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PERFORMANCE EVALUATION USING VARIANCES
1. Standards are performance goals. Manufacturing companies normally use standard cost for
each of the three following product costs:
a. Direct materials
2. Reporting by the “principle of exceptions” is the reporting of only variances (or
3. The two variances in direct materials cost are:
4. The offsetting variances might have been caused by the purchase of low-priced, inferior
5. a. The two variances in direct labor costs are:
6. No. Even though the assembly workers are covered by union contracts, direct labor cost variances
7. Standards can be very appropriate in repetitive service operations. Fast-food restaurants can
CHAPTER 22 (FIN MAN); CHAPTER 7 (MAN)
FROM STANDARD COSTS
DISCUSSION QUESTIONS
22-1
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
DISCUSSION QUESTIONS (Continued)
8. a. The variable factory overhead controllable variance results from incurring a total amount
of variable factory overhead cost greater or less than the amount budgeted for the level of
10. Nonfinancial performance measures provide managers additional measures beyond the dollar
22-2
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
PE 22–1A (FIN MAN); PE 7–1A (MAN)
a. Direct materials price –$10,800 [($33.25 – $34.00) × 14,400 gal.]
PE 22–1B (FIN MAN); PE 7–1B (MAN)
a. Direct materials price $2,250 [($3.00 – $2.50) × 4,500 lbs.]
PE 22–2A (FIN MAN); PE 7–2A (MAN)
a. Direct labor rate $8,850 [($30.50 – $30.00) × 17,700 hrs.]
PE 22–2B (FIN MAN); PE 7–2B (MAN)
a. Direct labor rate –$1,400 [($16.50 – $17.00) × 2,800 hrs.]
PRACTICE EXERCISES
22-3
PE 22–3A (FIN MAN); PE 7–3A (MAN)
PE 22–3B (FIN MAN); PE 7–3B (MAN)
PE 22–4A (FIN MAN); PE 7–4A (MAN)
PE 22–4B (FIN MAN); PE 7–4B (MAN)
Variable Factory Overhead
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
PE 22–5A (FIN MAN); PE 7–5A (MAN)
Work in Process (14,000* gal. × $34.00) 476,000
PE 22–5B (FIN MAN); PE 7–5B (MAN)
Work in Process (5,000* lbs. × $2.50) 12,500
PE 22–6A (FIN MAN); PE 7–6A (MAN)
Sales (3,500 units × $400) $1,400,000
Favorable Unfavorable
Less variances from standard cost:
Direct materials price (PE22–1A; PE7–1A) $10,800
GIOVANNI COMPANY
Income Statement Through Gross Profit
For the Year Ended December 31, 2014
22-5
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
PE 22–6B (FIN MAN); PE 7–6B (MAN)
Sales (1,000 units × $90) $90,000
Favorable Unfavorable
PE 22–7A (FIN MAN); PE 7–7A (MAN)
Number of employee errors………………………………………………………………
…
Input
PE 22–7B (FIN MAN); PE 7–7B (MAN)
Number of times ingredients are missing……………………………………………… Input
DVORAK COMPANY
Income Statement Through Gross Profit
For the Year Ended December 31, 2014
22-6
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
Ex. 22–1 (FIN MAN); Ex. 7–1 (MAN)
Quantity × Total
650 lbs. ×$ 585
Standard direct materials cost per bar of chocolate:
Ex. 22–2 (FIN MAN); Ex. 7–2 (MAN)
EXERCISES
Ingredient
Cocoa
Price
$0.90 per lb.
22-7
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
Ex. 22–3 (FIN MAN); Ex. 7–3 (MAN)
a.
Standard Cost at
Planned Volume
(600,000 Bottles)
Manufacturing costs:
Direct labor $10,800
Note: The cost standards are expressed as “per 100 bottles.”
b.
Standard Cost at Cost Variance—
Actual Actual Volume (Favorable)
Costs (610,000 Bottles) Unfavorable
Manufacturing costs:
Direct labor $ 9,890 $10,980 $(1,090)
c. Time in a Bottle Company’s actual costs were $2,555 less than budgeted. Favorable
direct labor and direct material cost variances more than offset a small
For the Month Ended May 31, 2014
TIME IN A BOTTLE COMPANY
Manufacturing Costs—Budget Performance Report
TIME IN A BOTTLE COMPANY
Manufacturing Cost Budget
For the Month Ended May 31, 2014
22-8
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
Ex. 22–4 (FIN MAN); Ex. 7–4 (MAN)
a. Price variance:
Quantity variance:
Total direct materials cost variance:
b. The direct materials price variance should normally be reported to the
Purchasing Department, which may or may not be able to control this variance.
