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Part IIIManagement Accounting

Performance Evaluation Tools

Chapter 14 • Performance Evaluation Using Flexible Budgeting

Chapter 15 • Segmental Profitability Analysis Evaluation

Chapter 16 • Return on Investment

Chapter 17 • Financial Statement Ratio Analysis

Chapter 18 • Statement of Cash Flow

Management Accounting | 267

Performance Evaluation Using Flexible Budgeting

Purpose and Nature of StandardsIn management accounting, performance evaluation usually refers to the process

of controlling costs through the use of standards. The terms “performance evalua-tion” and “control of costs” are often used interchangeably; however, performance evaluation may be used in a broader sense to also include all revenue and operating expenses. Performance evaluation is a process that involves:

Step 1 Setting standards for all revenues, manufacturing costs, and operating expenses.

Step 2 Measuring actual revenues and costs/expenses (last period’s financial statement).

Step 3 Computing variances by subtracting standards from actual results.

Step 4 Analyzing variances into component parts (compute detailed vari-ances).

Step 5 Reporting results of variance analysis to appropriate managers.

Step 6 Investigating significant variances and cause of variances and taking corrective action (this step is done by management.)

The key to an effective use of the performance evaluation tool is a solid under-standing of the nature and purpose of standards. Terms sometimes substituted for standards are planned values and budgeted values. Many companies use the planned values appearing on their comprehensive budgets as benchmarks for

268 | CHAPTER FOURTEEN • Performance Evaluation Using Flexible Budgeting

evaluating actual results. However, the concept of what constitutes a proper standard is somewhat technical and requires careful explanation. The theory of standards in management accounting usually revolves around the concepts of flexible budget standards and static budget standards.

Flexible and Static Budget StandardsIn management accounting, two types of standards are recognized: flexible

budget standards and static budget standards. Standards based on flexible budgets are theoretically preferably; however, to fully understand the concept of flexible budget standards some understanding of static budget standards is necessary.

Static budget standards as implied by the word “static” are standards that when set are not changed regardless of the difference between planned and actual levels of activity. When static budget standards are used, it is necessary to compute volume variances caused by a difference in actual and planned activity. The foundation of static budget standards is always planned activity and, therefore, the standards created at the beginning of the planning period are the same standards used at the end of the planning period.

Flexible budget standards attempt to overcome misleading inferences that can easily arise from the use of static budget standards. The major weakness of static budget standards is that they are only appropriate to one level of activity–the planned level. Actual costs are almost always caused by a level of activity that may be signifi-cantly different from planned activity. For example, to compare actual material costs incurred at a production level of 1,000 units against a standard based on planned activity of 500 could be misleading. Management might be mislead into thinking that material usage costs are out of control. An increase in material cost is inevitable when volume increases and does not necessarily mean that a problem of control exists.

A major advantage of using flexible budget standards is that volume variances are automatically eliminated since actual costs and standards are based on the same level of activity–that is, actual output activity. A flexible budget is generally defined as a budget that shows total standard cost (or revenue) at different levels of potential activity. A flexible budget is actually a set of possible standards. The exact standard that will be used is not determined until the end of the period when actual activity is known. The flexible budget standards used are always based on actual output activity (e.g., production/sales).

Although flexible budgets typically show both fixed and variable costs, a flexible budget is only required for variable costs and revenues. Only variable costs/revenues are affected by changes in volume. Fixed costs may be included for purposes of disclosing the total cost picture. In other words, the standards for fixed costs are the same in both static budgeting and flexible budgeting. Other things equal, a change in volume should have no effect on fixed costs.

Conceptual Foundation of Flexible and Static Budget StandardsA standard is a bench mark, a type of yard stick, for evaluating performance.

In many ways standards are also goals or objectives. Standards should not be set so high as to be unattainable. Standards also should be a motivating factor that


encourage improvement in efficiency and productivity. The basic assumption under-lying the use of standards is that costs or revenues are controllable through manage-rial decision-making.

The value of using standards is not without some differences in approach and theory. A general theory of using standards, however, has evolved and the rest of this chapter is concerned with setting forth this theory and illustrating the application of standards. As mentioned above, two types of standards are generally recognized: static budget standards and flexible budget standards.

A conceptual foundation underlies both these types of standards. The major components of this foundation are the following:

1. The most important classification of costs when it comes to standards is fixed and variable costs.

2. The concept of the activity variable, Q (quantity), is of critical importance in setting standards and computing variances.

3. Q (quantity) is an activity variable that may either have as its frame of reference units sold or units produced. Q as used here refers to the quantity of output.

4. There are two types of activity whether the frame of reference is units sold or units produced.

a. Planned quantity of outputb. Actual quantity of output

5. The question that has received considerable attention and debate is: Should the standards for computing variances be based on actual quantity or planned quantity of output?

6. Static budget standards are always based on planned quantity of output. Flexible budget standards are always based on actual quantity of output.

7. The use of flexible budgets automatically removes volume variances that is created when static budget standards are used. In terms of units, the volume variance is simply actual output less planned output.

8. In addition to total cost or total revenue standards, standards should also be set for the individual factors that create the total cost standards.

9. The purpose of performance evaluation is to identify problems in cost or revenue causing activities. A problem is indicated when a variance is considered significant. Variances are commonly labeled as favorable and unfavorable. The fact that a variance has been identified as favorable does not mean the absence of problems. For example, a favorable variance for material usage could mean that the workers are causing the product to be of lower quality.

In order to understand these general principles, a detailed discussion of flexible budgeting and static budgeting follows:


Static Budget and Flexible Budget Standards EquationsAs previously discussed in chapter 7, the aggregate total cost equation was given

as:TC = V(Q) + F (1)

TC - total costsV - variable cost rateQ - quantity

In equation (1), Q or quantity may be either units sold or units produced. Furthermore, the aggregate variable cost rate, V, may be defined in terms of indi-vidual components as previously discussed in chapter 6.

