Variances+Example

# Variances+Example - Chapter 21 Chapter 21 Performance...

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1 Chapter Chapter 21 21 Performance Evaluation Using Performance Evaluation Using Variances from Standard Costs Variances from Standard Costs Financial and Managerial Accounting 8th Edition Warren Reeve Fess

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2 1. Describe the types of standards and how they are established for businesses. 2. Explain and illustrate how standards are used in budgeting. 3. Calculate and interpret direct materials price and quantity variances. 4. Calculate and interpret direct labor rate and time variances. Objectives Objectives
3 6. Journalize the entries for recording standards in the accounts and prepare an income statement that includes variances from standards. 7. Explain how standards may be used for nonmanufacturing expenses. 8. Explain and provide examples of nonfinancial performance measures. Objectives Objectives 5. Calculate and interpret factory overhead controllable and volume variances.

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4 Standards—Performance Benchmarks Standards—Performance Benchmarks Requires joint efforts of accountants, engineers, and other management personnel Setting Standards Setting Standards Reviewing and Revising Standards Reviewing and Revising Standards Should be revised when they no longer reflect operating conditions they intended to measure Types of Standards Types of Standards Theoretical or ideal (world record) standards Currently attainable standards (normal standards)
5 Western Rider Inc., a manufacturer of blue jeans, uses standard manufacturing costs in its budgets.

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6 Western Rider Inc. Standard Cost per Pair of XL Jeans Direct materials: \$5.00 per square yard x 1.5 square yards = \$ 7.50 Direct labor: \$9.00 per hour x 0.80 hour per pair = 7.20 Factory overhead: \$6.00 per hour x 0.80 hour per pair = 4.80 Total standard cost per pair \$19.50
7 Western Rider Inc. Budget Performance Report For the Month Ended June 30, 2006 Direct materials \$ 40,150 \$37,500 \$2,650 Standard Cost Cost at Actual Variance Actual Volume (favorable) Manufacturing Costs Costs (5,000 units) Unfavorable Direct labor 38,500 36,000 2,500 Factory overhead 22,400 24,000 (1,600 ) Total mfg. costs \$101,050 \$97,500 \$3,550

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8 Total Total Manufacturing Manufacturing Cost Variance Cost Variance Direct Materials Price Variance Direct Materials Qty Variance Direct Labor Rate Variance Direct Labor Time Variance Variable Factory Overhead Controllable Variance Fixed Factory Overhead Volume Variance Direct Direct Materials Materials Cost Variance Cost Variance Direct Direct Labor Labor Cost Variance Cost Variance Factory Factory Overhead Overhead Cost Variance Cost Variance
9

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Direct Materials Price Variance Direct Materials Price Variance Actual price per unit \$5.50 per sq. yd. Standard price per unit 5.00 per sq. yd. Price variance (unfavorable)
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Variances+Example - Chapter 21 Chapter 21 Performance...

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