Budget Performance Evaluation
The need for standards
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
Setting Standard Costs
(Standards Costs) (Quality Controls Engineers) (Payroll Department) Industrials Engineers
2.1.( A Case Study)
Kg, Pound, Barrels Allowances for Unavoidable waste and Normal Spoilage
Table 2: Setting Direct Materials Quantities Standards
? Rest period, Cleanup, Machine Set up and Machine Downtime Megkong
Table 4: Setting Direct Labor Quantity Standards
Predetermined Overhead Rate)
(Budgeted Overhead Costs) (Expected
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)
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
Materials Price Quantity
Labor Rate Variance
Labor Time Variance
Variable Spending Variance
Variable Efficiency Variance
Direct Materials Variances
4,200 pounds $3.10
AQ: Actual QuantityAP: Actual Price
SP: Standard Price TMV: Total Material Variance
Mekong: MQV=(AQSP)-(SQSP)=(4,200$3.00)-(4,000$3.00) =$600U
Actual Quantity Standard Price (AQ) (SP)
Standard Quantity Standard Price (SQ) (SP)
Materials Quantity Variance
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.
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 (Standard Direct Labor per unit)
Actual Hours Actual Rate(AH) (AR)
Actual Hours Standard Rate
Labor Price Variance(LPV)
Actual Hours Standard Rate (AH) (SR)
Standard Hours Standard Rate
Labor Quantity Variances (LQV)
Table9: Summary of 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.
Actual Hours Actual Rate
Actual Hours Standard Rate (AH) (AR)
Variable Spending Variance(VSV)
Applies Mekong 2,000h $3 2,000
Total Actual Overhead$10,900
Total Overhead Budgeted$10,400
Actual Hours Standard Rate (AH) (SR)
Standard Hours Standard Rate (SH) (SR)
Efficiency Variance (VEV)
(Variable and Fixed Overhead Costs) (Flexible Bduget Preparation)
Variable Overhead Variance
Logistic Solution Provides order fulfillment service for dot.com merchant
Merchants. The company maintains warehouse that stock item carried by its dot.com 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.
Material Purchasing 4:
Finished Goods $42,000
1,000 $60 30 $4200
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