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© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. . Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc. Chapter 21. Performance Evaluation Using Variances from Standard Costs.

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© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.

Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

Chapter 21

Performance Evaluation Using Variances from Standard Costs

Financial and Managerial Accounting

8th Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

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Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

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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.

After studying this chapter, you should be able to:

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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.

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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

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

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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

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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

5,000 x $7.50 per pair

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

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Direct Materials Price Variance

Direct

Materials

Cost Variance

Direct Materials Price 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

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Direct

Materials

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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Factory

Overhead

variances from standard for factory overhead result from
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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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$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

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$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

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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.

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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

nonfinancial performance measures
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
slide40

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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Chapter 21

The End