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Performance Evaluation

Performance Evaluation. Chapter 8. Preparing Flexible Budgets. Hmm! Comparing static budgets with actual costs is like comparing apples and oranges. Static budgets are prepared for a single, planned level of activity.

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Performance Evaluation

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  1. Performance Evaluation Chapter 8

  2. Preparing Flexible Budgets Hmm! Comparingstatic budgets withactual costs is likecomparing applesand oranges. Static budgetsare prepared for asingle, planned levelof activity. Performance evaluation is difficult when actual activity differs from the planned level of activity. Let’s look at Melrose Co.

  3. Preparing Flexible Budgets F = Favourable varianceActual sales exceededbudgeted level of sales.

  4. Preparing Flexible Budgets

  5. Preparing Flexible Budgets Would you expect thesevariances to be favourableor unfavourable giventhe favourable sales variance?

  6. Preparing Flexible Budgets I don’t think Ican answer thequestion usinga static budget. Actual activity is belowbudgeted activity which is unfavorable. So, shouldn’t variable costsbe lower if actual activityis lower?

  7. Preparing Flexible Budgets • The relevant question is . . . • “What portion of the variances is due to activity and price changes, and whatportion is due to cost control?” • To answer the question, we must the budget for theactual activity.

  8. Preparing Flexible Budgets Show revenues and expensesthat should have occurred at theactual activity. May be prepared for any activity level in the relevant range. Reveal variances due to good cost control or lack of cost control. Improve performance evaluation.

  9. Preparing Flexible Budgets Central Concept If you can tell me what your activity wasfor the period, I will tell you what your costs and revenue should have been.

  10. Preparing Flexible Budgets To a budget for different activitylevels, we must know how costs behave with changes in activity levels. Total variablecostschange in directproportion to changes in activity. Total fixedcostsremain unchangedwithin the relevantrange. Variable Fixed

  11. Preparing Flexible Budgets Let’s prepare budgets for the Melrose Co.

  12. Preparing Flexible Budgets 18,000 units× $12.00 per unit = $216,000

  13. Preparing Flexible Budgets

  14. Preparing Flexible Budgets “What portion of the variances is due to activity and price changes, and what portion is due tocost control?”

  15. Sales and Cost Variances Sales price variance 19,000 units × ($80 per unit – $78 per unit) Variances due toactivity change

  16. Sales and Cost Variances Variances dueto cost control

  17. Standard Costs We will use standard costs analysis to determine the causes for manufacturing cost variances.

  18. Establishing Standards Based on carefullypredetermined amounts. Used for planning labor, material,and overhead requirements. Standard Costs are The expected levelof performance. Benchmarks formeasuring performance.

  19. Establishing Standards Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations.

  20. Establishing Standards Practical standardsshould be set at levelsthat are currentlyattainable withreasonable andefficient effort. Should we usepractical standardsor ideal standards? ManagerialAccountant Engineer

  21. Lax standardscreatemotivational problems. Establishing Standards I agree.Idealstandards, basedon perfection, areunattainable and discourage most employees. HumanResourcesManager Productionmanager

  22. Need for Standards Managers focus on quantities and coststhat exceed standards, a practice known asmanagement by exception.. Standard Amount DirectMaterial DirectLabour ManufacturingOverhead Type of Product Cost

  23. Selecting Variances to Investigate • Materiality, frequency, capacity to control, and characteristics of the cost are items to consider. How do I knowwhich variancesto investigate?

  24. This variance isunfavourablebecause the actual costexceeds the standard cost. Manufacturing Cost Variances A standard cost variance is the amount by whichan actual cost differs from the standard cost. Standard Product Cost

  25. Manufacturing Cost Variances First, they point to causes ofproblems and directionsfor improvement. Second, they trigger investigations in departments having responsibility for incurring the costs. I see that thereis an unfavourable variance. But why arevariances important to me?

  26. Manufacturing Cost Variances Takecorrective actions Identifyquestions Receive explanations Conduct next period’s operations Analyze variances Prepare standard cost performance report Begin

  27. Price Variance Usage Variance The difference betweenthe actual quantity andthe standard quantity Price and Usage Variances Standard Cost Variances The difference betweenthe actual price and thestandard price

  28. Price and Usage Variances Actual Quantity Actual Quantity Standard Quantity × × × Actual PriceStandard Price Standard Price Price Variance Usage Variance Standard priceis the amount that should have been paid for the resources acquired.

  29. Price and Usage Variances Actual Quantity Actual Quantity Standard Quantity × × × Actual PriceStandard Price Standard Price Price Variance Usage Variance Standard quantityis the quantity that shouldhave been used for the output achieved.

  30. Price and Usage Variances Actual Quantity Actual Quantity Standard Quantity × × × Actual PriceStandard Price Standard Price Price Variance Usage Variance AQ(AP - SP) SP(AQ - SQ) AQ = Actual QuantitySP= Standard PriceAP= Actual PriceSQ = Standard Quantity

  31. Calculating the Materials Priceand Usage Variances Let’s apply what we have learned calculate standard cost variances, starting withmaterial.