V = V M + V L + V O + V S + V A (2) Where:

V M - variable material cost rate V L - variable labor cost rateV O - variable overhead rateV S - variable selling expense rateV A - variable administrative rate

In a similar manner the aggregate fixed cost standard, F, may be defined in terms of its individual components:

F = F L + F O + F S + F A (3)Where:

F L - fixed labor costF S - fixed selling expenses F O - fixed overhead costsF A - fixed administrative expenses

The process of setting standards is, therefore, larger in scope than simply setting a standard for the aggregate variable rate and the aggregate amount of fixed expenses/costs. In less mathematical terms, standards for a manufacturing business need to be set for the following:

Manufacturing Costs Operating Expenses1. Material (variable) 4. Selling (fixed and variable)2. Direct labor (variable) 5. General and administrative3. Manufacturing overhead (Fixed and variable) (Fixed and variable)

The above general theory can be summarized mathematically as follows:Flexible budget standard equation: TC = V S(Q A) + FStatic budget standard equation: TC = V S( Q P) + F

TVC - total costV S - aggregate standard variable cost rateF - planned fixed cost


Q A - actual quantity (output)Q P - planned quantity (output)

The equations for flexible budget and static budgeting are obviously the same, except that in flexible budgeting the standard is based on actual quantity of output whereas in static budgeting the standard is based on planned quantity of output. In terms of individual cost/expenses components of which five have been now identi-fied, the static and flexible budget equations for these components are:

Figure 14.1

Type of Cost Flexible Budget Equation

Static Budget Equation

1. Material TSVMC = VSM(Q A) TSVMC = VS

M(Q P)

2. Direct labor TSVLC = VSL(Q A) TSMLC = VS

L(Q P)

3. Manufacturing Overhead TSVMO = VSO(Q A) TSVMO = VS

O(Q P)

4. Selling expenses TSVSE = VSS(Q A) TSVSE = VS

S(Q P)

5. General and administrative TSVGA = VSG(Q A) TSVGA = VS

G(Q P)

Note: TSV stands for “total standard variable”.

The only difference in flexible budget and static budget standards, as explained before, is quite obvious. Flexible budget standards are based on actual quantity of output, Q A, and static budget standards are based on planned quantity of output, Q P. Standards for manufacturing costs are based on production quantity while operating expenses such as selling expenses are based on sales quantity. The difference in planned Q and actual Q output is now critically important.

Setting Standards for Individual Flexible Budget FactorsSetting standards for total costs is important; however, the first step is to set stan-

dards for the factors that make up the component parts as discussed in this chapter. Setting standards for the variable cost rates is the first and most difficult step. This step is actually done at the beginning of the operating period. The factors involved that create the variable cost rates for manufacturing costs are easier to identity than the factors for selling and general and administrative expenses. The table on the next page shows the factors typically associated with manufacturing and operating expenses.

Because selling and general and administrative expenses cover a much wider range of items, it is not as easy to identify specific factors that require standards. However, for some items such as sales people commissions, the factors can be easily identified. For example, if the sales commission rate is 10% and the price of the product is $300. In this instance, the cost factor is $30 and the unit factor is simply 1.


Although the foundation of flexible budgets are always the equations for variable costs as just explained, the preferred practice for purposes of reporting to manage-ment is to present flexible budgets in tabular form. The following is an example of a tabular flexible budget:

Figure 14.3 • Flexible Budgeting- Manufacturing Costs

VM = $ 2VL = $3VO = $4

Units of Product Manufactured

100 200 300 400 500 600

TVMC $200 $ 400 $ 600 $ 800 $1,000 $1,200

TVLC $300 $ 600 $ 900 $1,200 $1,500 $1,800

TMVO $400 $ 800 $1,200 $1,600 $2,000 $2,400

Total $900 $1,800 $2,700 $3,600 $4,500 $5,400

If actual units manufactured were 500, then the standard cost for material would $ 1,000 ($2.00 x 500). For variable manufacturing overhead, the standard would be $2,000 ($4.00 x 500).

Comprehensive Illustration of Variance AnalysisThe K. L. Widget company’s controller after considerable analysis put together

the following information: Planned Actual

Production 7,000 units 7,800 unitsSales 6,000 units 6,500 unitsPlanned Price $300 $310

Variable Cost Factors

Item Factors Legend

Material VSM = US

M x CSM US

m - standard units per productCS

m - standard cost of one unit

Direct labor VSL = HS

L x RSL HS

L - standards hours per productRS

L - standard labor rate per hour

Overhead (V) VSO = US

O x CSO US

O - standard units of overhead serviceCS

O - standard cost of 1 unit of service

Selling VSS = US

S x CSS US

S - service units CS

S - standard cost of one service unit

Gen. & Admin. VSG = US

G x CSG US

G - service units CS

G - standard cost of one service unit

Figure 14.2


Manufacturing Cost Information

Materials Labor –––––––––––––– ––––––––––––––– Planned Actual Planned ActualUnits of material per product 5 5.4 Hours of labor 2 2.5Cost of material per unit $3.00 $3.20 Wage rate $15.00 $16.00

Manufacturing overhead Planned Actual –––––––– –––––––

Variable overhead rate (per unit) $5.00 $5.60Fixed manufacturing overhead $200,000 $250,000

Operating expenses Information

Planned Actual –––––––– –––––––

Selling: Variable Commissions $195,000 $201,500 Packaging $ 30,000 $ 39,000 Travel $ 12,000 $ 14,300

Fixed Advertising $100,000 $125,000 Sales people salaries $500,000 $550,000

General and Administrative Planned Actual

–––––––– ––––––– Variable Supplies $6,000 $8,450 Postage $3,000 $4,225 Fixed Executive salaries $200,000 $220,000 Building rent $ 50,000 $ 80,000

Step 1 The first step in the evaluation process is to create the flexible budgets from the planned data provided. Typically, this would be done at the beginning of the operating period. Based on the above information, flexible budgets are shown in Tables 1 and 2.


Table 1 Flexible Budget-Manufacturing Cost(Units of Product)

Variable costs Rate 2,000 4,000 6,000 8,000 10,000

Materials $ 15.00 $ 30,000 $ 60,000 $ 90,000 $ 120,000 $ 150,000

Factory Labor 30.00 60,000 120,000 180,000 240,000 300,000

Manufacturing 5.00 10,000 20,000 30,000 40,000 50,000

Total variable mfg. costs $ 50.00 $ 100,000 $ 200,000 $ 300,000 $ 400,000 $ 500,000

Fixed Costs

Manufacturing $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000

Total costs $ 300,000 $ 400,000 $ 500,000 $ 600,000 $ 700,000

Table 2 Flexible Budget- Income Statement

Sales (units)

Revenue Rate 2,000 4,000 6,000 8,000 10,000

Sales $ 300 $ 600,000 $ 1,200,000 $ 1,800,000 $ 2,400,000 $ 3,000,000

Variable Costs

Selling

Commissions $ 30.00 $ 60,000 $ 120,000 $ 180,000 $ 240,000 $ 300,000

Packaging 5.00 10,000 20,000 30,000 40,000 50,000

Travel 2.00 4,000 8,000 12,000 18,000 24,000

Gen. and administrative

Supplies $ 1.00 $ 2,000 $ 4,000 $ 6,000 $ 8,000 $ 10,000

Postage 0.50 1,000 2,000 3,000 4,000 5,000

Total variable $ 38.50 $ 77,000 $ 154,000 $ 231,000 $ 310,000 $ 389,000

Fixed

Selling

Advertising $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000

Sales people’s salaries 500,000 500,000 500,000 500,000 500,000

Gen. & administrative.

