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Performance Evaluation and Using Variances

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20 diapositives · 339 Views · Sep 03, 2014

This chapter provides an in-depth exploration of performance evaluation through variances in manufacturing costs, focusing on direct materials, direct labor, and factory overhead. It elucidates the standard cost system, allowing management to compare standard costs against actual costs to find variances. The text presents formulas for calculating variances, including price and quantity variances for materials and labor rate and time variances for labor. Examples illustrate the computation of variances, facilitating budgetary performance evaluation and improving decision-making in manufacturing processes.

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  1. Performance Evaluation and Using Variances Chapter M6

  2. Standards • Performance goals used for all three manufacturing costs • Direct materials • Direct labor • Factory overhead • Standard cost systems • Allows management to determine how much of a product should cost and how much it does cost and the difference

  3. Terms Standard cost What it should cost Actual cost What it does cost Variance Difference Favorable or unfavorable Standards Theoretical Currently attainable or normal standards Budgetary performance evaluation Summarizes actual cost, standard amounts at current production level and differences

  4. Example Actual volume is 5,000 units

  5. Direct Materials Variance • Price variance = • (actual price – std price) X actual Quantity • Quantity variance = • (Actual quantity – std quantity) X std price • Total direct materials variance = • Price variance + quantity variance

  6. Example 2 • Material used in the production of Product Z has a standard cost of $3 per lb. And standard use of 10,000lbs. Actual records show 15,000 lbs. used with an actual cost of $2.50 per lb. Computer the variance

  7. Example 2: • Price variance = • (AP – SP) X AQ • (2.50 – 3.00) X 15,000lbs • $(7,250) favorable variance • Quantity variance = • (AQ – SQ) X SP • (15,000 -10,000) X $3 • $15,000 unfavorable variance • Total variance • $(7250) + $15,000 = $7,750

  8. Example 3 • Material used in the production of product D has a standard cost of $5 per lb. and a standard use of 2 lbs per units produced. Production of 5,000 units occurred during the period. Actual records show 9,000 lbs. used with an actual cost of $6 per lb. Compute the direct material variances

  9. Example 3: • Price variance = (AP-SP) X AQ • (6 – 5) X 9,000 = $9,000 unfavorable • Quantity variance = (AQ-SQ) X SP • (9000 – 10,000) X $5 = $5,000 favorable • Total • Unfavorable $9,000 • Favorable 5,000 • Total $4,000 unfavorable

  10. Direct Labor Variances • Rate variance • (Actual rate – Std rate ) x Actual hours • Time variance • (actual hrs – std hrs) X Std rate • Total variance • Time + Rate

  11. Example 4 • Factory records show that each product produced requires 3 direct labor hours. Production during the period consisted of 10,000 units with 29,500 hours of labor used. Labor has a standard cost of $10 per hour and actual cost of $11 per hour. Compute the direct labor variances

  12. Example 4: • Rate variance = (AR – SR) X Ahrs • (11 – 10) X ( 29,500) • $29,500 unfavorable • Time variance + (Ahr – Shr) X SR • (29,500 – 30,000) X 10 • $5,000 favorable • Total • $29,500 unfavorable + $5,000 favorable • $24,500 unfavorable

  13. Factory overhead variance • Determine the impact of changing the production on fixed and variable factory overhead cost • Standard factory overhead cost rate = Total budget cost at 100% capacity/Standard hours at 100% capacity • Variable costs per unit • Total variable factory overhead • Total hours

  14. Example 5:

  15. Example 5: Factory overhead variance • Step 1: get the following information • Standard F/O cost rate = • Total budget cost at 100% capacity • Standard hrs at 100% capacity • $30,000/5,000 = $6 per hour • Variable cost per unit at 100% • $18,000/5,000 = $3.60 per hour • Fixed costs per unit at 100% • $12,000/5,000 = $2.40 per hour

  16. Variances for Factory Overhead • Controllable variance • Deals with variable cost • Actual variable F/O • Minus Budget Variable F/O at actual • Equals Variance • Volume Variance • Deals with fixed costs

  17. Example 5: • Using the information in the table assume that actual production is 80% of capacity. Actual variable costs are $16,000 • Actual Var F/O $16,000 • Budget 14,400 • Variance 1,600

  18. Volume variance • 100% capacity direct labor hours • -standard direct labor hours at actual • Unused capacity • X standard fixed overhead rate • Volume variance

  19. Example 7: • Using the information on Western Rider assume actual production is 80% capacity and compute volume variance • 5,000 DLH • -4,000 DLH • 1,000 DLH • X $2.40 per DLH • $2,400 volume variance