1. 1 Click to edit Master title style 1 1 1 Performance Evaluation Using Variances From Standard Costs 7

2. 2 Click to edit Master title style 2 2 2 Standards 7-1 Standards are performance goals. Manufacturers normally use standard costs for each of the three manufacturing costs:  Direct materials  Direct labor  Factory overhead

3. 3 Click to edit Master title style 3 3 3 16 Standard Cost for XL Jeans 7-2

4. 4 Click to edit Master title style 4 4 4 19 Budget Performance Report 7-2

5. 5 Click to edit Master title style 5 5 5 20 Relationship of Variances to the Total Manufacturing Cost Variances 7-2

6. 6 Click to edit Master title style 6 6 6 22 Standard square yards per pair of jeans1.50sq. yards Actual units producedx 5,000pairs of jeans Standard square yards of denim budgeted for actual production7,500sq. yards Standard price per sq. yd.x $5.00 Standard direct materials cost at actual production$37,500 Direct Materials 7-3

7. 7 Click to edit Master title style 7 7 7 23 Actual price per unit$5.50per sq. yd. Standard price per unit 5.00 per sq. yd. Price variance (unfavorable)$0.50per sq. yd. $0.50 times the actual quantity of 7,300 sq. yds. = $3,650 unfavorable Direct Materials Price Variance 7-3

8. 8 Click to edit Master title style 8 8 8 24 Actual quantity used7,300 sq. yds. Standard quantity at actual production7,500 Quantity variance (favorable) (200) sq. yds. (200) square yards times the standard price of $5.00 = ($1,000) favorable Direct Materials Quantity Variance 7-3

9. 9 Click to edit Master title style 9 9 9 Example Exercise 7-1 7-3 Tip Top Corp. produces a product that requires six standard pounds per unit. The standard price is $4.50 per pound. If 3,000 units required 18,500 pounds, which were purchased at $4.35 per pound, what is the direct materials (a) price variance, (b) quantity variance, and (c) cost variance? 27

10. 10 Click to edit Master title style 10 For Practice: PE7-1A, PE7-1B Follow My Example 7-1 28 7-3 a.Direct materials price variance (favorable) ($2,775) [($4.35 – $4.50) x 18,500 pounds] b.Direct materials quantity variance (unfavorable) $2,250 [(18,500 pounds – 18,000 pounds) x $4.50] c.Direct materials cost variance (favorable) ($525) [($2,775) + $2,250] or[($4.35 x 18,500 pounds) – ($4.50 x 18,000 pounds)] = $80,475 – $81,000

11. 11 Click to edit Master title style 11 29 Standard direct labor hours per pair of XL jeans0.80direct labor hour Actual units producedx 5,000pairs of jeans Standard direct labor hours budgeted for actual production4,000direct labor hours Standard rate per DLHx $9.00 Standard direct labor cost at actual production$36,000 Direct Labor Variances 7-3

12. 12 Click to edit Master title style 12 30 Actual rate$10.00 Standard rate 9.00 Rate variance—unfavorable$ 1.00per hour $1.00 times the actual time of 3,850 hours = $3,850 unfavorable Direct Labor Rate Variance 7-3

13. 13 Click to edit Master title style 13 31 Actual hours3,850DLH Standard hours at actual production 4,000 Time variance—favorable(150)DLH (150) Direct labor hours times the standard rate of $9.00 = ($1,350) favorable Direct Labor Time Variance 7-3

14. 14 Click to edit Master title style 14 Example Exercise 7-2 7-3 Tip Top Corp. produces a product that requires 2.5 standard hours per unit at a standard hourly rate of $12 per hour. If 3,000 units required 7,420 hours at an hourly rate of $12.30 per hour, what is the direct labor (a) rate variance, (b) time variance, and (c) cost variance? 34

15. 15 Click to edit Master title style 15 For Practice: PE7-2A, PE7-2B Follow My Example 7-2 35 7-3 a.Direct labor rate variance (unfavorable) $2,226 [($12.30 – $12.00) x 7,420 hours] b.Direct labor time variance (favorable) ($960) [7,420 hours – 7,500 hours) x $12.00] c.Direct labor cost variance (favorable) ($1,266) [$2,226 + ($960)] or [($12.30 x 7,420 hours) – ($12.00 x 7,500 hours)] = $91,266 – $90,000

16. 16 Click to edit Master title style 16 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. The Factory Overhead Flexible Budget 7-4

17. 17 Click to edit Master title style 17 39 Variable Factory Overhead Controllable Variance Actual variable factory overhead$ 10,400 Budgeted variable factory overhead for actual amount produced (4,000 hrs. x $3.60) 14,400 Controllable variance— favorable$ (4,000) F 7-4

18. 18 Click to edit Master title style 18 Example Exercise 7-3 7-4 Tip Top Corp. produced 3,000 units of product that required 2.5 standard hours per unit. The standard variable overhead cost per unit is $2.20 per hour. The actual variable factory overhead was $16,850. Determine the variable factory overhead controllable variance. 40

19. 19 Click to edit Master title style 19 For Practice: PE7-3A, PE7-3B Follow My Example 7-3 41 7-4 $350 unfavorable $16,850 – [$2.20 x (3,000 units x 2.5 hours)]

20. 20 Click to edit Master title style 20 42 Fixed Factory Overhead Volume Variance 100% of normal capacity5,000direct labor hours Standard hours at actual production 4,000 Capacity not used1,000direct labor hours Standard fixed overhead ratex $2.40 Volume variance—unfavorable$ 2,400U 7-4

21. 21 Click to edit Master title style 21 Example Exercise 7-4 7-4 Tip Top Corp. produced 3,000 units of product that required 2.5 standard hours per unit. The standard fixed overhead cost per unit is $0.90 per hour at 8,000 hours, which is 100% of normal capacity. Determine the fixed factory overhead volume variance. 44

22. 22 Click to edit Master title style 22 For Practice: PE7-4A, PE7-4B Follow My Example 7-4 7-4 $450 unfavorable $0.90 x [8,000 hours – (3,000 units x 2.5 hours)] 45

23. 23 Click to edit Master title style 23 46 Reporting Factory Overhead Variances Total actual factory overhead$22,400 Factory overhead applied (4,000 hours x $6.00 per hour) 24,000 Total factory overhead cost variance—favorable$(1,600)F 7-4