Bab 8 Variance Analysis

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Performance Evaluation Using Performance Evaluation Using Variances from Standard CostsVariances from Standard Costs

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1. Describe the types of standards and how they are established for businesses.

2. Explain and illustrate how standards are used in budgeting.

3. Calculate and interpret direct materials price and quantity variances.

4. Calculate and interpret direct labor rate and time variances.

ObjectivesObjectivesObjectivesObjectives

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6. Journalize the entries for recording standards in the accounts and prepare an income statement that includes variances from standards.

7. Explain how standards may be used for nonmanufacturing expenses.

8. Explain and provide examples of nonfinancial performance measures.

ObjectivesObjectivesObjectivesObjectives

5. Calculate and interpret factory overhead controllable and volume variances.

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Standards—Performance BenchmarksStandards—Performance BenchmarksStandards—Performance BenchmarksStandards—Performance Benchmarks

Requires joint efforts of accountants, engineers, and other management personnel

Setting StandardsSetting Standards

Reviewing and Revising StandardsReviewing and Revising Standards

Should be revised when they no longer reflect operating conditions they intended to measure

Types of StandardsTypes of Standards

Theoretical or ideal (world record) standards

Currently attainable standards (normal standards)

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Western Rider Inc., a manufacturer of blue jeans, uses standard manufacturing costs

in its budgets.

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Western Rider Inc.Standard Cost per Pair of XL Jeans

Direct materials:$5.00 per square yard x 1.5 square yards = $ 7.50

Direct labor:$9.00 per hour x 0.80 hour per pair = 7.20

Factory overhead:$6.00 per hour x 0.80 hour per pair = 4.80Total standard cost per pair $19.50

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Western Rider Inc.Budget Performance Report

For the Month Ended June 30, 2006

Direct materials $ 40,150 $37,500 $2,650

Standard Cost Costat Actual Variance

Actual Volume (favorable) Manufacturing Costs Costs (5,000 units) Unfavorable

Direct labor 38,500 36,000 2,500

Factory overhead 22,400 24,000 (1,600)

Total mfg. costs $101,050 $97,500 $3,550

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TotalTotalManufacturingManufacturingCost VarianceCost Variance

TotalTotalManufacturingManufacturingCost VarianceCost Variance

Direct Materials Price Variance

Direct Materials Price Variance

Direct Materials Qty Variance

Direct Materials Qty Variance

Direct Labor Rate Variance


Direct Labor Time Variance


Variable Factory Overhead Controllable Variance

Variable Factory Overhead Controllable Variance

Fixed Factory Overhead Volume Variance

Fixed Factory Overhead Volume Variance

Direct Direct MaterialsMaterialsCost VarianceCost Variance

Direct Direct MaterialsMaterialsCost VarianceCost Variance

Direct Direct LaborLaborCost VarianceCost Variance

Direct Direct LaborLaborCost VarianceCost Variance

FactoryFactoryOverheadOverheadCost VarianceCost Variance

FactoryFactoryOverheadOverheadCost VarianceCost Variance

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Direct Materials Price VarianceDirect Materials Price VarianceDirect Materials Price VarianceDirect Materials Price 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

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Direct Materials Quantity VarianceDirect Materials Quantity VarianceDirect Materials Quantity VarianceDirect Materials Quantity Variance

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

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Direct Materials Direct Materials Variance RelationshipsVariance Relationships


Actual quantity x Standard price 7,300 x $5.00 =

$36,500

Actual quantity x Actual price

7,300 x $5.50 = $40,150

$3,650 U

Material Price Variance

Standard quantity x Standard price 7,500 x $5.00 =

$37,500

($1,000) F

Material Quantity Variance

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$2,650 U

Total Direct Materials Cost Variance

Actual quantity x Standard price 7,300 x $5.00 =

$36,500

Actual quantity x Actual price

7,300 x $5.50 = $40,150

Standard quantity x Standard price 7,500 x $5.00 =

$37,500

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Direct Labor VariancesDirect Labor VariancesDirect Labor VariancesDirect Labor Variances

Standard direct labor hours per 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

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Direct Labor VariancesDirect Labor VariancesDirect Labor VariancesDirect Labor Variances

