Ppt 22

Standard Costingand

Variance Analysis

Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University

Chapter 22

Gail Mestas

Replace book cover with FM 2005e

22–2 Copyright © Houghton Mifflin Company. All rights reserved.

Learning Objectives

1. Define standard costs and describe how managers use standard costs in the management cycle.

2. Explain how standard costs are developed and compute a standard unit cost.

3. Prepare a flexible budget and describe how variance analysis is used to control costs.


Learning Objectives (cont’d)

4. Compute and analyze direct materials variances.

5. Compute and analyze direct labor variances.

6. Compute and analyze manufacturing overhead variances.

7. Explain how variances are used to evaluate managers’ performance.


Standard Costing

• Objective 1– Define standard costs and describe how

managers use standard costs in the management cycle


Standard Costing

… is a method of cost control that includes a measure of actual

performance and a measure of the difference, or variance, between standard and actual performance


Standard Costs

• Realistic estimates of costs– Based on analysis of both past and

projected operating costs and conditions

• Provide a predetermined performance level for the standard costing method

• Usually stated in terms of cost per unit


Standard Costs (cont’d)

• Based on – Past costs

– Engineering estimates

– Forecasted demand

– Worker input

– Time and motion studies

– Type and quality of direct materials


Standard Costing

• How the standard costing method differs from the normal and actual costing methods

Product Cost Elements

Standard Costing

Normal Costing

Actual Costing

Direct Materials Estimated costs Actual costs Actual costs Direct Labor Estimated costs Actual costs Actual costs Manufacturing Overhead Estimated costs Estimated costs Actual costs


Standard Costs and the Management Cycle

• Planning– Managers use standard costs to

• Develop budgets– Direct materials

– Direct labor

– Variable manufacturing overhead

• Establish goals for product costing


Standard Costs and the Management Cycle (cont’d)

• Executing– Managers use standard costs to

• Apply dollar, time, and quality standards to work

• Collect actual cost data



• Reviewing– Managers compare standard and actual

costs• Compute variances

– Provide measures of performance that can be used to control costs and evaluate managers

– Analyze significant variances to determine cause

» Unfavorable variances may reveal operating problems that require correcting

» Favorable variances may indicate favorable practices that should be implemented elsewhere



• Reporting– Managers use standard costs to report on

• Operations

• Managers’ performance

22–13

Standard Costing, Variance Analysis, and the

Management Cycle

Gail Mestas

Insert updated Exhibit 1, segment information for Goodyear Tire & rubber co., chapter 18, POA, 2005e


The Relevance of Standard Costing in Today's Business Environment

• Manufacturing companies– Increased automation

• Significant decrease in direct labor cost– Corresponding decline in importance of labor-related

standard costs and variances

• Many companies now apply standard costing only to direct materials and manufacturing overhead

• Service organizations– Use standard costing for direct labor and service

overhead costs


Discussion

Q. What is the main difference between the standard costing and normal costing methods?

A. The standard costing method uses estimated costs for direct materials and direct labor, whereas the normal costing method uses actual costs for these items

The methods are similar in that both use estimated costs for manufacturing overhead


Computing Standard Costs

• Objective 2– Explain how standard costs are developed

and compute a standard unit cost


Computing Standard Costs

• Fully integrated standard costing system– Uses standard costing for all elements of product

cost• Direct materials

• Direct labor

• Manufacturing overhead

– Inventory accounts and Cost of Goods Sold account

• Maintained and reported in terms of standard costs

• Standard unit costs used to compute account balances

• Actual costs recorded separately– Actual and standard costs can then be compared


Computing Standard Costs (cont’d)

• Six elements of a standard unit cost for a manufactured product

1. Price standard for direct materials

2. Quantity standard for direct materials

3. Standard for direct labor rate

4. Standard for direct labor time

5. Standard for variable overhead rate

6. Standard for fixed overhead rate


Standard Direct Materials Cost

… is found by multiplying the price standard for direct materials by the

quantity standard for direct materials

Standard Direct Materials Cost

= Direct Materials Price Standard x

Direct Materials Quantity Standard


Standard Direct Materials Cost (cont’d)

• Direct materials price standard – Careful estimate of the cost of a specific

direct material in the next accounting period

– Developed by purchasing agent or purchasing department

• Takes into account– All possible price increases

– Changes in available quantities

– New sources of supply


Standard Direct Materials Cost (cont’d)

• Direct materials quantity standard – Estimate of the amount of direct materials that will

be used in the accounting period• Includes scrap and waste

– Influenced by • Product engineering specifications• Quality of direct materials• Age and productivity of machinery• Quality and experience of work force