Executive salaries $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000

Building rent 50,000 50,000 50,000 50,000 50,000

Total fixed 850,000 850,000 850,000 850,000 850,000

Total expenses $ 927,000 $ 1,004,000 $ 1,081,000 $ 1,160,000 $ 1,209,000


Table 3Variance Analysis- Cost of Goods Manufactured

Planned Production - 7,000Actual Production - 7,800

Actual Standard Variance

Materials used (V) $ 134,784 $ 117,000 $ 17,784 U

Direct Factory Labor (V) 312,000 234,000 78,000 U

Manufacturing (V) 43,680 39,000 4,680 U

Manufacturing (F) 250,000 200,000 50,000 U

Total cost of goods manufactured $ 740,464 $ 590,000 $ 150,464 U

Table 4 Variance Analysis - Income Statement (Direct Costing) Planned activity 6,000 units Actual activity 6,500

Actual Standard Variance

Sales $ 2,015,000 $ 1,950,000 $ 65,000 U

Variable expenses

Selling

Cost of goods sold $ 408,720 $ 325,000 $ 83,720 U

Commissions $ 201,500 $ 195,000 $ 6,500 U

Packaging 39,000 32,500 6,500 U

Travel 14,300 13,000 1,300 U

General and administrative

Supplies $ 8,450 $ 6,500 $ 1,950 U

Postage 4,225 3,250 975 U

Total variable selling 676,195 575,250 100,945 U

Contribution margin $ 1,338,805 $ 1,374,750 $ 35,945 U

Fixed expenses

Selling

Advertising $ 125,000 $ 100,000 $ 25,000 U

Sales peoples’ salaries 550,000 500,000 50,000 U

General & administrative

Executive salaries 220,000 200,000 20,000 U

Building rent 80,000 50,000 30,000 U

Other (fixed manufacturing overhead) 250,000 200,000 50,000 U

Total fixed expenses $ 1,275,000 $ 1,050,000 $ 225,000 U

Net Income $ 63,805 $ 324,750 $ 260,945 U


Step 3 The third step is to identify the proper standards to be entered into the standards column. In our example here, actual production output was 7,800 and sales output was 6,500. The planned values were 7,000 units of production and 6,000 units of sales. These two values are no longer of any importance and it is the actual outputs that are used to set the flexible budget standards. For example, the standard for material is: SMVC = $15.00 (7,800) = $117,000. In flexible budgeting, the standard is always based on actual output which in this case for production is 7,800.

Step 4 The 4th step is to compute the total variances by subtracting from actual values the standard values. The differences should be labeled favorable or unfavorable as shown in Tables 3 and 4.

Analyzing The Total VariancesAfter total variances have been determined based on using the flexible budget

standards, the next step it to determine the causes of the total variances. Analyzing total variances can be the most challenging and difficult part of performance evalua-tion. Identifying the factors that cause the variances requires analyzing the underlying causes or reasons for variances. In this regard, accounting theorists many years ago focused on the variance factors that exist in material, labor and overhead. For this reason, in management accounting texts, the analysis of total variances has tended to center on the analysis of material, labor, and overhead.

Identifying the factors that cause variances is not so difficult, but developing the procedures for computing these variance factors has resulted in some chal-lenging variance equations. Several different methods have evolved with some resulting conflicts in terminology and answers. Students tend to find manufactur-ing cost variance analysis one of the more difficult topics in cost and management accounting.

Our objective now is to look at some commonly used techniques for analyzing the total variances for material, labor, and overhead. There are some alternative procedures available to the ones discussed here, but the student is referred to a text on traditional cost accounting, if the desire exists to look at other procedures.

Analyzing the Total Material Variance - Regarding material, it is clear that an increase in material price above the standard price will result in an unfavorable variance. Furthermore, if more material per unit was used than planned , then this extra usage of materials also adds to the unfavorable variance. The standard variable cost rate for materials as previously explained is: V MS = U MS x C MS where U MS is the number of units of material required per product and C MS is the cost per unit of material. After the total material variance has been determined, then the question becomes: how much of the total variance is due to price or cost of the material and how much due to usage or quantity?

In the analysis of total variances, particularly regarding material and labor, it is important to distinguish between quantity of inputs and quantity of outputs. The term “output” refers to the quantity of finished goods. The term “input” refer to the quantity


material and labor required or used. For example, if 1,000 chairs are made, then output is 1,000 and if each chair requires 6 units of material, then the quantity of material inputs would be 6,000. When the term “quantity” is being used in computing variance, it is important to realize at all times whether the term “quantity” is referring to outputs or inputs.

The total material cost variance equation is simply:Total material variance = actual material cost - standard material cost

The actual material cost is: AMC = V MA (QA) Where:

AMC - actual material costV MA - actual variable material cost rateQA - actual output

In order to know the quantity of materials used, the company must have a good system for tracking usage of inventory. The system used most likely will be some type of perpetual inventory system. The quantity used per product then is simply the total quantity of material used divided by the actual output.

Actual material cost is the number of units of product (output) times the actual material cost per unit of product or alternatively, it can be computed by multiplying the actual quantity of material used times the cost of one unit of material. In this type of analysis, there are two variable cost rates, actual and standard. The standard material cost is the number of actual units of output times the standard variable cost per unit of product. The total variance computed from using a flexible budget standard can be analyzed into the two factors:

1. Price2. Quantity (per units of product)

There, consequently, exists two variances commonly called:Material price varianceMaterial quantity variance

The material cost variance is more commonly called the material price variance. In terms of variance analysis for materials, the term “price” almost always means the price of one unit of raw material. In the analysis that follows, the term “price” will be used rather than “cost” in order to be consistent with the use of the term in manage-ment and cost accounting literature generally.

The mathematical definitions of these variances are as follows:

Material Price Variance:MPV = (P MA - P MS) Q MA

Where: MPV - material price varianceP MA - actual price of one unit of materialP MS - standard price of one unit of materialQ MA - actual quantity of material


Material Quantity Variance:MQV = (Q MA - Q MS )P MS

Where:MQV - material quantity varianceQ MA - actual quantity of material usedQ MS - standard quantity of material

To illustrate the procedure for computing material variances, assume the following:

Planned Actual ––––––– ––––––

Production 1,000 1,200Units of material per product 4.0 4.2Cost per unit of material $2.00 $2.50

Analysis of Material - Based on this information, the flexible budget standard equation is:

TSMC = $8.00 (QA)The actual variable material cost rate is $10.50 (4.2 x $2.50).