  32. Calculating the Materials Priceand Usage Variances Zippy Hanson Inc. has the following material standards to manufacture one Zippy: 1.5 kilograms per Zippy at $4.00 per kilogram Last week 1,700 kilograms of material were purchased and used to make 1,000 Zippies. The material cost a total of $6,630.

  33. Calculating the Materials Priceand Usage Variances Zippy What is the actual price per kilogrampaid for the material? a. $4.00 per kilogram. b. $4.10 per kilogram. c. $3.90 per kilogram. d. $6.63 per kilogram.

  34. Calculating the Materials Priceand Usage Variances Zippy What is the actual price per kilogrampaid for the material? a. $4.00 per kilogram. b. $4.10 per kilogram. c. $3.90 per kilogram. d. $6.63 per kilogram. AP = $6,630 ÷ 1,700 kgsAP = $3.90 per kg

  35. Calculating the Materials Priceand Usage Variances Zippy Hanson’s material price variance (MPV)for the week was: a. $170 unfavourable. b. $170 favourable. c. $800 unfavourable. d. $800 favourable.

  36. Calculating the Materials Priceand Usage Variances Zippy Hanson’s material price variance (MPV)for the week was: a. $170 unfavourable. b. $170 favourable. c. $800 unfavourable. d. $800 favourable. MPV = AQ(AP - SP) MPV = 1,700kgs. × ($3.90 - 4.00) MPV = $170 Favourable

  37. Calculating the Materials Priceand Usage Variances Zippy The standard quantity of material thatshould have been used to produce1,000 Zippies is: a. 1,700 kilograms. b. 1,500 kilograms. c. 2,550 kilograms. d. 2,000 kilograms.

  38. Calculating the Materials Priceand Usage Variances Zippy The standard quantity of material thatshould have been used to produce1,000 Zippies is: a. 1,700 kilograms. b. 1,500 kilograms. c. 2,550 kilograms. d. 2,000 kilograms. SQ = 1,000 units × 1.5 kgs per unit SQ = 1,500 kgs.

  39. Calculating the Materials Priceand Usage Variances Zippy Hanson’s material usage variance (MUV)for the week was: a. $170 unfavourable. b. $170 favourable. c. $800 unfavourable. d. $800 favourable.

  40. MUV = SP(AQ - SQ) MUV = $4.00(1,700 kgs - 1,500 kgs) MUV = $800 unfavourable Calculating the Materials Priceand Usage Variances Zippy Hanson’s material usage variance (MUV)for the week was: a. $170 unfavourable. b. $170 favourable. c. $800 unfavourable. d. $800 favourable.

  41. Material Variances Summary Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 1,700 kgs. 1,700 kgs. 1,500 kgs. × × × $3.90 per kg. $4.00 per kg. $4.00 per kg. =$6,630 = $ 6,800 = $6,000 Price variance$170 favorable Usage variance$800 unfavorable

  42. I’ll start computingthe price varianceas soon as theinformation isavailable. Responsibility for Materials Variances I need the price variancesooner so that I can betteridentify purchasing problems. You accountants just don’tunderstand the problems thatpurchasing managers have.

  43. You used too much material because of poorly trained workers and poorly maintained equipment. Also, your poor scheduling sometimes requires me to rush order material at a higher price, causing unfavourable price variances. Responsibility for Materials Variances I am not responsible for this unfavourable materialusage variance. You purchased cheapmaterial, so my peoplehad to use more of it.

  44. Labour Variances Now let’s calculate standard cost variances for labour.

  45. Labour Variances Zippy Hanson Inc. has the following direct labour standard to manufacture one Zippy: 1.5 standard hours per Zippy at $6.00 perdirect labour hour Last week 1,550 direct labour hours were worked at a total labor cost of $9,610 to make 1,000 Zippies.

  46. Labour Variances Zippy What was Hanson’s actual price (AP)for labor for the week? a. $6.20 per hour. b. $6.00 per hour. c. $5.80 per hour. d. $5.60 per hour.

  47. Labour Variances Zippy What was Hanson’s actual price (AP)for labour for the week? a. $6.20 per hour. b. $6.00 per hour. c. $5.80 per hour. d. $5.60 per hour. AP = $9,610 ÷ 1,550 hours AP = $6.20 per hour

  48. Labour Variances Zippy Hanson’s labour price variance (LPV) for the week was: a. $310 unfavourable. b. $310 favourable. c. $300 unfavourable. d. $300 favourable.

  49. Labour Variances Zippy Hanson’s labour price variance (LPV) for the week was: a. $310 unfavourable. b. $310 favourable. c. $300 unfavourable. d. $300 favourable. LPV = AH(AP - SP) LPV = 1,550 hrs($6.20 - $6.00) LPV = $310 unfavourable

  50. Labour Variances Zippy The standard hours (SH) of labour that should have been worked to produce1,000 Zippies is: a. 1,550 hours. b. 1,500 hours. c. 1,700 hours. d. 1,800 hours.

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