1 Click to edit Master title style 1 1 1 Performance Evaluation Using Variances From Standard Costs 7

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Performance Performance Evaluation Evaluation

Using Using Variances Variances

From Standard From Standard CostsCosts

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Standards 7-1

Standards are performance goals. Manufacturers normally use standard costs for each of the three manufacturing costs:

Direct materials

Direct labor

Factory overhead

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Standard Cost for XL Jeans 7-2

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Budget Performance Report 7-2

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Relationship of Variances to the Total Manufacturing Cost Variances

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Standard square yards per pair of jeans 1.50 sq. yards

Actual units produced x 5,000 pairs of jeansStandard square yards of

denim budgeted foractual production 7,500 sq. yards

Standard price per sq. yd. x $5.00Standard direct materials cost

at actual production $37,500

Direct Materials 7-3

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Actual price per unit $5.50 per sq. yd.Standard price per unit 5.00 per sq. yd.Price variance (unfavorable) $0.50 per sq. yd.

$0.50 times the actual quantity of 7,300 sq. yds. = $3,650 unfavorable

Direct Materials Price Variance 7-3

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Actual quantity used 7,300 sq. yds.Standard quantity at actual production 7,500Quantity variance (favorable) (200) sq. yds.

(200) square yards times the standard price of $5.00 = ($1,000) favorable

Direct Materials Quantity Variance 7-3

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Example Exercise 7-1

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Tip Top Corp. produces a product that requires six standard pounds per unit. The standard price is $4.50 per pound. If 3,000 units required 18,500 pounds, which were purchased at $4.35 per pound, what is the direct materials (a) price variance, (b) quantity variance, and (c) cost variance?

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For Practice: PE7-1A, PE7-1B

Follow My Example 7-1

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a. Direct materials price variance (favorable)($2,775) [($4.35 – $4.50) x 18,500 pounds]

b. Direct materials quantity variance (unfavorable)$2,250 [(18,500 pounds – 18,000 pounds) x

$4.50]c. Direct materials cost variance (favorable)

($525) [($2,775) + $2,250] or[($4.35 x 18,500 pounds) – ($4.50 x 18,000 pounds)] = $80,475 – $81,000

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Standard direct labor hours per pair of XL jeans 0.80 direct labor hour

Actual units produced x 5,000 pairs of jeansStandard direct labor hours budgeted for actualproduction 4,000 direct labor hoursStandard rate per DLH x $9.00Standard direct labor cost

at actual production $36,000

Direct Labor Variances 7-3

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Actual rate $10.00Standard rate 9.00Rate variance—unfavorable $ 1.00 per hour

$1.00 times the actual time of 3,850 hours = $3,850 unfavorable

Direct Labor Rate Variance 7-3

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Actual hours 3,850 DLHStandard hours at actualproduction 4,000Time variance—favorable (150) DLH

(150) Direct labor hours times the standard rate of $9.00 = ($1,350) favorable

Direct Labor Time Variance 7-3

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7-3

Tip Top Corp. produces a product that requires 2.5 standard hours per unit at a standard hourly rate of $12 per hour. If 3,000 units required 7,420 hours at an hourly rate of $12.30 per hour, what is the direct labor (a) rate variance, (b) time variance, and (c) cost variance?

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a. Direct labor rate variance (unfavorable)$2,226 [($12.30 – $12.00) x 7,420 hours]

b. Direct labor time variance (favorable)($960) [7,420 hours – 7,500 hours) x $12.00]

c. Direct labor cost variance (favorable)($1,266) [$2,226 + ($960)] or [($12.30 x 7,420

hours) – ($12.00 x 7,500 hours)] = $91,266 – $90,000

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Variances from standard for factory overhead result from:

1. Actual variable factory overhead cost greater or less than budgeted variable factory overhead for actual production.

2. Actual production at a level above or below 100% of normal capacity.

The Factory Overhead Flexible Budget 7-4

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Variable Factory Overhead Controllable Variance

Actual variable factory overhead $ 10,400Budgeted variable factory overhead

for actual amount produced (4,000 hrs. x $3.60) 14,400 Controllable variance— favorable $ (4,000) F

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7-4

Tip Top Corp. produced 3,000 units of product that required 2.5 standard hours per unit. The standard variable overhead cost per unit is $2.20 per hour. The actual variable factory overhead was $16,850. Determine the variable factory overhead controllable variance.

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$350 unfavorable

$16,850 – [$2.20 x (3,000 units x 2.5 hours)]

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Fixed Factory Overhead Volume Variance

100% of normal capacity 5,000 direct labor hoursStandard hours at actual production 4,000Capacity not used 1,000 direct labor hoursStandard fixed overhead rate x $2.40Volume variance—unfavorable $ 2,400 U

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7-4

Tip Top Corp. produced 3,000 units of product that required 2.5 standard hours per unit. The standard fixed overhead cost per unit is $0.90 per hour at 8,000 hours, which is 100% of normal capacity. Determine the fixed factory overhead volume variance.

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$450 unfavorable

$0.90 x [8,000 hours – (3,000 units x 2.5 hours)]

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Reporting Factory Overhead Variances

Total actual factory overhead $22,400

Factory overhead applied (4,000hours x $6.00 per hour) 24,000

Total factory overhead cost variance—favorable $(1,600) F

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1 Click to edit Master title style 1 1 1 Performance Evaluation Using Variances From Standard Costs 7