Actual direct labor hoursused in production 3,850 direct labor hours

Actual rate per direct laborhour x $10.00

Total actual direct labor cost $ 38,500

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Direct Labor Rate VarianceDirect Labor Rate VarianceDirect Labor Rate VarianceDirect Labor Rate Variance

Actual rate $10.00Standard rate 9.00Rate variance (unfavorable) $ 1.00 per DLH

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

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Direct Labor Time VarianceDirect Labor Time VarianceDirect Labor Time VarianceDirect Labor Time Variance

Actual hours 3,850 DLHStandard hours at actual

production 4,000 DLHTime variance (150) DLH

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

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Direct Labor Variance Direct Labor Variance RelationshipsRelationships


Actual hours x Standard rate

3,850 x $9.00 = $34,650

Actual hours x Actual rate 3,850 x $10 =

$38,500

$3,850 U


Standard hours x Standard rate

4,000 x $9.00 = $36,000

($1,350) F


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Actual hours x Standard rate

3,850 x $9.00 = $34,650

Actual hours x Actual rate 3,850 x $10 =

$38,500

Standard hours x Standard rate

4,000 x $9.00 = $36,000

$2,500 U

Total Direct Labor Cost Variance

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Overhead is applied at $6.00 per direct labor hour based on estimated 5,000 total hours.

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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.

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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 Hours4,000 5,000 5,500

Total variable costs $14,400 $18,000 $19,800

Percentage of capacity 80% 100% 110%

Actual variable overhead 10,400 Variable overhead

variance—favorable $(4,000) F

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Total variable costs $14,400 $18,000 $19,800

Percentage of capacity 80% 100% 110%

Actual variable overhead 10,400 Variable overhead

variance—favorable $(4,000) F

Controllable variance based on variable costs

Controllable variance based on variable costs

Level of activity

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Percentage of capacity 80% 100% 110%Total fixed costs 12,000 12,000 12,000Fixed cost per DLH $3.00 $2.40 $2.18

Desired Desired capacitycapacity

Standard hours

Standard hours at at actualactual production production



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Percentage of capacity 80% 100% 110%Total fixed costs 12,000 12,000 12,000Fixed cost per DLH $3.00 $2.40 $2.18

100% of normal capacity 5,000 DLHStandard hours at actual production 4,000 DLHCapacity not used 1,000 DLHStandard fixed overhead rate at 100% x $2.40Fixed overhead volume variance $ 2,400 U



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Western Rider Inc.Factory Overhead Cost Variance Report

For the Month Ended June 30, 2006Productive capacity for the month (100% of normal) 5,000 hoursActual production for the month 4,000 hours Budget (at Actual Variances Production) Actual Favorable Unfavorable Variable factory overhead costs $14,400 $10,400 $4,000Fixed factory overhead costs 12,000 12,000Total factory overhead costs $26,400 $22,400Total controllable variances $4,000 $ 0Net controllable variances—

favorable $4,000Volume 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

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Fixed Overhead Variances and the Fixed Overhead Variances and the Factory Overhead AccountFactory Overhead Account


Factory Overhead

Actual factory overhead $22,400

$10,400 + $12,000

$10,400 + $12,000

Applied factory overhead $24,000

4,000 hours x $6.00 per hour

4,000 hours x $6.00 per hour

Balance, June 30 1,600

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Factory Overhead



Balance, June 30 1,600Controllable

Variance: $4,000 F

$22,400 – $26,400$22,400 – $26,400

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Factory Overhead



Balance, June 30 1,600

Volume Variance: $2,400 U

$26,400 – $24,000$26,400 – $24,000

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Total Factory Overhead Variance

Controllable variance $4,000 FVolume variance 2,400 U Total $1,600 F

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Controllable variance $14,400Fixed factory overhead 12,000 Total $26,400

Budgeted Factory Overhead for Amount Produced

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Recording and

Reporting Variances

from Standards

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Aug. 1 Materials (7,300 sq. yds. X $5.00) 36 500 00

Direct Materials Price Variance 3 650 00

Accounts Payable 40 150 00

On August 1, Western Rider Inc. On August 1, Western Rider Inc. purchased, on account, the 7,300 square purchased, on account, the 7,300 square yards of blue denim at $5.50 per square yards of blue denim at $5.50 per square

yard. Recall, the standard price was $5.00.yard. Recall, the standard price was $5.00.

