Performance Evaluation Chapter 8 Performance Evaluation

Standard vs. Actual To evaluate managerial performance you compare standard vs. actual Standard Amount – amount mgmt expects to exist; Companies establish standards for many different variables including the number of units made, the sales price of the units, the costs of the units, and the cost of the resources used to make the units

Standard vs. Actual Actual Amount – the amount that did, in fact, exist; Companies identify many different variables for which there are actual amounts Standard – Budgeted Expectation Actual – Historical Result

Standard – Actual = Variance Variance – Difference between a standard amount and an actual amount A variance can be either favorable or unfavorable Favorable – Did better than you thought you would Unfavorable – Did worse than you thought you would

Variances When actual sales exceed expected sales Favorable When actual sales are less than expected Unfavorable When actual costs exceed budgeted costs When actual costs are less then budgeted costs

Let’s Try It Budget Actual Variance F or UF Selling & Admin   Budget Actual Variance F or UF Selling & Admin $ 29,000.00 $ 27,000.00 Sales Revenue $ 310,000.00 $ 325,000.00 Materials Price 2.00 per lb 2.10 per lb Cost of Goods Sold $ 125,000.00 $ 100,000.00

Let’s Try It Budget Actual Variance F or UF Selling & Admin   Budget Actual Variance F or UF Selling & Admin $ 29,000.00 $ 27,000.00 $2,000 F Sales Revenue $ 310,000.00 $ 325,000.00  $15,000  F Materials Price 2.00 per lb 2.10 per lb  $0.10 / lb  UF Cost of Goods Sold $ 125,000.00 $ 100,000.00  $25,000 F 

Budgets Static Budget – Remains unchanged even if the actual volume of activity differs from planned volume = Standard Prices(Costs) * Expected Volume Flexible Budget – Show expected revenues and costs at a variety of volume levels = Standard Prices(Costs) * Actual Volume

Actual Result = Actual Prices(Costs) * Actual Volume Activity (Volume) Variance = Difference between static budget and flexible budget Flexible Budget Variance = Difference between flexible budget and the actual results

Static Flexible Actual Budget Budget Results Standard Standard Actual Prices/Costs Prices/Costs Prices/Costs X X X Expected Units Actual Units Actual Units Activity (Volume Variance) Price (Rate) Variance

Sales Volume Variance Difference between the static budget and the flexible budget Static = Budgeted Volume Flexible = Actual Volume

Sales Price Variance Difference between budgeted and actual sales price or cost

For Example Company expects to sell 18,000 units for $80 per unit. At the end of the quarter, the company sold 19,000 units for $78 per unit. Sales Price Variance $80 vs. $78 Unfavorable Sales Volume Variance 18,000 vs. 19,000 Favorable

Static Flexible Actual Budget Budget Results Standard Standard Actual Prices/Costs Prices/Costs Prices/Costs X X X Expected Units Actual Units Actual Units $80 * 18,000 $80 * 19,000 $78 * 19,000 $1,440,000 $1,520,000 $1,482,000 Activity (Volume Variance) Flexible Budget Variance $80,000 – Favorable $38,000 – Unfavorable $42,000 - Favorable

For Example Total Sales Variance: Actual Sales (19,000 * $78) $1,482,000 Expected Sales (18,000 * $80) 1,440,000 Total Sales Variance $ 42,000 Favorable

Formulas Materials Price Variance: Materials Usage Variance: = Actual Price – Standard Price * Actual Quantity Materials Usage Variance: =Actual Quantity – Standard Quantity * Standard Price Labor Rate Variance: = Actual Rate – Standard Rate * Actual Quantity

Example Standard / Budgeted information: Labor: 20 min per painting; $7 wage cost per hour Material: ½ quart of paint per painting; $5 per quart Overhead: $3 per labor hour

Actual 2010 paintings Labor: 700 hrs; $6.90 cost per hour Material: 1,100 quarts purchased @ $6; 975 quarts used

Direct Labor Variance S.P. * S.Q. S.P. * A.Q. A.P. * A.Q. $7 * 670 hrs $7 * 700 hrs $6.90*700 hrs $4,690 $4,900 $4,830 $210 $70 Unfavorable Favorable Quantity Price $140 Unfavorable

Material Variance Format Standard Price Standard Price Standard Quantity Actual Quantity Standard Price Actual Price Actual Quantity Actual Quantity ***The actual quantities are different. One is actual quantity purchased, the other is actual quantity used. Inventory Quantity Price

Material Variance $5 * 1005 qts $5 * 975 qts $5,025 $4,875 Inventory Standard Price Standard Price Standard Quantity Actual Quantity $5 * 1005 qts $5 * 975 qts $5,025 $4,875 Standard Price Actual Price Actual Quantity Actual Quantity ***The actual quantities $5 * 1100 $6 * 1100 are different. One is actual $5,500 $6,600 quantity purchased, the other is actual quantity used. Inventory Quantity Price

Total Material Variance Material - $5,025 - $4,875 = $150 Favorable Price - $5,500 - $6,600 = $1,100 Unfavorable Inventory - $4,875 - $5,500 = $625 Unfavorable Total Variance = $1,575 Unfavorable