Step 1 The first step is to compute the total material cost variance based on the definitions: AMC = V MA (QA) and TSMC =V MS (QA)

(QA represents the actual output of goods)Actual material cost ($10.50 x 1,200 ) $12,600Standard material cost ($8.00 x 1,200 ) $ 9,600 _______Material cost variance $3,000

–––––– ––––––

Step 2 The second step is to compute the total material price variance based on the definition: MPV = (P MA - P MS)Q MA

Actual price $2.50Standard price $2.00 _____ .50Actual quantity of materials used (1,200 x 4.2) 5,040

–––––Material price variance $2,520

Step 3 The third step is to compute the quantity variance:

based on the definition: MQV = ( Q MA - Q MS) P MS

Actual quantity of materials used (1,200 x 4.2) 5,040Standard quantity of material (1,200 x4) 4,800 ––––– 240Standard price $2.00

––––– Material quantity variance $ 480

–––––– $3,000

–––––– ––––––


Analyzing the Total Labor Cost Variance - It is clear regarding labor that an increase in the wage rate above the standard wage rate will result in an unfavorable variance. Furthermore, if the number of actual labor hours incurred are greater than planned, then these additional labor hours also add to the unfavorable total labor variance. The standard variable cost rate for labor, as previously explained, is: VL

S = HSL x RS

L where HSL is the number of labor hours required per unit of product

and RLS is the standard wage rate per hour. After the total labor cost variance has

been determined, then the question becomes: how much of the total variance is due to the labor wage rate and how much is due to labor hours usage?

As mentioned previously, it is also important in analyzing labor to distinguish between quantity of inputs and quantity of outputs. Labor hours incurred is a measure of input quantity. Output still remains the quantity of finished goods.

The total labor cost variance equation may be defined as:Total labor cost variance = actual labor cost - standard labor cost

The actual labor cost is: ALC = V LA (QA) Where:

ALC - actual labor costV LA - actual variable labor cost rate (per unit of product)QA - actual output (units of product)

In other words, actual labor cost is the number of units of product (output) times the actual labor cost per unit of product. In this type of analysis, there are two variable cost rates, actual and standard. The standard labor cost is the number of units of product (output) times the standard variable labor cost per unit of product. The total labor variance computed from using a flexible budget standard can be analyzed into two factors:

1. Wage rate2. Number of labor hours (per unit of product)

There, consequently, exists two variances commonly called:1. Labor rate variance2. Labor hours variance

The mathematical definitions of these variances are as follows:Labor Rate Variance:

LRV = (R LA - R LS) H LA Where:

LRV - labor rate varianceR LA - actual labor wage rate per hour R LS - standard labor wage rate per hourH LA - actual labor hours

Labor Hours Variance:LHV = ( H La - H Ls)R Ls)


Where:LHV - labor hours varianceH LA - actual labor hoursH LS - standard labor hours

To illustrate the procedure for computing material variances, assume the following:

Planned Actual –––––––– ––––––

Production 1,000 1,200Labor hours per product 2.0 2.5Wage rate $10.00 $12.00

Based on this information, the flexible budget standard for labor is:TSLC = V LS (QA ) = $20.00 (1,200) = $24,000

The actual variable labor cost rate is $30.00 (2.5 x $12.00).

Step 1 The first step is to compute the total labor cost variance:Actual labor cost ($30.00 x 1,200 ) $36,000Standard labor cost ($20.00 1,200 ) $24,000 _______Labor cost variance $12,000 –––––– ––––––

Step 2 The second step is to compute the labor rate variance based on the definition: LRV = (R LA - R LS) H LA

Actual labor rate $12.00Standard labor rate $10.00 ––––––Price variance per unit $ 2.00Actual labor hours incurred (2.5 x 1,200 ) 3,000 ––––––Labor rate variance $ 6,000

Step 3 The third step is to compute the labor hours variance: based on the definition: LHV = ( H LA - H LS)R LS This variance is equivalent to the material quantity variance.

Actual labor hours incurred (1,200 x 2.5) 3,000Standard labor hours (1,200 x 2.0) 2,400 –––––Total variance (hours) 600Standard wage rate 10.00 ––––––Labor hours variance $ 6,000 –––––– $12,000

–––––– –––––– Analysis of Total Variance for Overhead - One of the more difficult and

challenging areas of analysis is manufacturing overhead. Accountants decades ago developed some sophisticated procedures for analyzing the manufacturing overhead account. The procedure adopted was to analyze the balance of the account rather than simply analyze the charges to the account. The balance of the manufacturing overhead account represents under- or over-applied overhead. However, since


different methods may be used to apply manufacturing overhead, several different approaches to overhead analysis resulted. The discussion that follows assumes that overhead was applied based on a standard level of activity such as direct labor hours. Based on this assumption, a three-way analysis results. If overhead is applied based on actual direct labor hours, then only two variances are required. The efficiency variance then does not exist.

In order to identify the principles involved, the following manufacturing overhead account is assumed.

Manufacturing Overhead Actual 330,000 240,000 applied (80,000 x $3.00)

Balance 90,000

The analysis of this account can get very complex depending on what assumptions are made. Generally, overhead is applied based on an overhead rate. An overhead rate requires:

1. An assumed capacity level on which the rate is based2. A basis of application such as direct labor hours

Technically, overhead should be applied based on standard hours at actual output. This will be the assumption in this discussion.

