@ 2012, Cengage Learning Performance Evaluation Using Variances from Standard Costs LO 2 – Understanding How Standards are Used in Budgeting

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

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

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

Budget Performance Report 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. 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). LO 2

Manufacturing Cost Variances LO 2

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

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