If materials of the same quality were purchased from another supplier at a price
Direct Materials
Cost Variance =
Direct Materials
Price Variance
Direct Materials
Quantity Variance
(Actual Price – Standard Price) × Actual Quantity
=
=
Direct Materials Price Variance +
Direct Materials Quantity Variance
(Actual Quantity – Standard Quantity) × Standard Price
22-9
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
Ex. 22–5 (FIN MAN); Ex. 7–5 (MAN)
Price variance:
Quantity variance:
Total direct materials cost variance:
(Actual Quantity – Standard Quantity) × Standard Price
=
Direct Materials
Price Variance
Direct Materials
Quantity Variance
=
Direct Materials Price Variance +
Direct Materials Quantity Variance
(Actual Price – Standard Price) × Actual Quantity
Direct Materials
Cost Variance =
22-10
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
Ex. 22–6 (FIN MAN); Ex. 7–6 (MAN)
Product finished………………………………………………………
…
1,400 units
Proof:
Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity
22-11
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
Ex. 22–7 (FIN MAN); Ex. 7–7 (MAN)
a.
× =
Whole tomatoes
…
3,360 lbs. $ 0.50 per lb. $1,680
b.
– = × =
3,556 lbs. 3,360 lbs. 196 lbs. $ 0.50 per lb. $98 U
Materials
Quantity
Variance
Standard
Cost per
Batch
Standard
Quantity
Standard
Price
Batch K-54
Quantity for
Actual Standard
Quantity per
Batch
Quantity
Difference
Standard
Price
22-12
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
Ex. 22–8 (FIN MAN); Ex. 7–8 (MAN)
a. Rate variance:
Time variance:
Total direct labor cost variance:
b. The employees may have been less experienced workers who were paid less than
(Actual Direct Labor Hours – Standard Direct Labor Hours)
× Standard Rate per Hour
Direct Labor Rate Variance + Direct Labor Time Variance
(Actual Rate per Hour – Standard Rate per Hour)
× Actual Hours
=
Direct Labor
Rate Variance
Direct Labor
Time Variance
=
Direct Labor
Cost Variance =
22-13
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
Ex. 22–9 (FIN MAN); Ex. 7–9 (MAN)
a. Rate variance:
Time variance:
Total direct labor cost variance:
b. Debit to Work in Process: $12,800
Direct Labor
Rate Variance
Direct Labor
Time Variance
=
=
Direct Labor
Cost Variance =
Direct Labor Rate Variance + Direct Labor Time Variance
(Actual Rate per Hour – Standard Rate per Hour)
× Actual Hours
(Actual Direct Labor Hours – Standard Direct Labor Hours)
× Standard Rate per Hour
22-14
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
Ex. 22–10 (FIN MAN); Ex. 7–10 (MAN)
a. (1) Cutting Department
Rate variance:
Time variance:
Total direct labor cost variance:
=
(Actual Direct Labor Hours – Standard Direct Labor Hours)
× Standard Rate per Hour
Direct Labor
Time Variance
(Actual Rate per Hour – Standard Rate per Hour)
× Actual Hours
Direct Labor
Rate Variance =
22-15
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
Ex. 22–10 (FIN MAN); Ex. 7–10 (MAN) (Concluded)
(2) Sewing Department
Rate variance:
*0.40 hr. × 25,000 units
Total direct labor cost variance:
(Actual Rate per Hour – Standard Rate per Hour)
× Actual Hours
Direct Labor
Rate Variance =
Direct Labor
Cost Variance =
Direct Labor Rate Variance + Direct Labor Time Variance
22-16
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
Ex. 22–11 (FIN MAN); Ex. 7–11 (MAN)
b. Standard time used for the volume of admissions:
Total
Number of admissions…
…
140 350
c. Actual productive minutes available
(4 employees × 40 hrs. × 60 min.)………………………
…
9,600 minutes
Unscheduled Scheduled
22-17
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
Ex. 22–12 (FIN MAN); Ex. 7–12 (MAN)
a.
b. Actual pieces sorted = 41,220,000
Actual Pieces of Mail Sorted ÷
Standard Sorts per Minute ×
Standard Minutes per Hour =
Standard Number of Hours
Standard Sorts per Hour
(per employee)
22-18
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
Ex. 22–13 (FIN MAN); Ex. 7–13 (MAN)
Step 1: Determine the standard direct materials and direct labor per unit.
Standard direct materials quantity per unit:
Direct materials lbs. budgeted for June:
Standard pounds per unit:
Standard direct labor time per unit:
Direct labor hrs. budgeted for June:
Step 2: Using the standard quantity and time rates in step 1, determine the
standard costs for the actual June production.
Standard direct materials at actual volume:
Step 3: Determine the direct materials quantity and direct labor time variances,
assuming no direct materials price or direct labor rate variances.
Actual direct labor……………………………………………………………………… $24,500
(1,750 hrs. – 1,800 hrs.) × $14.00 = –$700 F
22-19
CHAPTER 22 Performance Evaluation Using Variances from Standard Costs
Ex. 22–14 (FIN MAN); Ex. 7–14 (MAN)
Direct labor hours 18,000 20,000 22,000
Variable overhead cost:
LENO MANUFACTURING COMPANY
Factory Overhead Cost Budget—Press Department
For the Month Ended November 30, 2014
22-20
