1. Performance Evaluation Using Variances from Standard Costs23
Performance Evaluation Using Variances from Standard Costs
Student Version

2. Describe the types of standards and how they are established.1
Describe the types of standards and how they are established.
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3. 1
Types of Standards
Unrealistic standards that can be achieved only under perfect operating conditions (such as no idle time, no machine breakdowns, no materials spoilage) are called ideal standards or theoretical standards.

4. 1
Currently attainable standards, sometimes called normal standards, can be attained with reasonable effort. Standards set at this level allow for disruptions, such as material spoilage and machine breakdowns.

5. Describe and illustrate how standards are used in budgeting.2
Describe and illustrate how standards are used in budgeting.
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6. Standard Cost per Unit = Standard Price × Standard Quantity2
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

7. Budget Performance Report2
Budget Performance Report
The report that summarizes actual costs, standard cost, and the differences for the units produced is called a budget performance report.

8. 2
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 (at actual volumes).

9. Direct Materials Variance2
Direct Materials Variance
The total direct materials variance is separated into price and quantity variances.

10. 2
Direct Labor Variance
The total direct labor variance is separated into rate and time variances.

11. Compute and interpret direct materials and direct labor variances.3
Compute and interpret direct materials and direct labor variances.
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12. Direct Materials Variances3
Direct Materials Variances
Actual Direct Materials Cost = Actual Price × Actual Quantity
Actual Direct Materials Cost = $5.50 × (7,300 sq. yards.)
Actual Direct Materials Cost = $40,150
Standard Direct Materials Cost = Standard × Standard Quantity
Standard Direct Materials Cost = $5.00 × (7,300 sq. yards.)
Standard Direct Materials Cost = $37,150
Actual costs ($40,150) – Standard costs ($37,500) = $2,650
Total Unfavorable Materials Variance

13. Direct Materials Price Variance3
Direct Materials Price Variance
Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity
Direct Materials Price Variance = ($5.50 – $5.00) × 7,300 sq. yds.
Direct Materials Price Variance = $3,650 Unfavorable Variance
Western Rider paid $0.50 more per square yard of material than the standard.

14. Direct Materials Quantity Variance3
Direct Materials Quantity Variance
Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price
Direct Materials Quantity Variance = (7,300 sq. yds. – 7,500 sq. yds. × $5.00
Direct Materials Price Variance = ($1,000) Favorable Variance
Western Rider used 200 less square yards of material than the standard.

15. 3 Exhibit 4 Direct Materials Variance Relationships Actual cost:
Standard cost:
Actual quantity × Actual price 7,300 × $5.50 = $40,150
Actual quantity × Standard price 7,300 × $5.00 = $36,500
Standard quantity × Standard price 7,500 × $5.00 = $37,500
Materials price variance
Material quantity variance
$3,650 U
($1,000) F
Total direct materials cost variance
$40,150 – $37,500 = $2,650 U

16. Direct Labor Variances3
Direct Labor Variances
Actual Direct Labor Cost = Actual Rate per Hour × Actual Time
Actual Direct Labor Cost = $10.00 per hr. × 3,850 hrs.
Actual Direct Labor Cost = $38,500
Standard Direct Labor Cost = Standard Rate per Hour × Standard Time
Standard Direct Labor Cost = $9.00 per hr. × 4,000 hrs.
Standard Direct Labor Cost = $36,000
Actual costs ($38,500) – Standard costs ($36,000) = $2,500
Total Unfavorable Labor Variance

17. Direct Labor Rate Variance3
Direct Labor Rate Variance
Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours
Direct Labor Rate Variance = ($10.00 – $9.00) × 3,850 hours
Direct Labor Rate Variance = $3,850 Unfavorable Variance
If the actual direct labor rate for the units produced is less than the standard direct labor rate, the variance is favorable.

18. Direct Labor Time Variance3
Direct Labor Time Variance
Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour
Direct Labor Time Variance = (3,850 hours – 4,000 direct labor hours) × $9.00
Direct Labor Time Variance = ($1,350) Favorable Variance
If the actual direct hours for the units produced exceeds the standard direct labor hours, the variance is unfavorable.