– Established and monitored by • Production managers• Management accountants• Others

– Engineers, purchasing agents, machine operators


Standard Direct Labor Cost

… for a product, task, or job is calculated by multiplying

the standard wage for direct labor by the standard hours of direct labor

Standard Direct Labor Cost

= Direct Labor Rate Standard x

Direct Labor Time Standard


Standard Direct Labor Cost (cont’d)

• Direct labor rate standard– Hourly direct labor rate expected to prevail

during the next accounting period• For each function or job classification

– Average standard rate is developed for each task

• Standard rate is used even if worker is paid more or less than the standard rate

– Easy to establish• Rates are set by labor unions or defined by the

company


Standard Direct Labor Cost (cont’d)

• Direct labor time standard– Expected time required for each department,

machine, or process to complete the production of one unit or one batch of output

– Developed using• Current time and motion studies of workers and

machines

• Records of past performance

– Should be revised when• Machinery is replaced

• Quality of work force changes


Standard Manufacturing Overhead Cost

… is the sum of the estimates of variable and fixed overhead costs in the next

accounting period

• Two parts– Variable costs and fixed costs

• Compute separately because their cost behavior differs


Standard Manufacturing Overhead Cost (cont’d)

• Standard variable overhead rate– Computed by dividing the total budgeted

variable overhead costs by an expression of capacity, such as number of standard direct labor hours or standard machine hours

Total Budgeted Variable Overhead Costs Standard Variable Overhead Rate

= Expected Number of Standard Machine Hours


Standard Manufacturing Overhead Cost (cont’d)

• Standard fixed overhead rate– Computed by dividing the total budgeted

fixed overhead costs by an expression of capacity, usually normal capacity in terms of standard hours or units

• Denominator expressed in same terms as the variable overhead rate

Total Budgeted Fixed Overhead Costs Standard Fixed Overhead Rate

= Normal Capacity in Terms of Standard Machine Hours

Normal capacity is the level of operating capacity needed to meet expected sales demand

Its use ensures that all fixed OH* costs have been applied to units produced by the time normal capacity is reached*Overhead


Total Standard Unit CostDirect materials price standards Casing materials $9.20 per square foot Movement mechanism $2.17 each Direct materials quantity standards Casing materials .025 square foot per watch Movement mechanism 1 per watch Direct labor time standards Case Stamping Department .01 hour per watch Watch Assembly Department .05 hour per watch Direct labor rate standards Case Stamping Department $8.00 per hour Watch Assembly Department $10.20 per hour Standard manufacturing overhead rates Standard variable overhead rate $12.00 per direct labor hour Standard fixed overhead rate $9.00 per direct labor hour

Remember When, Inc., recently updated the standards for its line of watches

Compute the total standard cost of one watch

Direct materials costs Casing ($9.20 per sq.ft. x .025 sq.ft.) $ .23 One movement mechanism 2.17 Direct labor costs Case Stamping Dept. ($8.00 per hour x .01 hour per watch) .08 Watch Assembly Dept. (10.20 per hour x .05 hour per watch) .51 Variable overhead ($12.00 per hour x .06 hour per watch) .72 Total standard variable cost of one watch $3.71 Fixed overhead ($9.00 per hour x .06 hour per watch) .54 Total standard cost of one watch $4.25


Discussion

Q. Why are the variable and fixed components for the standard manufacturing overhead cost computed separately?

A. Variable costs and fixed costs are computed separately because their cost behavior differs


Variance Analysis

• Objective 3– Prepare a flexible budget and describe

how variance analysis is used to control costs


Variance Analysis

… is the process of computing the differences between standard costs and actual costs and identifying the causes

of those differences

• Managers use – Flexible budgets to improve variance analysis

– Variance analysis to control costs


The Role of Flexible Budgets in Variance Analysis

• Accuracy of variance analysis depends greatly on the type of budget managers use when comparing variances– Static budget

– Flexible budget


The Role of Flexible Budgets in Variance Analysis (cont’d)

• Static budget– Also called fixed budget

– Forecasts revenues and expenses for just one level of sales and just one level of output

• Does not allow for changes in output level– If actual output differs from budgeted output, a

variance between actual and budgeted amounts will occur

» Cannot judge performance accurately


Performance Report Using Data from a Static Budget

Gail Mestas

Insert updated exhibit 1, performance report using data from a static budget, chpater 25, POA, 2005e



