accounting #2 #2
The purchasing manager is generally responsible for the material price variance while the production manager is responsible for the
material quantity variance
These two amounts differ because the flexible budget based on two cost drivers is
more accurate than the flexible budget based on one driver.
Variances are more accurate when using:
multiple cost drivers
Many factors influence materials purchase prices including the
quantity and quality of materials purchased, the number of purchase orders placed with suppliers, how the purchased materials are delivered, and whether the materials are purchased in a rush order. If any of these factors deviates from what was assumed when the standards were set, a materials price variance can result.
overtime premiums can lead to
unfavorable labor rate variances
A fixed overhead volume variance results from treating fixed manufacturing costs as if they are
variable
If activity is higher than expected, variable costs should be higher than expected; and if activity is lower than expected
variable costs should be lower than expected.
when direct labor is used as the overhead allocation base the variable overhead efficiency variance
will be favorable when the direct labor efficency variance is favorable
The production manager is ordinarily responsible for the materials quantity variance. If the actual price were used in the calculation of the materials quantity variance, the production manager's performance evaluation
would be unfairly influenced by the efficiency or inefficiency of the purchasing manager.
Price Variance
difference between the actual amount paid for an input and the standard amount that should have been paid, multiplied by the actual amount of the input purchased
When budgeted fixed overhead costs is less than fixed overhead applied to work in process, the volume variance is labeled
favorable
when the standard cost allowed for the actual output is less than the standard cost allowed for the planned out put this is
favorable
a favorable labor rate variance is not always
favorable for a company
comparing actual costs to static planning budget costs only makes sense if the costs are
fixed
Because all of the variances on this report are solely due to the difference between the actual level of activity and the level of activity in the planning budget from the beginning of the period, they are called
activity variances
flexible budget performance report consists of
activity variances, spending variances, revenue, planning budget, flexible budget and actual results
variable overehad efficency may depend on
the efficiency of direct labor
Estimates of what revenues and costs should have been based on the actual level of activity are shown on the ___ budget
flexible budget
one of the common errors in preparing performance reports is to implicitly assume that all costs are variable
true
activity variance
subtract planning budget from flexible budget
Quantity Variance Formula
(AQ - SQ) x SP or compare the AQxSP and SQxSP
materials price variance formula
(AQ x AP) - (AQ x SP)
Materials Quantity Variance Formula
(AQ x SP) - (SQ x SP)
spending variance formula
(AQxAP)-(SQ standard quan xS P standard price)
standard quantity per unit
The amount of an input that should be required to complete a single unit of product, including allowances for normal waste, spoilage, rejects, and other normal inefficiencies.
standard quantity allowed
The amount of an input that should have been used to complete the period's actual output. It is computed by multiplying the actual number of units produced by the standard quantity per unit.
flexible budget
s an estimate of what revenues and costs should have been, given the actual level of activity for the period. When a flexible budget is used in performance evaluation, actual costs are compared to what the costs should have been for the actual level of activity during the period rather than to the static planning budget. This is a very important distinction. If adjustments for the level of activity are not made, it is very difficult to interpret discrepancies between budgeted and actual costs.
quantity standards
specify how much of an input should be used to make a product or provide a service
price standards
specify how much should be paid for each unit of the input.
price and quantity variances usually have different causes
that is why they are seperated
how production supervisors use direct labor worker can lead to
labor rate variances
Labor rate variance = (AH × AR) − (AH × SR) Labor rate variance = AH(AR − SR) Labor rate variance = 1,050 hours ($21.60 per hour − $22.00 per hour) Labor rate variance = $420 F Labor Efficiency Variance: Labor efficiency variance = (AH × SR) − (SH × SR) Labor efficiency variance = SR(AH − SH) Labor efficiency variance = $22.00 per hour (1,050 hours − 1,000 hours) Labor efficiency variance = $1,100 U where: AH = Actual quantity of labor-hours used in production SH = Standard quantity of labor-hours allowed for the actual output AR = Actual rate per direct labor-hour SR = Standard rate per direct labor-hour
labor vairance
budgeted profit and actual profit can have discrepancies because of
level of activity being different
If overhead is over-applied, the total of the standard cost overhead variances is
favorable
revenue variance
flexible budget and actual results difference
what shows u what costs are effected by changes in level of activity
flexible budget
changes in activity have no impact on actual fixed costs within the relevant range
true
fixed costs are applied to work in process like they are variable costs
true
spending variance formula
(AQxAP)-(SQxSP)
Price Variance Formula
(actual price of input - budgeted price of input) x actual quantity of input
fancy nails budgeted rev is 20 dollars per manicure. The planning budget for june was based on 2400 manicures. During JUne, the actula rev was 49750 for 2500 manicures. The revenue variance for June is:
Flexible Budget amount for revenue= 20$ per manicure x 2500 manicures = 50000! Revenue Variance = 50000-49750=250 unfavorable
The activity variances shown in the exhibit are computed by taking the amounts in the flexible budget column and subtracting the amounts in the planning budget column.
