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Performance Evaluation
Using Variances from
Standard Costs
Accounting, 21st Edition
Warren Reeve Fess
Setting Standards
Requires joint efforts of accountants, engineers, and
other management personnel
Types of Standards
Theoretical or ideal (world record) standards
Currently attainable standards (normal standards)
Direct
DirectLabor
LaborRate
Rate
Total
Total Direct
Direct Variance
Variance
Manufacturing
Manufacturing Labor
Labor
Cost
CostVariance
Variance Cost
CostVariance
Variance Direct
DirectLabor
LaborTime
Time
Variance
Variance
Variable
VariableFactory
FactoryOverhead
Overhead
Factory
Factory Controllable
ControllableVariance
Variance
Overhead
Overhead
Cost
CostVariance
Variance Fixed
FixedFactory
FactoryOverhead
Overhead
Volume
VolumeVariance
Variance
Direct
Direct Materials
Materials Price
Price Variance
Variance
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
Direct Materials
Materials Quantity
Quantity Variance
Variance
Actual quantity used 7,300 sq. yds.
Standard quantity at
actual production 7,500
Quantity variance (favorable) (200) sq. yds.
(200) square yards times the standard price of
$5.00 = ($1,000) favorable
Direct
Direct Materials
Materials
Variance
Variance Relationships
Relationships
Actual quantity x Actual quantity x Standard quantity
Actual price Standard price x Standard price
7,300 x $5.50 = 7,300 x $5.00 = 7,500 x $5.00 =
$40,150 $36,500 $37,500
Desired
Standard hours
capacity
at actual
production
Western Rider Inc. produced 5,000 pairs
of XL jeans in June. Each pair requires
0.80 standard labor hours for production.
The firm operated at 80% of capacity.
Direct Labor Hours
4,000 5,000 5,500
Percentage of capacity 80% 100% 110%
Total fixed costs 12,000 12,000 12,000
Fixed cost per DLH $3.00 $2.40 $2.18
100% of normal capacity 5,000 DLH
Standard hours at actual production 4,000 DLH
Capacity not used 1,000 DLH
Standard fixed overhead rate at 100% x $2.40
Fixed overhead volume variance $ 2,400 U
Western Rider Inc.
Factory Overhead Cost Variance Report
For the Month Ended June 30, 2006
Productive capacity for the month (100% of normal) 5,000 hours
Actual production for the month 4,000 hours
Budget
(at Actual Variances
Production) Actual Favorable
Unfavorable
Variable factory overhead costs $14,400 $10,400 $4,000
Fixed factory overhead costs 12,000 12,000
Total factory overhead costs $26,400 $22,400
Total controllable variances $4,000 $ 0
Net controllable variances—
favorable $4,000
Volume variance—unfavorable:
Capacity not used at the standard rate for fixed
factory overhead—1,000 x $2.40 2,400
Total factory overhead cost variance--favorable $1,600
Fixed
Fixed Overhead
Overhead Variances
Variances and
and the
the
Factory
Factory Overhead
Overhead Account
Account
Factory Overhead
Actual factory Applied factory
overhead $22,400 overhead $24,000
Balance, June 30 1,600
$10,400
$10,400 ++ 4,000
4,000 hours
hours xx
$12,000
$12,000 $6.00
$6.00 per
per hour
hour
Fixed
Fixed Overhead
Overhead Variances
Variances and
and the
the
Factory
Factory Overhead
Overhead Account
Account
Factory Overhead
Actual factory Applied factory
overhead $22,400 overhead $24,000
Balance, June 30 1,600
Controllable
Variance: $4,000 F
$22,400
$22,400 –– $26,400
$26,400
Fixed
Fixed Overhead
Overhead Variances
Variances and
and the
the
Factory
Factory Overhead
Overhead Account
Account
Factory Overhead
Actual factory Applied factory
overhead $22,400 overhead $24,000
Balance, June 30 1,600
Volume
Variance: $2,400 U
$26,400
$26,400 –– $24,000
$24,000
Fixed
Fixed Overhead
Overhead Variances
Variances and
and the
the
Factory
Factory Overhead
Overhead Account
Account
$3,650 U
$5.50 x 7,300 = $40,150 Direct
$5.00 x 7,300 = $36,500 materials
price
variance
Western
Western Rider
Rider Inc.
Inc. used
used 7,300
7,300 square
square yards
yards
of
of blue
blue denim
denim toto produce
produce 5,0005,000 pairs
pairs of
of XL
XL
jeans,
jeans, compared
compared to to the
the standard
standard of
of 7,500
7,500
square
square yards.
yards. Date
Date thethe entry
entry August
August 31.
31.
Aug. 31 Work in Process (7,500 x $5.00) 37 500 00
Direct Materials Quantity Variance 1 000 00
Materials (7,300 x $5.00) 36 500 00
$1,000 F
Standard
$5.00price x Actual7,300
quantity = $36,500 Direct
Standard price x Standard
$5.00
quantity 7,500 = $37,500 Materials
quantity
variance
For
For the
the month
month ofof August,
August, Western
Western Rider
Rider Inc.
Inc. accrued
accrued
wages
wages ofof $38,500
$38,500 (3,850
(3,850 hours
hours at at $10
$10 per
per hour)
hour) in in
producing
producing 5,000
5,000 XL
XL Jeans.
Jeans. The
The standard
standard rate
rate isis $9
$9 per
per
hour
hour and
and each
each pair
pair of
of jeans
jeans had
had aa time
time standard
standard of of 0.8
0.8 hr.
hr.
$10.00
Actual rate x Actual3,850
hours = $38,500
$3,850 U (rate)
Standard
$9.00rate x Actual3,850
hours = $34,650
$1,350 F (time)
Standard
$9.00rate x Standard
4,000quantity = $36,000
Sales…………………………………… $140,000
Cost of goods sold…………………….. 97,500
Gross profit--at standard………………. $ 42,500
Favorable Unfavorable
Less variances from standard cost:
Direct materials price……………….. $3,650
Direct materials quantity……………. $1,000
Direct labor rate…………………….. 3,850
Direct labor time……………………. 1,350
Factory overhead controllable………. 4,000
Factory overhead volume…………… 2,400 3,550
Gross profit……………………………. $38,950
Operating expenses……………………. 25,725
Income before income tax…………….. $13,225
Nonfinancial
Performance Measures
Inventory turnover
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
Nonfinancial Performance
Measures (Fast Food
Restaurant)
Inputs
Inputs
Employee
Employeetraining
training Outputs
Outputs
Employee
Employeeexperience
experience Line
Linewait
wait
Number
Numberof ofnew
newmenu
menu Activity
Percent
Percentorder
order
items
items Counter accuracy
accuracy
Number
Numberof ofemployees
employees service Friendly
Friendlyservice
service
Fryer
Fryerreliability
reliability score
score
Fountain
Fountainsupply
supply
availability
availability
Chapter 22
The
The End
End