• Flexible budget– Also called variable budget

– Summary of expected costs for a range of activity levels

• Provides forecasted data that can be adjusted for changes in output level

– Used primarily as a cost control tool in evaluating performance



• Flexible budget formula– An equation that determines the expected,

or budgeted, cost for any level of output• Includes

– Per unit amount for variable costs

– Total amount for fixed costs

Costs Fixed Budgeted Produced) Unitsof No. per Unit Cost (Variable Costs Budgeted Total


Flexible Budget for Evaluation of Overall Performance

Gail Mestas

Insert updated exhbit 2, flexible budget for evaluation of overall performance, chapter 25, POA, 2005e



• The flexible budget formula for Remember When, Inc. is

• The company produced 19,100 units during 20x5

$9,450 Produced) Unitsof No. ($3.71 Costs Budgeted Total

$9,450 19,100) ($3.71 Costs Budgeted Total

$9,450 $70,861

$80,311


Performance Report Using Data from a Flexible Budget

Gail Mestas

Insert exhibit 3, performance report using data from a flexible budget, chapter 25, POA, 2005e


Using Variance Analysis to Control Costs

Compute variance

Is the variance significant?

No corrective action needed

No

Yes

Analyze variance todetermine its cause

Select performance measures to correct

the problem

Take corrective action

Step 1

Step 2

Step 3

Step 4


Using Variance Analysis to Control Costs (cont’d)

• Computing the amount of a variance is important– But, this does not prevent the variance

from reoccurring

– Must determine its cause• Select performance measures that will help

track the problem

• Must then find the best solution


Discussion

Q. What is the flexible budget formula?

A. It is an equation used to determine expected, or budgeted cost for any level of output

per Unit Cost (Variable Costs Budgeted Total

Produced) Unitsof No.

Costs Fixed Budgeted


Computing and Analyzing Direct Materials Variances

• Objective 4– Compute and analyze direct materials

variances


Computing and Analyzing Direct Materials Variances

• To control operations, managers compute and analyze variances for– Whole cost categories

• Such as total direct materials costs

– Elements of those categories• Such as the price and quantity of each direct

material

The more detailed the analysis of a variance is, the more effective managers will be in controlling costs


Computing Direct Materials Variances

• Total direct materials cost variance– Difference between the standard cost and

actual cost of direct materials


Computing Direct Materials Variances

Cambria Company makes leather bags. Each bag should use 4 feet of leather (standard quantity), and the standard price of leather is $6.00 per foot. During August, the company purchased 760 feet of leather costing $5.90 per foot and used the leather to produce 180 bags

cost Standard

bag)per feet 4 bags (180foot per $6.00$4,320 720foot per $6.00

cost actual Less

4,484 760foot per $5.90

quantity standard price Standard

quantity actual price Actual

ncecost varia materialsdirect Total (U) 164 $

Actual cost > standard cost

This is an unfavorable (U) situation


Computing Direct Materials Variances (cont’d)

• Total direct materials cost variance must be broken into two parts to find the cause of the variance– Direct materials price variance

– Direct materials quantity variance



• Direct materials price variance– Difference between the standard price and the

actual price per unit multiplied by the actual quantity purchased

– Also called the direct materials spending or rate variance

Price) Actual Price (Standard Variance Price MaterialsDirect Quantity Actual

feet 760 $5.90) ($6.00

Because the company paid less for direct materials than it expected, the variance is favorable (F)

(F) $76



• Direct materials quantity variance– Difference between the standard quantity and the

actual quantity used multiplied by the standard price

– Also called the direct materials efficiency or usage variance

Quantity (Standard Price Standard VarianceQuantity MaterialsDirect Quantity) Actual Allowed

feet) 760 feet (720 foot per $6.00

Because the company used more for direct materials than it expected, the variance is unfavorable (U)

(U) $240



• Test calculations of variances– If correct, the net of the direct materials

price variance and direct materials quantity variance will equal the total direct materials cost variance

Direct materials price variance $ 76 (F) Direct materials quantity variance 240 (U) Total direct materials cost variance $164 (U)


Diagram of Direct Materials Variance Analysis

Gail Mestas

INsert updated figure 3, diagram of direct materials varinace analysis, chapter 25, POA, 2005e


Analyzing and Correcting Direct Materials Variances

• Company had been experiencing direct materials price variances and quantity variances for some time

• For three months, managers tracked – Purchasing activities

• Discovered that the purchasing agent had purchased, without authorization, a lower grade of leather at a reduced price

– After analysis, engineers determined the lower grade of leather was not appropriate