On August 1, Western Rider Inc. On August 1, Western Rider Inc. purchased, on account, the 7,300 square purchased, on account, the 7,300 square yards of blue denim at $5.50 per square yards of blue denim at $5.50 per square

yard. Recall, the standard price was $5.00.yard. Recall, the standard price was $5.00.

$5.50 7,300 = $40,150

$5.00 7,300 = $36,500

$3,650 U Direct materials price variance

x x

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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

Western Rider Inc. used 7,300 square yards Western Rider Inc. used 7,300 square yards of blue denim to produce 5,000 pairs of XL of blue denim to produce 5,000 pairs of XL

jeans, compared to the standard of 7,500 jeans, compared to the standard of 7,500 square yards. Date the entry August 31.square yards. Date the entry August 31.

Western Rider Inc. used 7,300 square yards Western Rider Inc. used 7,300 square yards of blue denim to produce 5,000 pairs of XL of blue denim to produce 5,000 pairs of XL

jeans, compared to the standard of 7,500 jeans, compared to the standard of 7,500 square yards. Date the entry August 31.square yards. Date the entry August 31.

Standard price x Actual quantityStandard price x Standard quantity

$5.00 7,300 = $36,500

$5.00 7,500 = $37,500

$1,000 F Direct Materials quantity variance

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Aug. 31 Work in Process 36 000 00

Direct Labor Rate Variance 3 850 00 Direct Labor Time Variance 1 350 00 Wages Payable 38 500 00

For the month of August, Western Rider Inc. accrued For the month of August, Western Rider Inc. accrued wages of $38,500 (3,850 hours at $10 per hour) in wages of $38,500 (3,850 hours at $10 per hour) in

producing 5,000 XL Jeans. The standard rate is $9 per producing 5,000 XL Jeans. The standard rate is $9 per hour and each pair of jeans had a time standard of 0.8 hr.hour and each pair of jeans had a time standard of 0.8 hr.

For the month of August, Western Rider Inc. accrued For the month of August, Western Rider Inc. accrued wages of $38,500 (3,850 hours at $10 per hour) in wages of $38,500 (3,850 hours at $10 per hour) in

producing 5,000 XL Jeans. The standard rate is $9 per producing 5,000 XL Jeans. The standard rate is $9 per hour and each pair of jeans had a time standard of 0.8 hr.hour and each pair of jeans had a time standard of 0.8 hr.

Actual rate x Actual hoursStandard rate x Actual hours

Standard rate x Standard quantity

= $38,500

= $34,650

= $36,000

$10.00 3,850

$9.00 3,850$3,850 U (rate)

$9.00 4,000$1,350 F (time)

This entry is not shown in the textbook.

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Western Rider Inc.Income Statement

For the Month Ended June 30, 2006

Sales…………………………………… $140,000Cost of goods sold…………………….. 97,500Gross profit--at standard………………. $ 42,500

Less variances from standard cost:Direct materials price……………….. $3,650Direct materials quantity……………. $1,000Direct labor rate…………………….. 3,850Direct labor time……………………. 1,350Factory overhead controllable………. 4,000Factory overhead volume…………… 2,400 3,550

Gross profit……………………………. $38,950Operating expenses……………………. 25,725Income before income tax…………….. $13,225

Favorable Unfavorable

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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

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Nonfinancial Performance Measures (Fast Food Restaurant)

InputsInputsEmployee trainingEmployee trainingEmployee experienceEmployee experienceNumber of new menu Number of new menu itemsitems

Number of employeesNumber of employeesFryer reliabilityFryer reliabilityFountain supply Fountain supply availabilityavailability

InputsInputsEmployee trainingEmployee trainingEmployee experienceEmployee experienceNumber of new menu Number of new menu itemsitems

Number of employeesNumber of employeesFryer reliabilityFryer reliabilityFountain supply Fountain supply availabilityavailability

OutputsOutputsLine waitLine waitPercent order Percent order accuracyaccuracy

Friendly service Friendly service scorescore

OutputsOutputsLine waitLine waitPercent order Percent order accuracyaccuracy

Friendly service Friendly service scorescore

Activity

Counter service

Bab 8 Variance Analysis

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