variable overhead efficiency variance.

Labor and Variable Overhead Variances

Hallowell Audio Company manufactures compact disc CD. The company use

Use standards to control its costs. The labor standards that have been set for one disc are as follows:

During July, 5,750 hours of direct labor time were recorded in the manufacture of 20,000 disc. The direct labor cost totaled $73,600 for the month.


What direct labor cost should have been incurred in the manufacture of the 20,000 units of the CD? By how much does this differ from, the cost that was incurred?

Break down the difference in cost from(1) above into a labor rate (price) variance and a labor (quantity) efficiency variance.

The budgeted variable overhead rate is $4 per direct labor hour. During July, the company incurred $21,850 in variable manufacturing overhead cost. Compute the variable overhead spending and affiance variances for the month.

  • 2.2.2-Journal Entries

  • (Standard Cost System) Job Order Costing or Process Costing Job Order Costing

  • (Job Order Costing) (Variance)

  • Mekong







12,600 $12,000

Material Purchasing 4:

$21,000 $20,000

Manufacturing Overhead



Finished Goods $42,000

1,000 $60 30 $4200

The End!

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