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
  – Factory overhead
• 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)
 overhead

   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
Factory overhead variance
• Determine the impact of changing
  the production on fixed and variable
  factory overhead cost
• 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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