– Scrap and rework• Discovered that inferior leather was causing the

unfavorable quantity variance


Discussion

Q. What is the direct materials price variance?

A. It is the difference between the standard price and the actual price per unit multiplied by the actual quantity purchased. It is also called the direct materials spending or rate variance

Price) Actual Price (Standard Variance Price MaterialsDirect Quantity Actual


Computing and Analyzing Direct Labor Variances

• Objective 5– Compute and analyze direct labor

variances


Computing Direct Labor Variances

• Total direct labor cost variance– Difference between the standard direct

labor cost for good units produced and actual direct labor costs

• Good units are the total units produced less units that are scrapped or need to be reworked


Computing Direct Labor Variances (cont’d)

At Cambria Company, each leather bag requires 2.4 standard direct labor hours, and the standard direct labor rate is $8.50 per hour. During August, 450 direct labor hours were used to make 180 bags at an average pay rate of $9.20 per hour

cost Standard

bag)per hours 2.4 bags (180foot per $8.50$3,672 hours 432hour per $8.50

cost actual Less

4,140 hours 450 hour per $9.20

allowed hours standard rate Standard

hours actual rate Actual

ncecost varialabor direct Total (U) 468 $




• Total direct labor cost variance must be broken onto two parts to find the cause of the variance– Direct labor rate variance

– Direct labor efficiency variance



• Direct labor rate variance– Difference between the standard direct labor rate

and the actual direct labor rate multiplied by the actual direct labor hours worked

– Also called the direct labor spending variance

Rate) Actual Rate (Standard Variance RateLabor Direct

Hours Actual hours 450 $9.20) ($8.50

(U) $315

Because the company paid more per hour for direct labor than it expected, the variance is unfavorable



• Direct labor efficiency variance– Difference between the standard direct labor hours

allowed for good units produced and the actual direct labor hours worked multiplied by the standard direct labor rate

– Also called the direct labor quantity or usage variance

Allowed Hours (Standard Rate Standard Variance EfficiencyLabor Direct Hours) Actual

hours) 450 hours (432 hour per $8.50

(U) $153

Because the company used more direct labor hours than it expected, the variance is unfavorable (U)



• Test calculations of variances– If correct, the net of the direct labor rate

variance and direct labor efficiency variance will equal the total direct labor cost variance

Direct labor rate variance $ 315 (U) Direct labor efficiency variance 153 (U) Total direct labor cost variance $468 (U)

22–61

Diagram of Direct Labor

Variance Analysis

Gail Mestas



Analyzing and Correcting Direct Labor Variances

• Managers analyzed – Employee time cards

• An assembly worker who had fallen ill was replaced with a machinery operator from another department

– Assembly worker is paid $8.50 per hour and the machine operator is paid $9.20 per hour

– Machine operator not as skilled as the assembly worker

» Temporary situation so no corrective action taken

– Materials handling• Parts delivered late on five occasions

– Will track delivery time and number of delays for next three months


Discussion

Q. What is the direct labor efficiency variance?

A. The direct labor efficiency variance is the difference between the standard direct labor hours allowed for good units produced and the actual direct labor hours worked multiplied by the standard direct labor rate. It is also called the direct labor quantity or usage variance

Hours (Standard Rate Standard Variance EfficiencyLabor Direct Hours) Actual Allowed


Computing and Analyzing Manufacturing Overhead Variances

• Objective 6– Compute and analyze manufacturing

overhead variances


Computing and Analyzing Manufacturing Overhead Variances

• Controlling variable and fixed overhead costs is more difficult for managers than controlling direct materials and direct labor costs– Responsibility for manufacturing overhead costs is

hard to assign• Fixed overhead costs

– Unavoidable past costs

– Not under the control of any department manager

• Variable overhead costs– Some control possible if they can be related to

departments or activities


Using a Flexible Budget to Analyze Manufacturing Overhead Variances

• Cambria Company’s managers use a flexible budget to evaluate performance– For manufacturing overhead costs only

– Evaluate activity level using direct labor hours

• Variable costs vary with the number of direct labor hours worked

• Total fixed overhead costs remain constant

22–67

Flexible Budget for

Evaluation of Manufacturing

Overhead Costs

Gail Mestas



Using a Flexible Budget to Analyze Manufacturing Overhead Variances

• Flexible budget formula

• Flexible budget formula when applied to Cambria’s data

Hour Labor Direct per Costs (Variable Costs OH Budgeted Total

Hours)Labor Direct ofNumber

Costs OH Fixed Budgeted

Hours)Labor Direct of No. ($5.75 Costs OH Budgeted Total

$1,300

To find the total monthly budgeted overhead costs, insert direct labor hours into the flexible budget