The above account was based on the following assumptions:Capacity (normal) 100,000 DLHStandard fixed overhead $200,000Variable rate $1.00 per DLHActual output 16,000 units of productFull capacity 20,000 units of productStandard DLH per product 5Actual direct labor hours 85,000

The total overhead rate would be:Fixed rate (200,000/100,000) $2.00 per DLHVariable rate $1.00 per DLH –––––––––––– $3.00 per DLH

Based on output of 16,000 units of product, the standard direct labor hours would have been 80,000 hours (16,000 x 5)

There are three possible explanations for the balance of $90,000. These reasons are commonly called:

1. Spending variance2. Efficiency variance3. Volume variance

The spending variance is defined:Spending variance = actual overhead - budgeted overhead at actual output (e.g., hours)


The Efficiency variance is defined as:Efficiency variance = budgeted overhead at actual hours - budgeted overhead at standard hours

The volume variance is defined as:Volume variance = budgeted overhead at standard hours - applied overhead

Budgeted overhead is defined as consisting of fixed and variable manufacturing overhead.Example of Analyzing the Manufacturing Overhead Variance

Spending variance: Actual overhead $330,000 Budgeted overhead at actual hours Budgeted fixed $200,000 Budgeted variable ( $1.00 x 85,000) 85,000 ––––––– $285,000 ––––––– $45,000Efficiency variance: Budgeted overhead at actual direct labor hours $285,000 Budgeted overhead at standard hours (80,000) Budgeted fixed $200,000 Budgeted variable (80,000 x $1.00) $ 80,000 $280,000 –––––––– –––––––– $ 5,000Volume variance Budgeted overhead at standard hours $280,000 Less: Overhead applied (80,000 x $3.00) $240,000 –––––––– $40,000 ––––––– $90,000 ––––––– –––––––The spending variance is caused for two reasons:

1. The actual variable manufacturing overhead is more or less than standard variable overhead rate at actual output.

2. The actual fixed manufacturing overhead is more or less than the standard fixed manufacturing overhead.

In other words, the expenditures for these two types of overhead were greater than planned at the beginning of the operating period.

The efficiency variance is the result of the variable overhead rate being more or less than planned. If the actual manufacturing overhead rate is equal to the planned variable manufacturing overhead rate, then the efficiency variance is zero. The efficiency variance is strictly a variable cost variance. An alternative definition is:

EV = (actual direct labor hours - standard direct labor hours) x standard variable overhead rateEV = (85,000 - 80,000) $1 = $5,000


The volume variance is strictly a fixed manufacturing overhead variance. It exists when the hours used to apply overhead are more or less than capacity hours. When standard hours equals capacity hours, the volume variance is zero. An alternative definition is:

V V = (H c - H s) R f (R f - fixed overhead rate)

VV = (100,000 - 80,000) $2.00 = $40,000

Graphical Analysis of VariancesSome students find it helpful to see variance analysis presented visually in the

form of graphs. It is possible to present material and labor variances graphically. Most school children learn at an early age that area of a rectangle is simply length times width: A = L x W. Total cost in principle is based on the same equation: Cost = units x price (C = U x P). Therefore, cost can be represented on a graph as the area of a rectangle as has been done in graph 1 (see Figure 14.4).

The actual material cost is shown in graph 1, (area A, the outer large rectangle). The area of rectangle A is Pa x Qa. Area B (standard material cost) represents standard material cost. Standard material cost or area B is Ps x Qs. The difference between rectangle A and rectangle B would be the sum of area C and D. This difference represents total material cost variance. Rectangle C represents the material price variance (Pa - Ps) Qa. The area of rectangle D represents the material quantity variance (Qa - Qs) Ps. In this graph, all the variances illustrated are unfavorable variances. The same type of graph may be prepared for labor cost variances.

Figure 14.4 • (Graph 1) Graphical Illustration of Material Cost Variances

A Actual Material Cost

MaterialQuantity

C Material Price Variance

StandardMaterial cost

B

MaterialQuantityVariance

D

$

Pa

Ps

Qs Qa

Graphical Illustration of Manufacturing Overhead VariancesIn addition to showing material and labor graphically, it is possible to show

manufacturing overhead variances graphically.


Graph 2 is based on the following data:Actual production 8,000 units of productFull capacity production 10,000 unitsDirect labor hours per product 2 Full capacity direct labor hours 20,000Actual hours worked 18,000Standards direct labor hours 16,000Planned fixed manufacturing overhead $100,000Variable overhead per direct labor hour $8.00Overhead application rate: Fixed ($100,000 / 20,000) $ 5.00 Variable overhead rate $ 8.00 –––––– Total overhead rate per dlh $13.00 Actual manufacturing overhead $275,000

The balance of the manufacturing overhead account is $67,000 ($275,000 - $208,000) In other words actual overhead minus applied overhead. This graphical illustration above makes visible the following points:

1. At 18,000 actual hours of direct labor, the budgeted overhead (fixed plus variable) is $244,000.

2. At 16,000 standard hours (the hours used to apply overhead), the budgeted overhead (fixed plus variable) is $228,000.

SV

EVVV

$300,000

$275,000

$260,000

$244,000$228,000

$208,000

$100,000

20,000

18,000

16,000

12,000

8,000

4,000

Hs Ha Hc

Direct Labor Hours

Figure 14.5 (Graph 2) Graphical Illustration of Manufacturing Overhead Variances


3. At 20,000 hours (full capacity) the budgeted overhead (fixed plus variable) is $260,000.

4. The actual overhead is $275,000.

5. The spending variance is $31,000 ($275,00 - $244,000).

6. The efficiency variance is $16,000 ($244,000 - $228,00).

7. The amount of applied manufacturing overhead is $208,000.

8. The volume variance is $20,000 ($228,000 - $208,000).Flexible Budgeting and Static Budgeting Variances Compared

The computation and analysis of variances is an important step in finding the underlying causes of significant variations in actual results and planned results. The use of flexible budgeting makes the understanding of variances easier because the effect of a change in volume (quantity of output) is removed from the total variances. If static budgeting is used, then a volume variance would have to be computed. For example, the analysis of the total material cost variance based on static budgeting would have been as follows (see page 278 for data):

Total material cost variance Actual material cost ($10.50 x 1,200 ) $12,600 Standard material cost ($8.00 x 1,000 ) $ 8,000 ______ $4,600 ––––––– –––––––Material Volume variance Based on the definition: MVV = (QA - QP) V MS

Standard material cost at actual activity $ 9,600Standard material cost at planned activity $ 8,000

Volume variance –––––– $1,600Material price variance Based on the definition: MPV = (P MA - P MS)Q MA

Actual price $ 2.50 Standard price $ 2.00 –––––– $ .50 Actual quantity of materials used (1,200 x 4.2) 5,040 Material price variance –––––– $2,520Material Quantity Variance Based on the definition: MQV = ( QM

A - Q MS ) P MS

Actual quantity of materials used (1,200 x 4.2) 5,040 Standard quantity of material (1,200 x4) 4,800 –––––– 240 Standard price $ 2.00 Material quantity variance $ 480 –––––– Sum of material variances $4,600 –––––– ––––––


Whether static or flexible budgeting is used, it is should be noticed that the material price and material quantity variances are calculated exactly in the same way. The same is also true for the labor rate variance and the labor hours variance. Following is a comparison summary of the analysis based on both static budgeting and flexible budgeting.

