@ 2012, Cengage Learning

Performance Evaluation Using Variances from Standard Costs

LO 2 – Understanding How Standards are Used in Budgeting

Budgetary Performance EvaluationThe control function, or budgetary

performance evaluation, compares the actual performance against the budget.

LO 2LO 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

LO 2LO 2

Budgetary Performance Evaluation

Western Rider’s standard costs per unit for XL jeans are shown in Exhibit 1.

LO 2LO 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.

LO 2LO 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.

LO 2LO 2

Budget Performance Report

Western Rider produced and sold 5,000 pairs of XL jeans. It incurred direct materials costs of $40,150, direct labor costs of $38,500, and factory overhead costs of $22,400. Western Rider Inc.’s budget performance report is shown in Exhibit 2 on the next slide.

LO 2LO 2

Budget Performance ReportLO 2LO 2

Manufacturing Cost Variances

In examining Exhibit 2, you can see that the direct materials variance is an unfavorable $2,650. The amount of blue denim used per pair of blue jeans may have been different than expected, and/or the purchase price of blue denim was higher than expected.

LO 2LO 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 as shown in Exhibit 3 (next slide).

LO 2LO 2

Manufacturing Cost VariancesLO 2LO 2

The total direct materials variance is separated into price and quantity variances.

Manufacturing Cost VariancesLO 2LO 2

Price Difference + Quantity Difference

The total direct labor variance is separated into rate and time variances.

Manufacturing Cost VariancesLO 2LO 2

Rate Difference + Time Difference