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Performance Evaluation Using Variances from Standard Costs

Performance Evaluation Using Variances from Standard Costs. LO 2 – Understanding How Standards are Used in Budgeting. LO 2. Budgetary Performance Evaluation. The control function , or budgetary performance evaluation, compares the actual performance against the budget. Standard Cost Per Unit.

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Performance Evaluation Using Variances from Standard Costs

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  1. Performance Evaluation Using Variances from Standard Costs LO 2 – Understanding How Standards are Used in Budgeting

  2. LO 2 Budgetary Performance Evaluation • The control function, or budgetary performance evaluation, compares the actual performance against the budget.

  3. Standard Cost Per Unit Standard Price Standard Quantity x = LO 2 Budgetary Performance Evaluation • The standard cost per unit for direct materials, direct labor, and factory overhead is computed as follows:

  4. LO 2 Budgetary Performance Evaluation Western Rider’s standard costs per unit for XL jeans are shown in Exhibit 1.

  5. LO 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.

  6. LO 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.

  7. LO 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.

  8. LO 2 Budget Performance Report

  9. LO 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.

  10. LO 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).

  11. LO 2 Manufacturing Cost Variances

  12. Price Difference + Quantity Difference LO 2 Manufacturing Cost Variances • The total direct materials variance is separated into price and quantity variances.

  13. Rate Difference + Time Difference LO 2 Manufacturing Cost Variances • The total direct labor variance is separated into rate and time variances.

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