19. 3 Exhibit 5 Direct Labor Variance Relationships Actual cost:
Standard cost:
Actual hours × Actual rate 3,850 × $10 = $38,500
Actual hours × Standard rate 3,850 × $9 = $34,650
Standard hours × Standard rate 4,000 × $9 = $36,000
Direct labor rate variance
Direct labor time variance
$3,850 U
($1,350) F
Total direct labor cost variance
$38,500 – $36,000 = $2,500 U

20. 4
Compute and interpret factory overhead controllable and volume variances.
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21. The Factory Overhead Flexible Budget4
The Factory Overhead Flexible Budget
Budgeted Factory Overhead at Normal Capacity
Normal Productive Capacity
Factory Overhead Rate =
Factory Overhead Rate =
$30,000
5,000 direct labor hours
Factory Overhead Rate = $6.00 per direct labor hour

22. Fixed Factory Overhead Rate4
Fixed Factory Overhead Rate
Budgeted Fixed Overhead at Normal Capacity
Normal Productive Capacity
Fixed Factory Overhead Rate =
$12,000
5,000 direct labor hours
Fixed Factory Overhead Rate =
Fixed Factory Overhead Rate = $2.40 per direct labor hour

23. Variable Factory Overhead Rate4
Variable Factory Overhead Rate
Budgeted Fixed Overhead at Normal Capacity
Normal Productive Capacity
Variable Factory Overhead Rate =
$18,000
5,000 direct labor hours
Variable Factory Overhead Rate =
Variable Factory Overhead Rate = $3.60 per direct labor hour

24. Variable Factory Overhead Variances4
Variable Factory Overhead Variances
Variable Factory Overhead Controllable Variance
Actual Variable Factory Overhead
Budgeted Variable Factory Overhead = –
Standard Hours for Actual Units Produced
Variable Factory Overhead Rate ×

25. Variable Factory Overhead Variances4
Variable Factory Overhead Variances
$14,400
Variable Factory Overhead Controllable Variance
Actual Variable Factory Overhead
Budgeted Variable Factory Overhead = –
4,000 direct labor hours × $3.60

26. 4 Variable Factory Overhead Controllable Variance
Actual Variable Factory Overhead
$14,400 = –
Variable Factory Overhead Controllable Variance =
$10,400 – $14,400
Variable Factory Overhead Controllable Variance =
$(4,000) Favorable Variance

27. Fixed Factory Overhead Variances4
Fixed Factory Overhead Variances
Fixed Factory Overhead Rate
Fixed Factory Overhead Volume Variance
Standard Hours for 100% of Normal Capacity
Standard Hours for Actual Units Produced × = – =
Fixed Factory Overhead Volume Variance
5,000 direct labor hours
4,000 direct labor hours
$2.40 × – =
Fixed Factory Overhead Volume Variance
$2,400 Unfavorable Variance

28. 4 Total Factory Overhead Cost Variance Actual Factory Overhead
Applied Factory Overhead = –
Standard Hours for Actual Units Produced
Total Factory Overhead Rate ×

29. 4 Total Factory Overhead Cost Variance Actual Factory Overhead
Applied Factory Overhead = –
5,000 jeans x 0.80 direct labor hr. per pair of jeans
$6.00 ×

30. 4 Actual Factory Overhead Total Factory Overhead Cost Variance= –
Total Factory Overhead Cost Variance
Applied Factory Overhead
$24,000
5,000 jeans x 0.80 direct labor hr. per pair of jeans
$6.00 ×

31. 4 Actual Factory Overhead Total Factory Overhead Cost Variance= -
Total Factory Overhead Cost Variance
Applied Factory Overhead
$24,000
$22,400 = –
Total Factory Overhead Cost Variance
$24,000
Total Factory Overhead Cost Variance
= $(1,600) Favorable Variance

32. Overapplied factory overhead4
Factory Overhead
Actual factory overhead 22,400
Applied factory overhead 24,000
Balance, June 30 1,600
Overapplied factory overhead

33. Budgeted Factory Overhead for Amount Produced4
Factory Overhead
Actual factory overhead 22,400
Applied factory overhead 24,000
Budgeted Factory Overhead for Amount Produced
Variable factory OH $14,400
Fixed factory OH 12,000
Total $26,400
Actual Factory Overhead
$22,400
Applied Factory Overhead
$24,000
$(4,000) F
$2,400 U
Controllable Variance
Volume Variance
$(1,600) F
Total Factory Overhead Cost Variance

34. 5
Journalize the entries for recording standards in the accounts and prepare an income statement that includes variances from standards.
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35. Recording and Reporting Variances from Standards5
Recording and Reporting Variances from Standards
Western Rider Inc. purchased, on account, the 7,300 square yards of blue denim at $5.50 per square yard. The standard price was $5.00 per square yard.

36. Western Rider Inc.’s Purchase of Materials Entry5
Western Rider Inc.’s Purchase of Materials Entry
$5.50 × 7,300 = $40,150
$5.00 × 7,300 = $36,500
$3,650 U Direct materials price variance

37. 5
Western Rider Inc. used 7,300 square yards of blue denim to produce 5,000 pairs of XL jeans, compared to the standard of 7,500 square yards.

38. Western Rider Inc.’s Use of Materials Entry5
Western Rider Inc.’s Use of Materials Entry
$5.00 × 7,500 = $37,500
$5.00 × 7,300 = $36,500
$(1,000) F Direct materials quantity variance