For all three variable manufacturing costs, these computations result in negative numbers and what are labeled as favorable (F) variances. T\ label favorable is used in these instances because the standard cost allowed for the actual output is less than the standard cost allowed for the planned output. H
The spending variances shown in are computed by taking the amounts in the actual results column and subtracting the amounts in the flexible budget column. For all three variable manufacturing costs, this computation results in a positive number .Because, in all three instances, the actual cost incurred exceeds the standard cost allowed for the actual level of output, the variance is labeled unfavorable (U).
Had any of the actual costs incurred been less than the standard cost allowed for the actual level of output, the corresponding variances would have been labeled favorable (F).
Performance reports are often prepared for organizations that do not have any source of outside revenue
In particular, in a large organization a performance report may be prepared for each department—including departments that do not sell anything to outsiders.
labor variance examples
Nevertheless, rate variances can arise based on how production supervisors use their direct labor workers. Skilled workers with high hourly rates of pay may be given duties that require little skill and call for lower hourly rates of pay. This will result in an unfavorable labor rate variance because the actual hourly rate of pay will exceed the standard rate specified for the particular task. In contrast, a favorable rate variance would result when workers who are paid at a rate lower than specified in the standard are assigned to the task. However, the lower-paid workers may not be as efficient. Finally, overtime work at premium rates will result in an unfavorable labor rate variance if the overtime premium is charged to the direct labor account. Possible causes of an unfavorable labor efficiency variance include poorly trained or motivated workers; poor-quality materials, requiring more labor time; faulty equipment, causing breakdowns and work interruptions; and poor supervision of workers. The managers in charge of production would usually be responsible for control of the labor efficiency variance. However, the purchasing manager could be held responsible if the purchase of poor-quality materials resulted in excessive labor processing time. Another important cause of an unfavorable labor efficiency variance may be insufficient demand for the company's products.
cost center performance reports
Performance reports are often prepared for organizations that do not have any source of outside revenue. In particular, in a large organization a performance report may be prepared for each department—including departments that do not sell anything to outsiders. For example, a performance report is very commonly prepared for production departments in manufacturing companies. Such reports should be prepared using the same principles we have discussed and should look very much like the performance report in Exhibit 9-8—with the exception that revenue, and consequently net operating income, will not appear on the report. Because the managers in these departments are responsible for costs, but not revenues, they are often called cost centers.
standard hours per unit
The amount of direct labor time that should be required to complete a single unit of product, including allowances for breaks, machine downtime, cleanup, rejects, and other normal inefficiencies.
Variable Overhead Efficiency Variance
The difference between the actual level of activity (direct labor-hours, machine-hours, or some other base) and the standard activity allowed, multiplied by the variable part of the predetermined overhead rate.
Materials Price Variance
The difference between the actual unit price paid for an item and the standard price, multiplied by the quantity purchased.
Variable Overhead Rate Variance
The difference between the actual variable overhead cost incurred during a period and the standard cost that should have been incurred based on the actual activity of the period.
what should the variance analysis cycle do
The emphasis should be on highlighting superior and unsatisfactory results, finding the root causes of these outcomes, and then replicating the sources of superior achievement and eliminating the sources of unsatisfactory performance. The variance analysis cycle should not be used to assign blame for poor performance.
Because of the existence of fixed costs, net operating income does not change in proportion to changes in the level of activity. There is a leverage effect.
The percentage changes in net operating income are ordinarily larger than the percentage increases in activity.
difference for non profit
The performance reports in nonprofit organizations are basically the same as the performance reports we have considered so far—with one prominent difference. Nonprofit organizations usually receive a significant amount of funding from sources other than sales
standard hours allowed
The time that should have been taken to complete the period's output. It is computed by multiplying the actual number of units produced by the standard hours per unit.
why could spending variance happen?
There are many possible explanations including paying a higher price for inputs than should have been paid, using too many inputs for the actual level of activity, a change in technology, and so on. In the next chapter we will explore these types of explanations in greater detail.
Excessive materials usage can result from many factors, including faulty machines, inferior materials quality, untrained workers, and poor supervision. Generally speaking, it is the responsibility of the production manager to see that material usage is kept in line with standards.