Comparison of Static and Flexible Budgeting Variance Analysis

Static Budgeting Flexible Budgeting

Total material cost variance $4,600 –––––– ––––––

Material volume variance $1,600Material price variance $2,520Material quantity variance $ 480 –––––– $4,600 –––––– ––––––

Total material cost variance $3,000 –––––– ––––––

Material price variance $2,520Material quantity variance $ 480 –––––– $3,000 –––––– ––––––

Summary Variance analysis can be highly effective in highlighting areas of decision-making

that need improvement. Traditionally, the discussion of variances has been in the framework of a manufacturing business and in particular to material, labor, and overhead. However, variance analysis can be used in any type of business and can be applied not only to manufacturing costs but also to all types of expenses. Flexible budgeting can be used in all types of businesses, because all businesses have variable costs and expenses.

In order to be able to understand the differences between flexible budgeting and static budgeting, the following terminology must be understood:

1. Variance analysis 11. Direct labor volume variance 2. Flexible budgeting 12. Material price variance 3. Static budgeting 13. Material price variance 4. Standard material cost 14. Labor rate variance 5. Standard labor cost 15. Labor hours variance 6. Inputs 16. Variable costs 7. Outputs 17. Fixed costs 8. Total material variance 18. Planned quantity 9. Total direct labor variance 19. Actual quantity 10. Material volume varianceAppendix - Graphical Analysis of Variances

The approach to variance analysis in cost and management accounting text books is almost always based on flexible budgeting. Standard costs are, therefore, based on the actual quantity of output rather than the planned quantity of output. Regarding material, for example, there are two values that require the use of flexible budgeting values:

1. Standard units of material allowed (at actual output)2. Total standard cost (at actual output)


Unless these two values are computed, a complete variance analysis of material and direct labor cannot be accomplished.

Standard units of material allowed is simply: U mS (QA0). In other words, standard

material allowed is the material required per unit of product times the number of units manufactured commonly called output. Total standard cost is V MS(QA

0), where V MS is the standard material cost per unit of output. Stated more simply, V MS(QA

0), is the equation for computing flexible budgeting standards for material.

The material variance equations presented in this chapter may be expanded as follow:

Material VariancesMaterial Price Variance

(P MA - P MS) Q MA = P MA( Q MA) - P MS (Q MA)

Material Quantity Variance(Q MA - Q MS)P MS = P Ms(Q MA) - P MS(Q MS )

If we take the variance analysis equations for material on the right hand side and place them in close proximity, then we can easily see that the price variance and the quantity variance have one term in common.

MPV = P MA ( Q MA ) - P MS (Q MA )

MQV = P Ms (Q MA ) - P MS(Q MS )The term P MS(Q MA ) may be read as the cost of material actually used at standard

price. This cost value would be the same as the flexible budgeting standard cost value only when there is no variance in the quantity of material used. Because of the difficulty in following the logic of these right hand definitions, most cost accounting text authors present the following graphical analytical tool.

Figure 14.6 • Material Variance Graph

PMA(QM

A) - QMS(PM

S)TMCV

$410

Actual MaterialCost

Standard Cost ofActual Material used

StandardMaterial Cost

(Flexible Budget)

$3,410 $3,300 $3,000

MPV MQV

$110 $300


The above diagram was based on the following data:

Actual output 500Standard units of material per unit of output 2Standard material price $3.00Actual material price $3.10Actual quantity of material used 1,100

Labor Variances

In a similar manner, the definition of labor variances may be expanded:

LRV = (R LA - R LS )H LA = R LA (H LA) - R LS(H LA )

LHV = ( H LA - H LS)R LS = R LS(H LA ) - R LS(H LS )As for the case with material, if we take variance equations for labor on the right

hand side and place them in close proximity we can easily see that the price variance and the quantity variance have one term in common.

LRV = R LA (H LA ) - R LS (H LA )

LHV = R LS(H LA ) - R LS(H LS )The term R LS(H LA ) may be read as the cost of labor hours actually incurred at

the standard wage rate. Thi cost value would be the same as the flexible budgeting value only when there is no variance in the actual labor hours incurred. Because of the difficulty in following the logic of these right hand definitions, most cost accounting text authors present the following graphical analytical tool.

Figure 14.7 • Labor Variance Graph

TMCV

$3,900

Actual LaborCost

Standard Cost ofActual Labor hours

StandardLabor Cost

(Flexible Budget)

$18,900 $18,000 $15,000

LRV LHV

$900 $3,000

The above diagram was based on the following data:

Actual output 500 Standard labor hours required 3Standard wage rate $10.00


Actual material price $10.50Actual labor hours incurred 1,800

Q. 14.1 What steps make up the management accounting concept of control?

Q. 14.2 What two values must be known in order to compute a variance?

Q. 14.3 Explain the difference between static budget standards and flexible budget standards.

Q. 14.4 What type of cost or expense requires a flexible budget?

Q. 14.5 Why is a flexible budget not required for fixed cost/expenses?

Q. 14.6 What activity level must be known in order to select the correct standard for purposes of computing variances?

Q. 14.7 If static budget standards are used to compute variances, what three variances must be computed in order to explain the total variance?

Q. 14.8 If flexible budgeting is used, what two variances must be computed in order to explain a total variance?

Q. 14.9 At what point in time are the standards under flexible budgeting actually known for purposes of computing variances?

Q. 14.10 List three ways to show or display a flexible budget.

Q. 14 .11 Present examples of the three methods in question 10 for material cost.

Q. 14.12 List five broad categories of variances that may be computed.

Q. 14.13 List the steps involved in analyzing the total variances for material and labor.

Q. 14.14 List and mathematically define the variances that must be computed to explain the total variances for material, labor, and overhead (assuming the use of flexible budgets).

Q. 14.15 What type of cost does the manufacturing overhead spending variance represent?

Q. 14.16 What type of cost does the manufacturing overhead efficiency variance represent?

Q. 14.17 What type of cost does the manufacturing volume variance represent?

Q. 14 .18 Identify the following variances:

A. (P MA - P MS) QA

B. (Q MA - Q MS) P MS

C. ( R LA - R LS) HA

D. ( H LA - H LS) R LS


Exercise 14.1 • Flexible Budget Standards for Material and Labor

The following information has been provided to you:Actual production 2,500Planned production 2,000

Material Data: Actual: Units of material used 5,200 Cost of material per unit $3.00

Material standards: Cost of one unit of material $2.80 Units of material required per product 2

Labor Data: Actual : Actual labor hours 6,500 Wage rate per hour $15.00

Labor standards: Labor hours per unit of product 3 Wage rate per hour $14.00

Manufacturing overhead Data: Actual overhead incurred: Fixed $60,000 Variable $25,000 Planned overhead: Fixed $50,000 Variable $22,500

