1. Chapter 22 Performance Evaluation Using Variances from Standard Costs
Principles of Financial and Managerial Accounting
11e
Principles of Managerial Accounting
11e
Chapter 22
Principles of Financial and Managerial Accounting
Using excel for Success
Student Version
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Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© 2012 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.
Reeve Warren Duchac

2. Describe the types of standards and how they are established.
Learning Objective 1
Describe the types of standards and how they are established.

3. LO 1
Standards
Standards are performance goals. Manufacturing companies normally use standard cost for each of the three following product costs:
Direct materials
Direct labor
Factory overhead

4. LO 1
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.

5. LO 1
Types of Standards
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.

6. Describe and illustrate how standards are used in budgeting.
Learning Objective 2
Describe and illustrate how standards are used in budgeting.

7. Budgetary Performance Evaluation
LO 2
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

8. Budgetary Performance Evaluation
LO 2
Budgetary Performance Evaluation WR
Western Rider’s standard costs per unit for XL jeans are shown below in Exhibit 1.

9. Budget Performance Report
LO 2
Budget Performance Report
The report that summarizes actual costs, standard costs, and the differences for the units produced is called a budget performance report.

10. Budget Performance Report
LO 2
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.

11. Manufacturing Cost Variances
LO 2
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.

12. Manufacturing Cost Variances
LO 2
Manufacturing Cost Variances
The total direct materials variance is separated into a price and quantity variance.
Price Difference + Quantity Difference

13. Manufacturing Cost Variances
LO 2
Manufacturing Cost Variances
The total direct labor variance is separated into a rate and a time variance.
Rate Difference + Time Difference

14. Compute and interpret direct materials and direct labor variances.
Learning Objective 3
Compute and interpret direct materials and direct labor variances.

15. Total Unfavorable Materials Variance
LO 3
Direct Materials Variances WR
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

16. Direct Materials Price Variance
LO 3
Direct Materials Price Variance WR
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
Unfavorable direct materials price variance
Western Rider paid $0.50 more per square yard of material than the standard.

17. Direct Materials Quantity Variance
LO 3
Direct Materials Quantity Variance WR
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
Favorable direct materials quantity variance
Western Rider used 200 square yards less than the standard.

18. Direct Labor Variances
LO 3
Direct Labor Variances WR
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

19. Direct Labor Rate Variance
LO 3
Direct Labor Rate Variance WR
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
Unfavorable direct labor rate variance
The unfavorable variance could have been caused by improper scheduling and use of employees.

20. Direct Labor Time Variance
LO 3
Direct Labor Time Variance WR
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
Favorable direct labor time variance
If there had been an unfavorable time variance, it might have been caused by a shortage of skilled workers.

21. Compute and interpret factory overhead controllable volume variances.
Learning Objective 4
Compute and interpret factory overhead controllable volume variances.

22. Factory Overhead Flexible Budget
LO 4
Factory Overhead Flexible Budget WR
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

23. Factory Overhead Flexible Budget
LO 4
Factory Overhead Flexible Budget WR
Budgeted Variable Overhead at Normal Capacity
Normal Productive Capacity
Variable Factory Overhead Rate =
$18,000
5,000 direct labor hours
Variable Factory Overhead Rate =
Variable Factory Overhead Rate = $3.60 per direct labor hour

24. Factory Overhead Flexible Budget
LO 4
Factory Overhead Flexible Budget WR
Fixed Factory Overhead Rate =
Budgeted Fixed Overhead at Normal Capacity
Normal Productive Capacity
$12,000
5,000 direct labor hours
Fixed Factory Overhead Rate =
Fixed Factory Overhead Rate = $2.40 per direct labor hour

25. Variable Factory Overhead Controllable Variance
LO 4
Variable Factory Overhead Controllable Variance
Variable Factory Overhead Controllable Variance
Actual Variable Factory Overhead
Budgeted Variable Factory Overhead – =
Standard Hours for Actual Units Produced
Variable Factory Overhead Rate x

26. Variable Factory Overhead Controllable Variance
LO 4
Variable Factory Overhead Controllable Variance WR
Variable Factory Overhead Controllable Variance
$14,400
Actual Variable Factory Overhead
Budgeted Variable Factory Overhead = – =
Variable Factory Overhead Controllable Variance
$10,400 – $14,400
4,000 direct labor hours x $3.60 =
Variable Factory Overhead Controllable Variance
– $4,000 Favorable Variance

27. Fixed Factory Overhead Volume Variance
LO 4
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

28. Fixed Factory Overhead Volume Variance
LO 4
Fixed Factory Overhead Volume Variance
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

29. Reporting Factory Overhead Variances
LO 4
Reporting Factory Overhead Variances
A factory overhead cost variance report is useful to management in controlling factory overhead costs.

30. Factory Overhead Account
LO 4
Factory Overhead Account WR
Applied Factory Overhead
Standard Hours for Actual Units Produced
Total Factory Overhead Rate = x
Applied Factory Overhead =
5,000 jeans x 0.80 direct labor hr. per pair of jeans
x $6.00
Applied Factory Overhead =
4,000 direct labor hrs. x $6.00 = $24,000

31. Factory Overhead Account
LO 4
Factory Overhead Account
Total Factory Overhead Cost Variance
Actual Factory Overhead
Applied Factory Overhead = –
Standard Hours for Actual Units Produced
Total Factory Overhead Rate x
(continued)

32. Factory Overhead Account
LO 4
Factory Overhead Account WR
Total Factory Overhead Cost Variance
Actual Factory Overhead
$24,000 = –
5,000 jeans x 0.80 direct labor hr. per pair of jeans
$6.00 x
(continued)

33. Factory Overhead Account
LO 4
Factory Overhead Account WR
Total Factory Overhead Cost Variance
Actual Factory Overhead
$24,000 = –
$22,400 – $24,000 =
Total Factory Overhead Cost Variance
– $1,600 Favorable Variance =
Total Factory Overhead Cost Variance
(concluded)

34. Learning Objective 5
Journalize the entries for recording standards in the accounts and prepare an income statement that includes variances from standard.

35. Recording and Reporting Variances
LO 5
Recording and Reporting Variances WR
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:

36. Recording and Reporting Variances
LO 5
Recording and Reporting Variances WR
$5.50 x 7,300 = $40,150
$5.00 x 7,300 = $36,500
$3,650 unfavorable direct materials price variance

37. Recording and Reporting Variances
LO 5
Recording and Reporting Variances WR
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:

38. Recording and Reporting Variances
LO 5
Recording and Reporting Variances WR
$5.00 x 7,500 = $37,500
$5.00 x 7,300 = $36,500
– $1,000 favorable direct materials quantity variance

39. Describe and provide examples of nonfinancial performance measures.
Learning Objective 6
Describe and provide examples of nonfinancial performance measures.

40. Nonfinancial Performance Measures
LO 6
Nonfinancial Performance Measures
A nonfinancial performance measure expresses performance in a measure other than dollars.

41. Nonfinancial Performance Measures
LO 6
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

42. Performance Evaluation Using Variances from Standard Costs
The End