Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 22 Student Version These slides should be viewed using the presentation mode (left click your mouse on the icon). Performance Evaluation Using Variances from Standard Costs

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 1 Describe the types of standards and how they are established.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Standards  Standards are performance goals. Manufacturing companies normally use standard cost for each of the three following product costs: 1.Direct materials 2.Direct labor 3.Factory overhead LO 1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Types of Standards  Unrealistic standards that can be achieved only under perfect operating conditions (such as no idle time, no machine breakdowns, and no materials spoilage) are called ideal standards or theoretical standards. LO 1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Types of Standards LO 1  Currently attainable standards, sometimes called normal standards, can be attained with reasonable effort. Such standards, which are used by most companies, allow for normal production difficulties and mistakes.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 2 Describe and illustrate how standards are used in budgeting.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Budgetary Performance Evaluation  The standard cost per unit for direct materials, direct labor, and factory overhead is computed as follows: Standard Cost Per Unit Standard Price Standard Quantity = x LO 2

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Budgetary Performance Evaluation Western Rider’s standard costs per unit for XL jeans are shown below in Exhibit 1. LO 2

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Budget Performance Report  The report that summarizes actual costs, standard costs, and the differences for the units produced is called a budget performance report. LO 2

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Budget Performance Report  The differences between actual and standard costs are called costs variances.  A favorable cost variance occurs when the actual cost is less than the standard cost (at actual volumes).  An unfavorable cost variance occurs when the actual cost exceeds the standard cost. LO 2

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Manufacturing Cost Variances  The total manufacturing cost variance is the difference between total standard costs and total actual costs for the units produced.  For control purposes, each product cost variance is separated into two additional variances. The following two slides show the variance separations for material and labor. LO 2

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The total direct materials variance is separated into a price and quantity variance. Manufacturing Cost Variances LO 2 Price Difference + Quantity Difference

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The total direct labor variance is separated into a rate and a time variance. Manufacturing Cost Variances LO 2 Rate Difference + Time Difference

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 3 Compute and interpret direct materials and direct labor variances.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Actual Direct Materials Cost = Actual Price x Actual Quantity Actual Direct Materials Cost = ($5.50 per sq. yard) x (7,300 sq. yards.) Actual Direct Materials Cost = $40,150 Standard Direct Materials Cost = Standard Price x Standard Quantity Standard Direct Materials Cost = ($5.00 per sq. yard) x (7,500 sq. yards.) Standard Direct Materials Cost = $37,500 Actual costs ($40,150) – Standard costs ($37,500) = $2,650 Total Unfavorable Materials Variance LO 3 Direct Materials Variances

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 Direct Materials Price Variance Direct Materials Price Variance = (Actual Price – Standard Price) x Actual Quantity Direct Materials Price Variance = ($5.50 – $5.00) x 7,300 sq. yds. Direct Materials Price Variance = $3,650 Western Rider paid $0.50 more per square yard of material than the standard. Unfavorable direct materials price variance

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 Direct Materials Quantity Variance Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) x Standard Price Direct Materials Quantity Variance = (7,300 sq. yds. – 7,500 sq. yds.) x $5.00 Direct Materials Quantity Variance = – $1,000 Western Rider used 200 square yards less than the standard. Favorable direct materials quantity variance

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Direct Labor Variances LO 3 Actual Direct Labor Cost = Actual Rate per Hour x Actual Time Actual Direct Labor Cost = $10.00 per hr. x 3,850 hrs. Actual Direct Labor Cost = $38,500 Standard Direct Labor Cost = Standard Rate per Hour x Standard Time Standard Direct Labor Cost = $9.00 per hr. x 4,000 hrs. Standard Direct Labor Cost = $36,000 Actual costs ($38,500) – Standard costs ($36,000) = $2,500 Total unfavorable direct labor cost variance

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Direct Labor Rate Variance LO 3 Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) x Actual Hours Direct Labor Rate Variance = ($10.00 – $9.00) x 3,850 hours Direct Labor Rate Variance = $3,850 The unfavorable variance could have been caused by improper scheduling and use of employees. Unfavorable direct labor rate variance

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Direct Labor Time Variance LO 3 Direct Labor Time Variance = (Actual Direct Labor Hours - Standard Direct Labor Hours) x Standard Rate per Hour Direct Labor Time Variance =(3,850 hours – 4,000 direct labor hours) x $9.00 Direct Labor Time Variance = – $1,350 If there had been an unfavorable time variance, it might have been caused by a shortage of skilled workers. Favorable direct labor time variance

