Performance Evaluation Using
Variances from Standard Costs
LO 2 – Understanding
How Standards are
Used in Budgeting
@ 2012, Cengage Learning
LO 2
Budgetary Performance Evaluation
The control function, or budgetary
performance evaluation, compares the actual
performance against the budget.
LO 2
Budgetary Performance Evaluation
 The standard cost per unit for direct materials, direct
labor, and factory overhead is computed as follows:
Standard
Standard Standard
x
=
Cost Per Unit
Price
Quantity
LO 2
Budgetary Performance Evaluation
Western Rider’s standard costs per unit for XL jeans are
shown in Exhibit 1.
LO 2
Budget Performance Report
The report that summarizes actual costs,
standard costs, and the differences for the
units produced is called a budget performance
report.
LO 2
Budget Performance Report
The differences between actual and standard
costs are called costs variances.
A favorable cost variance occurs when the
actual cost is less than the standard cost (at
actual volumes).
An unfavorable cost variance occurs when the
actual cost exceeds the standard cost.
LO 2
Budget Performance Report
Western Rider produced and sold 5,000 pairs
of XL jeans. It incurred direct materials costs
of $40,150, direct labor costs of $38,500, and
factory overhead costs of $22,400. Western
Rider Inc.’s budget performance report is
shown in Exhibit 2 on the next slide.
LO 2
Budget Performance Report
LO 2
Manufacturing Cost Variances
In examining Exhibit 2, you can see that the
direct materials variance is an unfavorable
$2,650. The amount of blue denim used per
pair of blue jeans may have been different
than expected, and/or the purchase price of
blue denim was higher than expected.
LO 2
Manufacturing Cost Variances
The total manufacturing cost variance is the
difference between total standard costs and
total actual costs for the units produced.
For control purposes, each product cost
variance is separated into two additional
variances as shown in Exhibit 3 (next slide).
LO 2
Manufacturing Cost Variances
LO 2
Manufacturing Cost Variances
 The total direct materials variance is separated into
price and quantity variances.
Price Difference + Quantity Difference
LO 2
Manufacturing Cost Variances
 The total direct labor variance is separated into rate
and time variances.
Rate Difference + Time Difference