# Performance Evaluation and Using Variances

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```					Performance Evaluation
and Using Variances
Chapter M6
Standards
• Performance goals used for all three
manufacturing costs
– Direct materials
– Direct labor
• Standard cost systems
– Allows management to determine how
much of a product should cost and how
much it does cost and the difference
Terms
•Standard cost            •Variance
–What it should cost     –Difference
•Actual cost                –Favorable or
unfavorable
–What it does cost
•Standards
–Theoretical
–Currently attainable or
normal standards
•Budgetary performance
evaluation
–Summarizes actual cost,
standard amounts at
current production level
and differences
Example
Mfg Costs          Actual Cost Standard    Variance-
cost at     favorable
actual      or
volume      unfavorable
Direct             \$40,150     \$37,500     \$2,650
materials
Direct             \$38,500       \$36,000   \$2,500
Labor
Factory            \$22,400       \$24,000   (\$1,600)

Actual volume is 5,000 units
Direct Materials Variance
• Price variance =
– (actual price – std price) X actual Quantity
• Quantity variance =
– (Actual quantity – std quantity) X std price
• Total direct materials variance =
– Price variance + quantity variance
Example 2
• Material used in the production of
Product Z has a standard cost of \$3
per lb. And standard use of
10,000lbs. Actual records show
15,000 lbs. used with an actual cost
of \$2.50 per lb. Computer the
variance
Example 2:
• Price variance =
– (AP – SP) X AQ
– (2.50 – 3.00) X 15,000lbs
– \$(7,250) favorable variance
• Quantity variance =
– (AQ – SQ) X SP
– (15,000 -10,000) X \$3
– \$15,000 unfavorable variance
• Total variance
– \$(7250) + \$15,000 = \$7,750
Example 3
• Material used in the production of
product D has a standard cost of \$5
per lb. and a standard use of 2 lbs
per units produced. Production of
5,000 units occurred during the
period. Actual records show 9,000
lbs. used with an actual cost of \$6
per lb. Compute the direct material
variances
Example 3:
• Price variance = (AP-SP) X AQ
• (6 – 5) X 9,000 = \$9,000 unfavorable
• Quantity variance = (AQ-SQ) X SP
• (9000 – 10,000) X \$5 = \$5,000
favorable
• Total
– Unfavorable   \$9,000
– Favorable      5,000
– Total         \$4,000 unfavorable
Direct Labor Variances
• Rate variance
– (Actual rate – Std rate ) x Actual hours
• Time variance
– (actual hrs – std hrs) X Std rate
• Total variance
– Time + Rate
Example 4
• Factory records show that each
product produced requires 3 direct
labor hours. Production during the
period consisted of 10,000 units with
29,500 hours of labor used. Labor
has a standard cost of \$10 per hour
and actual cost of \$11 per hour.
Compute the direct labor variances
Example 4:
• Rate variance = (AR – SR) X Ahrs
– (11 – 10) X ( 29,500)
– \$29,500 unfavorable
• Time variance + (Ahr – Shr) X SR
– (29,500 – 30,000) X 10
– \$5,000 favorable
• Total
– \$29,500 unfavorable + \$5,000 favorable
– \$24,500 unfavorable
• Determine the impact of changing
the production on fixed and variable
• Standard factory overhead cost rate
= Total budget cost at 100%
capacity/Standard hours at 100%
capacity
• Variable costs per unit
– Total variable factory overhead
–           Total hours
Example 5:
Percent of normal
capacity                    80%       90%       100%      110%
Units produced                5000      5625      6250      6875
DLH (.8 per unit)             4000      4500      5000      5500
Budgeted F/O
Variable costs
Indirect factory
wages                        \$8,000    \$9,000   \$10,000   \$11,000
Power and light           \$4,000    \$4,500    \$5,000    \$5,500
Indirect materials        \$2,400    \$2,700    \$3,000    \$3,300
Total variable costs   \$14,400   \$16,200   \$18,000   \$19,800
Fixed costs
Supervisory salaries     \$5,500    \$5,500    \$5,500    \$5,500
Depreciation             \$4,500    \$4,500    \$4,500    \$4,500
Insurance                \$2,000    \$2,000    \$2,000    \$2,000
Total Fixed cost     \$12,000   \$12,000   \$12,000   \$12,000
Total factory overhead      \$26,400   \$28,200   \$30,000   \$31,800
Example 5: Factory overhead variance
• Step 1: get the following information
– Standard F/O cost rate =
• Total budget cost at 100% capacity
• Standard hrs at 100% capacity
• \$30,000/5,000 = \$6 per hour
– Variable cost per unit at 100%
• \$18,000/5,000 = \$3.60 per hour
– Fixed costs per unit at 100%
• \$12,000/5,000 = \$2.40 per hour
Variances for Factory Overhead
• Controllable variance
– Deals with variable cost
– Actual variable F/O
– Minus Budget Variable F/O at actual
– Equals Variance
• Volume Variance
– Deals with fixed costs
Example 5:
• Using the information in the table
assume that actual production is
80% of capacity. Actual variable
costs are \$16,000
• Actual Var F/O     \$16,000
• Budget               14,400
• Variance              1,600
Volume variance
•   100% capacity direct labor hours
•   -standard direct labor hours at actual
•   Unused capacity
•   X standard fixed overhead rate
•   Volume variance
Example 7:
• Using the information on Western
Rider assume actual production is
80% capacity and compute volume
variance
• 5,000 DLH
• -4,000 DLH
• 1,000 DLH
• X \$2.40 per DLH
• \$2,400 volume variance

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