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 4 Compute and interpret factory overhead controllable volume variances.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Factory Overhead Flexible Budget LO 4 Factory Overhead Rate Budgeted Factory Overhead at Normal Capacity Normal Productive Capacity = $30,000 5,000 direct labor hours Factory Overhead Rate = Factory Overhead Rate = $6.00 per direct labor hour

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Variable Factory Overhead Rate = Budgeted Variable Overhead at Normal Capacity Normal Productive Capacity Variable Factory Overhead Rate = $3.60 per direct labor hour Factory Overhead Flexible Budget LO 4 $18,000 5,000 direct labor hours Variable Factory Overhead Rate =

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Fixed Factory Overhead Rate = Budgeted Fixed Overhead at Normal Capacity Normal Productive Capacity Fixed Factory Overhead Rate = $2.40 per direct labor hour Factory Overhead Flexible Budget LO 4 $12,000 5,000 direct labor hours Fixed Factory Overhead Rate =

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Variable Factory Overhead Controllable Variance Actual Variable Factory Overhead = Budgeted Variable Factory Overhead – Variable Factory Overhead Controllable Variance LO 4 Standard Hours for Actual Units Produced Variable Factory Overhead Rate x

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Budgeted Variable Factory Overhead $14,400 Variable Factory Overhead Controllable Variance LO 4 = Variable Factory Overhead Controllable Variance $10,400 – $14,400 Actual Variable Factory Overhead = – Variable Factory Overhead Controllable Variance = – $4,000 Favorable Variance 4,000 direct labor hours x $3.60

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Fixed Factory Overhead Volume Variance Standard Hours for 100% of Normal Capacity = Standard Hours for Actual Units Produced Fixed Factory Overhead Volume Variance – Fixed Factory Overhead Rate x = Fixed Factory Overhead Volume Variance 5,000 direct labor hours 4,000 direct labor hours x $2.40– = Fixed Factory Overhead Volume Variance $2,400 Unfavorable Variance LO 4

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  An unfavorable volume variance may be due to factors such as:  Failure to maintain an even flow of work  Machine breakdowns  Work stoppages caused by lack of materials or skilled labor  Lack of enough sales orders to keep the factory operating at normal capacity LO 4 Fixed Factory Overhead Volume Variance

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Reporting Factory Overhead Variances  A factory overhead cost variance report is useful to management in controlling factory overhead costs. LO 4

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Factory Overhead Account Applied Factory Overhead Standard Hours for Actual Units Produced = Total Factory Overhead Rate x Applied Factory Overhead = 4,000 direct labor hrs. x $6.00 = $24,000 Applied Factory Overhead = 5,000 jeans x 0.80 direct labor hr. per pair of jeans x $6.00 LO 4

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 4 Actual Factory Overhead = Applied Factory Overhead – Total Factory Overhead Cost Variance (continued) Factory Overhead Account Standard Hours for Actual Units Produced Total Factory Overhead Rate x

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 4 5,000 jeans x 0.80 direct labor hr. per pair of jeans $6.00 x Factory Overhead Account Actual Factory Overhead = – Total Factory Overhead Cost Variance $24,000 (continued)

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Actual Factory Overhead = – Total Factory Overhead Cost Variance $24,000 LO 4 $22,400 – $24,000 = Total Factory Overhead Cost Variance – $1,600 Favorable Variance = Total Factory Overhead Cost Variance Factory Overhead Account (concluded)

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 5 Journalize the entries for recording standards in the accounts and prepare an income statement that includes variances from standard.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 5 Recording and Reporting Variances Western Rider Inc. purchased, on account, the 7,300 square yards of blue denim at $5.50 per square yard. The standard price is $5.00 per square yard. The entry to record the purchase and the unfavorable direct materials price variance is as follows:

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. $5.50 x 7,300 = $40,150 $5.00 x 7,300 = $36,500 $3,650 unfavorable direct materials price variance LO 5 Recording and Reporting Variances

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 5 Recording and Reporting Variances Western Rider Inc. used 7,300 square yards of blue denim to produce 5,000 pairs of XL jeans. The standard quantity of denim for the 5,000 jeans produced is 7,500 square yards. The entry to record the materials used is as follows:

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 5 Recording and Reporting Variances $5.00 x 7,500 = $37,500 $5.00 x 7,300 = $36,500 – $1,000 favorable direct materials quantity variance

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 6 Describe and provide examples of nonfinancial performance measures.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Nonfinancial Performance Measures  A nonfinancial performance measure expresses performance in a measure other than dollars. LO 6

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Nonfinancial Performance Measures  Inventory turnover  Percent 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 LO 6

Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The End Performance Evaluation Using Variances from Standard Costs