Capacity hours 10,000Standard hours used to apply overhead 7,500Actual direct labor hours 8,000

Required:

Based on the above information:

1. Compute the flexible budget standards for material and labor.

2. Compute the total variances for material and labor.

3. For materials compute the material price variance and the material quantity variance.

4. For labor, compute the labor rate variance and the labor hours variance.

5. For manufacturing overhead, compute:a. The spending variance


b. The efficiency variancec. The volume variance

Exercise 14.2 • Flexible Budget Standards for Material and Direct Labor

The Acme Widget Company on January 1 budgeted production to be 1,000 units. However, at the end of the fiscal year on December 31, actual production was determined to be 1,500 units. Standards for Material were set as follows:

Material cost per unit of product $ 2.00Material units per unit of product 4.00 ––––––––

Actual production results were as follows:

Material cost per unit of product $ 3.00Material units per unit of product 5.00 ––––––––

Standards for direct labor were set as follows:

Labor wage rate per unit of product $10.00Labor hours per unit of product 3 ––––––––

Actual production results for labor were as follows:

Labor wage rate per unit of product $11.00Labor hours per unit of product 2.5 ––––––––

Required:1. Based on the above information, compute the following for material:

1. Actual material input (units) ( ) ––––––––––––––2. Actual output (units) ( ) ––––––––––––––

3. Actual material cost $ –––––––––––––4. Standard material cost: a. Flexible budgeting ( ) $ ––––––––––––– b. Static budgeting ( ) $ –––––––––––––5. Standard material units a. Flexible budgeting ( ) –––––––––––––– b. Static budgeting ( ) ––––––––––––––

2. Based on the above information, compute the following for direct labor:1. Actual direct labor hours (input) ( ) ––––––––––––––2. Actual output (units) ––––––––––––––

3. Actual direct labor cost ( ) $ –––––––––––––4. Standard direct labor cost: a. Flexible budgeting ( ) $ ––––––––––––– b. Static budgeting ( ) $ –––––––––––––5. Standard labor hours a. Flexible budgeting ( ) –––––––––––––– b. Static budgeting ( ) ––––––––––––––


3. Based on the above information, compute the following based on flexible budgeting:

Material:Total material cost variance ( ) –––––––––––––– ( )

Material price variance ( ) –––––––––––––– ( )Material quantity variance ( ) –––––––––––––– ( )

–––––––––––––– ( )


Direct labor:Total direct labor cost variance ( ) ––––––––––––– ( )Labor rate variance ( ) ––––––––––––– ( )Labor hours variance ( ) ––––––––––––– ( ) ––––––––––––– ( )

5. Based on the above information, compute the following based on static budgeting:

Material:Total material cost variance ( ) ––––––––––––– ( )

Material volume variance ( ) ––––––––––––– ( )Material price variance ( ) ––––––––––––– ( )Material quantity variance ( ) ––––––––––––– ( ) ––––––––––––– ( )


Direct labor:Total direct labor cost variance ( ) –––––––––––– ( )

Labor volume variance ( ) –––––––––––– ( )Labor rate variance ( ) –––––––––––– ( )Labor hours variance ( ) –––––––––––– ( ) –––––––––––– ( )

Problem 1 • Flexible Budgeting

The V. K. Gadget Company has not implemented a formal budgeting process. At the beginning of each quarter, the president of the company simply requests cost estimates from each vice president. No attempt has been made to convert this data into a formal budget. Consequently, the tentative decisions which form the basis of these cost estimates are frequently not executed. In the past, the vice presidents and other managers have felt that these cost estimates were meaningless for purposes of performance evaluation.


At the beginning of the first quarter, the vice presidents were asked to submit cost estimates for their respective areas. Each vice president was informed that sales of 8,500 units was forecasted but that production would be 10,000 units. The following reports were submitted to the president of the company.

Report from Vice President of Production

Cost Per Number of Material: Units Units Material X $6.00 4.0 Freight-in, material X $.50 Material Y $10.00 2.00

Labor (Variable): Rates Hours Cutting department $8.00 1.2 Assembly department $7.00 0.9 Finishing department xxxxx xxxxx

Variable Manufacturing Overhead: Fixed Manufacturing Overhead: Utilities $ 5,000 Fixed direct labor $120,000 Repairs and maintenance $23,000 Utilities $ 4,000 Supplies $ 9,000 Production planning & Spoilage loss $12,000 control $ 8,000 Purchasing & receiving $ 75,000 Factory insurance $ 1,500 Depreciation, prod. equip. $ 21,125 Depreciation, building $ 4,000 Factory supplies $ 1,000 Worker’s training cost $ 8,250

Report of Vice President of Marketing:Selling Expenses

Variable Selling: Fixed selling: Sales people’s comm. $170,000 Sales people’s salaries $483,000 Sales people travel $ 51,000 Sales people training $ 30,600 Packaging $ 12,750 Advertising $280,000 Bad debts $ -0- Sales offices rents $ 9,000 Credit department $ -0- Terr. offices oper. exp. $ 65,000 Home office sales exp. $ 30,000Report of Vice President of Finance:

General and Administrative ExpensesVariable General & Administrative Fixed General & Administrative

Supplies $ 8,500 Executive salaries $95,000 Travel $21,675 Secretarial and clerical $ 9,000 Supplies $14,253 Depreciation, building $ 1,667 Depreciation, F & F $ 2,500


At this date, the plan was to sell one unit of the Gadget for $180.Other income and expenses was budgeted for $6,000.Based on the information presented above, prepare the flexible budgets that

should have been made in prior to the start of the first quarter.Required:

1. Convert all total variable data cost to a per unit basis. Use the work sheet (Form A) that has been provided.

2. Prepare the flexible budget for manufacturing costs (Form B) and selling and general and administrative expenses (Form C).

3. At the end of the first quarter, the actual number of units sold was 8,734. What would be the total selling and total general and administrative cost standard at this level of sales activity?

4. Assume that actual production for the first quarter was 14,960 units. What should be the standard for variable manufacturing costs at this level of activity?

