Performance measurement under standard costing can be seen in the following example. Assume a pizza company has set $5 as the standard cost of ingredients per pizza. The company anticipates selling 1,000 pizzas during the next week. The budget at the beginning of the week would be $5,000. This amount would be used for planning.
Now, assume the actual number of pizzas sold during the week was 1,200. The standard cost for ingredients to make 1,200 pizzas is $6,000. If the pizza parlor actually used $6,900 in ingredients during the week, there is a $900 variance from standard. This is an unfavorable variance since actual costs exceeded the standard cost for 1,200 pizzas.
This information would be presented on a budget performance report as follows:
Pizza Ingredients: Standard Cost Actual at Actual $6000, Costs 6900, Volume Cost Variance Cost (1,200 pizzas (Favorable)/Unfavorable $900.
1. Assume you are setting standard materials costs for a pizza restaurant. Use the example of a medium sized cheese pizza. How would you determine what standard materials cost should be?
2. Same question but take standard direct labor costs.
3. Did you think about any problems such as a worker dropping a pizza, someone ordering carryout but then not picking it up, etc.? Should those costs change the standard costs? Why or why not?
4. Suppose you have a favorable materials price variance and an unfavorable direct labor time variance. How could these two be related?