Computing Manufacturing Overhead Variances

• Total manufacturing overhead variance– Difference between actual overhead costs

and standard overhead costs• Standard overhead costs are applied to

production using a standard overhead rate– Standard overhead rate has two parts

» Variable

» Fixed


Computing Manufacturing Overhead Variances (cont’d)

For Cambria Company, the standard variable overhead rate is $5.75 per direct labor hour (from the flexible budget). Total budgeted overhead is $1,300 by normal capacity, which is 400 direct labor hours.

rate overhead Fixed

$3.25 hourslabor direct 400 $1,300

rate overhead standard Total

$9.00 $3.25 $5.75

capacity normal overhead fixed Budgeted

rate overhead fixed standard rate overhead variableStandard


Computing Manufacturing Overhead Variances (cont’d)

For Cambria Company, the standard variable overhead rate is $5.75 per direct labor hour (from the flexible budget). Total budgeted overhead is $1,300 by normal capacity, which is 400 direct labor hours.

888,3$ bag)per hours 2.4 bags (180hour labor direct per $9.00 costs overhead actual Less

produced units good toapplied costs OH Standard

varianceoverhead ingmanufactur Total (U) 212 $

This amount can be divided into variable overhead variances and fixed overhead variances

produced units good No.( rate OH standard Total allowed) hours standard

4,100



Variable Overhead Variance

• Total variable overhead variance– Difference between actual variable

overhead costs and the standard variable overhead costs that are applied to good units produced using the standard variable rate


Variable Overhead Variances (cont’d)

At Cambria Company, each leather bag requires 2.4 standard labor hours and the variable overhead rate is $5.75 per direct labor hour. During August, the company incurred $2,500 of variable overhead costs


bag)per hours 2.4 bags (180hour per $5.75

cost actual Less

produced units good toapplied Overhead

ncecost varia overhead variableTotal (U) 16 $

allowed hourslabor direct standard rate variableStandard

2,500$2,484 hours 432 hour per $5.75

22–74

Diagram of Variable

Overhead Variance Analysis

Gail Mestas




• Total variable overhead cost variance must be broken into two parts to find the cause of the variance– Variable overhead spending variance

– Variable overhead efficiency variance



• Variable overhead spending variance– Difference between the budgeted variable

overhead costs at actual hours and actual variable overhead

Hours Actualat Costs Variable Budgeted Variance Spending OH Variable Overhead Variable Actual

Actual Rate Variable (Standard OH Variable Actual Worked)Hours

$2,500 hours) 450 ($5.75 (F) $87.50



• Variable overhead efficiency variance– Difference between the standard direct

labor hours allowed for good units produced and the actual hours worked multiplied by the standard variable overhead rate

(Standard Rate Variable Standard Variance Efficiency OH Variable

Hours) Actual Allowed Hours


• Compute standard hours allowed

• Compute variable overhead efficiency variance


hours) 450 hours (432 $5.75

Bagper Hours Standard Produced UnitsGood Allowed Hours Standard bagper hours 2.4 bags 180

hours 432

(U) 50.103$

(Standard Rate Variable Standard Variance Efficiency OH Variable

Hours) Actual Allowed Hours



• Test calculations of variances– If correct, the net of the variable overhead

spending variance and variable overhead efficiency variance will equal the total variable overhead cost variance

Variable overhead spending variance $ 87.50 (F) Variable overhead efficiency variance 103.50 (U) Total variable overhead cost variance $ 16.00 (U)


Fixed Overhead Variances

• Total fixed overhead variance– Difference between actual fixed overhead

costs and the standard fixed overhead costs that are applied to good units produced using the standard fixed overhead rate

22–81

Diagram of Fixed

Overhead Variance Analysis

Gail Mestas



Fixed Overhead Variances (cont’d)

At Cambria Company, each leather bag requires 2.4 standard direct labor hours and the standard fixed overhead rate is $3.25 per direct labor hour. During August, the company incurred $1,600 of actual fixed overhead costs

bag)per hours 2.4 bags (180hour per $3.25

produced units good toapplied Overhead

ncecost varia overhead fixed Total (U) 196 $

allowed hourslabor direct standard rate fixed Standard

cost actual Less 1,600$1,404 hours 432 hour per $3.25



• Total fixed overhead cost variance must be broken into two parts to find the cause of the variance– Fixed overhead budget variance