5. State mathematically the flexible budgets prepared on Forms B and C.

6. Discuss the benefits or advantages of using flexible budgeting as opposed to static budgeting.


Form A • Work Sheet for Requirement 1

Flexible Budget Work Sheet

Units of product sold ––––––––––––––––––––Units of product manufactured ––––––––––––––––––––

Selling expenses - variable rates Estimated-Rate per Total Cost Unit of Product Cost of goods sold $ ____________ $ ____________ Sales people’s commissions $ ____________ $ ____________ Packaging $ ____________ $ ____________ Sales people travel $ ____________ $ ____________ Bad debts $ ____________ $ ____________ Credit department $ ____________ $ ____________ Total variable selling $ ____________ $ ____________

General & administrative expenses - variable rates Travel $ ____________ $ ___________ Supplies $ ____________ $ ___________ Total variable G & A $ ____________ $ ___________

Material (rate per product): Material X: Cost per product ( __ x __ ) $ ____________ Freight-in (Mat. X) ( __ x __ ) $ ____________ $ ___________ Material Y: Cost per product ( __ x __ ) $ ____________

Labor: Cutting department ( __ x __ ) $ ___________ Assembly department ( __ x __ ) $ ___________ Finishing Dept. (labor is fixed in this department) $ xxxxx ___________

Manufacturing overhead - variable rates Utilities $ ____________ $ ___________ Repairs & maintenance $ ____________ $ ___________ Supplies $ ____________ $ ___________ Material spoilage loss $ ____________ $ ___________ Total variable overhead $ ____________ $ ___________ Total variable mfg. cost $ ____________


Form B • Work Sheet for Requirement 2

Flexible Budget-Manufacturing

Units of Products Manufactured

Rate 4,000 6,000 8,000 10,000 12,000 14,000

Material: Material X Material Y

Labor: Cutting Dept. Assembly Dept.

Variable Overhead: Utilities Repairs & Main. Supplies Material spoilage

Total variable mfg.

Fixed overhead: Fixed direct labor Utilities Prod. plan. & cont. Pur. and receiv. costs Factory insurance Deprec., prod. equip. Depreciation, building Factory supplies Factory training cost

Total fixed


Form C • Work Sheet for Requirement 2

Flexible Budgets - Selling, General & Administrative

Units of Product Sold

Rate 4,000 6,000 8,000 10,000 12,000 14,000

Variable Selling:Cost of goods soldSales people’s commissionPackagingSales people travelBad debtsCredit department

Total variable selling

Variable General & Admin.TravelSupplies

Total variable G & A

Total variable

Fixed Selling:Sales people’s salariesSales people trainingAdvertisingTerritory sales offices rentalTerritory offices operating expense.Credit departmentHome office sales expense

Total fixed selling

Fixed Gen. & Admin:Executive salariesSecretarial & ClericalSuppliesDepreciation, buildingDepreciation, furniture

Total general & administrative

Total fixed expenses

Total expenses


Problem 2 • Performance Evaluation of Decision-making

Standards used in this problem should be computed based on the flexible budgets prepared in problem no.1; consequently, problem no. 1 should be worked first. The purpose of this problem is to give you practice in performance evaluation by experiencing the process of setting standards and computing variances for the cost of goods manufactured statement and the income statement.

Actual first quarter material and labor cost data that are necessary to this problem but not directly found on the company’s financial statements include the following:

Material Used Data: Material X Units of material used 61,336 Cost per unit $ 6.90 Freight-in per unit $ .60 Material Y Units of material used 32,912 Cost per unit $ 10.08 Freight paid by seller none

Direct Labor Cost Data: Cutting Department Direct labor hours 17,600 Wage rate per hour $ 8.50 Actual direct labor $149,600 Assembly Department Direct labor hours 13,876 Wage rate per hour $ 6.50 Actual direct labor $90,194 Finishing Department -0-

Variable Overhead Cost Data: Utilities $ 5,000 Repairs and maintenance $ 23,000 Supplies $ 9,000 Material spoilage $ 12,000

In the first quarter of the year, the V. K. Gadget Company operated at a loss. The following is a summarized version of the company’s income statement:


V. K. Gadget CompanyIncome Statement

For the quarter ended March 31, 20xx(Direct Costing Basis)

Sales $1,746,800

Variable Expenses: Cost of goods sold $605,669 Selling expenses 274,489 General and administrative 30,344 _______ $910,502Fixed Expenses: Selling $887,735 General and Administrative 109,107 Fixed manufacturing overhead 310,149 _______ 1,306,991 ________ Total Operating expenses 2,217,493 ________Net operating loss ($ 470,693) Other income -0- Other expense (interest) 28,181 Income taxes -199,454 171,273 _______Net loss $(299,420) _________ _________Actual units sold - 8,734Actual units manufactured - 14,960

Required:

1. Based on the above information, compute total variances for all items which appear on the cost of goods manufactured statement and income state-ment. Standards for purposes of this analysis should be based on the use of the flexible budgets prepared in problem 1. Use Forms A and B to com-pute total variances.

2. Based on the flexible budgets prepared in problem 1 compute:a. Total material varianceb. Material price variancec. Material quantity varianced. Total labor variancee. Labor rate variancef. Labor efficiency variance

3. If static budgeting concepts had been used, what level of activity would have been the basis of the standards used for computing variances?


4. Explain or give reasons why in the real world of business actual results would differ from planned values for each of the following:

a. priceb. cost of one unit of materialc. wage rate per hourd. labor hours per unit of producte. number of sales people hiredf. number of factory workers hiredg. selling variable cost rateh. variable overhead rate

Form A • Work Sheet for Requirement 1

PERFORMANCE EVALUATION - INCOME STATEMENT ACCOUNTS

Units Sold Actual Standard VarianceSales Expenses Variable: Selling: Cost of goods sold ____________ ____________ ____________ Selling ____________ ____________ ____________ General and administrative ____________ ____________ ____________

Total variable expenses ____________ ____________ ____________

Fixed: Selling ____________ ____________ ____________General and administrative ____________ ____________ ____________Fixed manufacturing ____________ ____________ ____________

Total fixed ____________ ____________ ____________

Total expenses ____________ ____________ ____________

Operating net income/loss ____________ ____________ ____________ Other income ____________ ____________ ____________ Other expense ____________ ____________ ____________ Net income/loss ____________ ____________ ____________


Form B • Work Sheet for Requirement 1

PERFORMANCE EVALUATION - COST OF GOODS MANUFACTURED

Units Manufactured

Actual Standard VarianceMaterial used: Materials used: X ____________ ____________ ____________ Materials used: Y ____________ ____________ ____________

Direct variable labor: ____________ ____________ ____________ Cutting department ____________ ____________ ____________ Assembly department ____________ ____________ ____________

Variable mfd. overhead: Utilities ____________ ____________ ____________ Repairs & maintenance ____________ ____________ ____________ Supplies ____________ ____________ ____________ Material spoilage loss ____________ ____________ ____________ Total ____________ ____________ ____________Cost of goods manufactured ____________ ____________ ____________Number of units manufactured ____________ ____________ ____________Cost per unit ____________ ____________ ____________

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