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Chapter 8
Performance Evaluation
Standard vs. Actual
• To evaluate managerial performance you
compare standard vs. actual
• Standard Amount – amount mgmt expects to
exist; Companies establish standards for many
different variables including the number of units
made, the sales price of the units, the costs of
the units, and the cost of the resources used to
make the units
Standard vs. Actual
• Actual Amount – the amount that did, in
fact, exist; Companies identify many
different variables for which there are
actual amounts
• Standard – Budgeted Expectation
• Actual – Historical Result
Standard – Actual = Variance
• Variance – Difference between a standard
amount and an actual amount
• A variance can be either favorable or
unfavorable
• Favorable – Did better than you thought
you would
• Unfavorable – Did worse than you thought
you would
Variances
• When actual sales exceed expected sales
– Favorable
• When actual sales are less than expected
– Unfavorable
• When actual costs exceed budgeted costs
– Unfavorable
• When actual costs are less then budgeted
costs
– Favorable
Let’s Try It
Budget
Actual
Selling & Admin
$ 29,000.00
$ 27,000.00
Sales Revenue
$ 310,000.00
$ 325,000.00
Materials Price
2.00 per lb
2.10 per lb
Cost of Goods
Sold
$ 125,000.00
$ 100,000.00
Variance
F or
UF
Let’s Try It
Budget
Actual
F or
UF
Variance
Selling & Admin
$ 29,000.00
$ 27,000.00 $2,000
F
Sales Revenue
$ 310,000.00
$ 325,000.00
$15,000
F
Materials Price
2.00 per lb
2.10 per lb
$0.10 / lb
UF
Cost of Goods
Sold
$ 125,000.00
$ 100,000.00
$25,000
F
Budgets
• Static Budget – Remains unchanged even
if the actual volume of activity differs from
planned volume
= Standard Prices(Costs) * Expected Volume
• Flexible Budget – Show expected
revenues and costs at a variety of volume
levels
= Standard Prices(Costs) * Actual Volume
• Actual Result = Actual Prices(Costs) *
Actual Volume
• Activity (Volume) Variance = Difference
between static budget and flexible budget
• Flexible Budget Variance = Difference
between flexible budget and the actual
results
Static
Budget
Standard
Prices/Costs
X
Expected Units
Flexible
Budget
Standard
Prices/Costs
X
Actual Units
Activity (Volume Variance)
Actual
Results
Actual
Prices/Costs
X
Actual Units
Price (Rate) Variance
Sales Volume Variance
• Difference between the static budget and
the flexible budget
• Static = Budgeted Volume
• Flexible = Actual Volume
Sales Price Variance
• Difference between budgeted and actual
sales price or cost
For Example
• Company expects to sell 18,000 units for
$80 per unit.
• At the end of the quarter, the company
sold 19,000 units for $78 per unit.
• Sales Price Variance
– $80 vs. $78
– Unfavorable
• Sales Volume Variance
– 18,000 vs. 19,000
– Favorable
Static
Budget
Flexible
Budget
Actual
Results
Standard
Prices/Costs
X
Expected Units
Standard
Prices/Costs
X
Actual Units
Actual
Prices/Costs
X
Actual Units
$80 * 18,000
$1,440,000
$80 * 19,000
$1,520,000
$78 * 19,000
$1,482,000
Activity (Volume Variance)
$80,000 – Favorable
Flexible Budget Variance
$38,000 – Unfavorable
$42,000 - Favorable
For Example
Total Sales Variance:
Actual Sales (19,000 * $78) $1,482,000
Expected Sales (18,000 * $80) 1,440,000
Total Sales Variance
$ 42,000
Favorable
Formulas
• Materials Price Variance:
= Actual Price – Standard Price * Actual Quantity
• Materials Usage Variance:
=Actual Quantity – Standard Quantity * Standard Price
• Labor Rate Variance:
= Actual Rate – Standard Rate * Actual Quantity
Example
Standard / Budgeted information:
• Labor: 20 min per painting; $7 wage cost
per hour
• Material: ½ quart of paint per painting; $5
per quart
• Overhead: $3 per labor hour
Actual
• 2010 paintings
• Labor: 700 hrs; $6.90 cost per hour
• Material: 1,100 quarts purchased @ $6;
975 quarts used
Direct Labor Variance
S.P. * S.Q.
$7 * 670 hrs
$4,690
S.P. * A.Q.
$7 * 700 hrs
$4,900
$210
Unfavorable
Quantity
A.P. * A.Q.
$6.90*700 hrs
$4,830
$70
Favorable
Price
$140
Unfavorable
Material Variance Format
Standard Price
Standard Quantity
Standard Price
Actual Quantity
Quantity
Inventory
Standard Price
Actual Quantity
***The actual quantities
are different. One is actual
quantity purchased, the other
is actual quantity used.
Actual Price
Actual Quantity
Price
Material Variance
Standard Price
Standard Quantity
Standard Price
Actual Quantity
$5 * 1005 qts
$5,025
$5 * 975 qts
$4,875
Quantity
Inventory
Standard Price
Actual Quantity
***The actual quantities
$5 * 1100
are different. One is actual
$5,500
quantity purchased, the other
is actual quantity used.
Actual Price
Actual Quantity
$6 * 1100
$6,600
Price
Total Material Variance
• Material - $5,025 - $4,875 = $150
Favorable
• Price - $5,500 - $6,600 = $1,100
Unfavorable
• Inventory - $4,875 - $5,500 = $625
Unfavorable
Total Variance = $1,575 Unfavorable