– Fixed overhead volume variance



• Fixed overhead budget variance– Difference between the budgeted and

actual fixed overhead costs

– Also called budgeted fixed overhead variance

Overhead Fixed Budgeted VarianceBudget OH Fixed

Overhead Fixed Actual

$1,600 $1,300

(U) $300



• Fixed overhead volume variance– Difference between budgeted fixed

overhead costs and manufacturing overhead costs applied to production using the standard fixed overhead rate

hourslabor direct 432for applied OH fixed Standard

bag)per hours 2.4 bags (180 hour labor direct per $3.25 $1,404

overhead fixed budgeted totalLess 1,300

ncecost varia overhead variableTotal (F) 104 $



• A volume variance will occur if more or less than normal capacity is used– Fixed overhead volume variance measures the

use of existing facilities and capacity

– Favorable overhead volume variance• Capacity exceeds the expected amount

– Unfavorable overhead volume variance• Company operates at a level below normal capacity

– May be in best interest of company during periods of slow sales

– Means company is not building up excess inventory


Summary of Manufacturing Overhead Variances

Variable overhead spending variance $ 87.50 (F) Variable overhead efficiency variance 103.50 (U) Fixed overhead budget variance 300.00 (U) Fixed overhead volume variance 104.00 (F) Total manufacturing overhead variance $212.00 (U)


Analyzing and Correcting Manufacturing Overhead Variances

Variance Amount Cause Corrective Action Variable overhead spending variance

$87.50 (F) Savings on purchases No action

Variable overhead efficiency variance

103.50 (U) Inefficiency of machine operator who substituted for ill assembly worker

Consider feasibility of implementing a program for cross-training employees

Fixed overhead budget variance

300.00 (U)

Higher than expected factory insurance premiums due to increased claims filed by employees

Study insurance claims filed over a three-month period

Fixed overhead volume variance

104.00 (F) Overutilization of capacity traced to high seasonal demand

No action necessary because variance fell within anticipated range


Discussion

Q. What four variances are used to analyze the total manufacturing overhead variance?

A. Variable overhead spending variance

Variable overhead efficiency variance

Fixed overhead budget variance

Fixed overhead volume variance


Using Cost Variances to Evaluate Managers’ Performance

• Objective 7– Explain how variances are used to

evaluate managers’ performance


Using Cost Variances to Evaluate Managers’ Performance

• The effectiveness and fairness of a manager's performance evaluation depends on– Human factors

– Company policies• Should be based on input from managers and

employees

• Should specify procedures that managers are to use


Using Cost Variances to Evaluate Managers’ Performance (cont’d)

• Procedures that should be specified for managers – Preparing operational plans– Assigning responsibility for carrying out the

operational plans– Communicating operational plans to key personnel– Evaluating performance in each area of

responsibility– Identifying causes of significant variances from the

operational plan– Taking corrective action to eliminate problems



• Variance analysis– Provides detailed data about differences

between standard and actual costs• Effective at pinpointing efficient and inefficient

operating areas– Basic comparison of budgeted and actual data not

as effective



• Effective managerial performance reports based on standard costs and related variances should – Identify

• Causes of the differences

• Personnel involved

• Corrective actions taken

– Be tailored to the manager’s specific areas of responsibility

• Explain clearly and accurately in what way the manager’s department did or did not meet operating expectations

Managers should only be held accountable for cost areas under their control



• Managerial performance reports should– Summarize all cost data

– Include variances for direct materials, direct labor, and manufacturing overhead

– Identify• Causes of variances

• Corrective actions taken



• The occurrence of a variance does not indicate poor performance

• If a variance consistently occurs, its cause is not identified, and no corrective action is taken, it may indicate poor performance on the part of the manager


Discussion

Q. What items should be included in an effective managerial performance report?

A. Summarization of all cost data

Variances for direct materials, direct labor, and manufacturing overhead

Identification of the causes of the variances, personnel involved, and any corrective actions taken


Time for Review

1. Define standard costs and describe how managers use standard costs in the management cycle

2. Explain how standard costs are developed and compute a standard unit cost

3. Prepare a flexible budget and describe how variance analysis is used to control costs


And Finally…

4. Compute and analyze direct materials variances

5. Compute and analyze direct labor variances

6. Compute and analyze manufacturing overhead variances

7. Explain how variances are used to evaluate managers’ performance

Ppt 22

Documents

select performance

good units

total budgeted

manufacturing

direct materials

fixed overhead

fixed overhead

evaluate managers