There may be times, however, when the purchasing manager is responsible for an unfavorable materials quantity variance. For example, if the purchasing manager buys inferior materials at a lower price, the materials may be unsuitable for use and may result in excessive waste. Thus, the purchasing manager rather than the production manager would be responsible for the materials quantity variance.
management by expectation
a management system that compares actual results to a budget so that significant deviations can be flagged as exceptions and investigated further. This approach enables managers to focus on the most important variances while bypassing trivial discrepancies between the budget and actual results.
electricity is
a mixed cost. fixed element and client visit
increasing number of clients will increase
activity variance
unfavorable variance of 5000 dollars in sales is determined by comparing the flexible budget (9000units) and the planning budget(10000units) what type of variance is described
activity variance
the calculation of the budget variance uses
actual fixed overhead and budgeted fixed overhead
standard quantity allowed
actual output x standard quantity per unit
volume variance
budgeted fixed overhead-fixed overhead applied to work in process
the standard price per unit for direct materials
can change based on changes in the delivery method
flexible budget prefromance report
combines activity and spending variances and revenue
standard rate per hour
defines the company's expected direct labor wage rate per hour, including employment taxes and fringe benefits. Using wage records and in consultation with the production manager
standard price per unit
defines the price that should be paid for each unit of direct materials and it should reflect the final, delivered cost of those materials
revenue variance
difference between what revenue should have been at the actual level of activity and the actual revenue
leverage effect
effects net operating income
If customer orders are insufficient to keep the workers busy, the work center manager has two options—
either accept an unfavorable labor efficiency variance or build inventory
Materials Price Variance: Materials price variance = (AQ × AP) − (AQ × SP) Materials price variance = AQ(AP − SP) Materials price variance = 6,500 pounds ($3.80 per pound − $4.00 per pound) Materials price variance = $1,300 F Materials Quantity Variance: Materials quantity variance = (AQ × SP) − (SQ × SP) Materials quantity variance = SP(AQ − SQ) Materials quantity variance = $4.00 per pound (6,500 pounds − 6,000 pounds) Materials quantity variance = $2,000 U where: AQ = Actual quantity of inputs purchased and used in production SQ = Standard quantity of inputs allowed for the actual output AP = Actual price per unit of the input SP = Standard price per unit of the input
equatttioonnsss of materials price variance and materials quantity variance
volume variance
error that occurs when the level of activity is estimated incorrectly
standard cost per unit
for all three variable manufacturing costs is computed the same way. The standard quantity (or hours) per unit is multiplied by the standard price (or rate) per unit to obtain the standard cost per unit.
the volume variance
has no relationship to actual spending
Non-profit organizations may
have revenue sources that are fixed and usually have significant funding from other things than sakes
why would the revenue be favorable or not?
he revenue variance is favorable if the average selling price is greater than expected; it is unfavorable if the average selling price is less than expected. This could happen for a variety of reasons including a change in selling price, a different mix of products sold, a change in the amount of discounts given, poor accounting controls, and so on.
Unfavorable activity variances may not indicate bad performance because:
increased activity should result in higher variable cost
standard
is a benchmark for measuring performance
It is labeled as unfavorable (favorable) when the actual quantity of material used in production
is greater than (less than) the quantity of material that should have been used according to the standard.
production . manager
is in charge of labor efficency
Quantity Variance
is the difference between how much of an input was actually used and how much should have been used for the actual level of output and is stated in dollar terms using the standard price of the input.
spending variance
is the difference between the actual amount of the cost and how much a cost should have been, given the actual level of activity. If the actual cost is greater than what the cost should have been, the variance is labeled as unfavorable. If the actual cost is less than what the cost should have been, the variance is labeled as favorable.
Materials price variance = (AQ × AP) − (AQ × SP) Materials price variance = AQ(AP − SP) Materials price variance = 7,000 pounds ($3.80 per pound − $4.00 per pound) Materials price variance = $1,400 F where: AQ = Actual quantity of inputs purchased AP = Actual price per unit of the input SP = Standard price per unit of the input Materials Quantity Variance: Materials quantity variance = (AQ × SP) − (SQ SP) Materials quantity variance = SP(AQ − SQ) Materials quantity variance = $4.00 per pound (6,500 pounds − 6,000 pounds) Materials quantity variance = $2,000 U where: AQ = Actual quantity of inputs used in production SQ = Standard quantity of inputs allowed for the actual output SP = Standard price per unit of the input
materials variance
labor rate variance?
measures the difference between the actual hourly rate and the standard hourly rate, multiplied by the actual number of hours worked during the period.
revenue and spending variances help with why
net operating income is different
static planning budget
only considers the planned level of activity does not change as volume changes
Activity Variance
planning and flexible budget differnce
A static planning budget is suitable for
planning but is inappropriate for evaluating how well costs are controlled.
Variance Analysis Cycle
prepare performance report analyze variances raise questions identify root causes take actions conduct next period's operations
Planning Budget
prepared before the period begins and is valid for only the planned level of activity
generating a favorable spending and revenue variance
protect the selling price, reduce price of inputs, increase operating efficiency
actual budget flexible and planned
pulling numbers, end results. making and calculating the numbers
most companies compute the material price variance when materials are _______ and the material quantity variance when materials are
purchased, used
a flexible budget allows managers to isolate activity variances and revenue and spending variances
true
non profits performance reports dont include
revenue and net operating income
standard cost card
shows the standard quantity (or hours) and standard price (or rate) of the inputs required to produce a unit of a specific product
The flexible budget shows what should have happened at the actual level of activity, whereas the planning budget
shows what should have happened at the budgeted level of activity
if activity increases by 20 percent
so should all variable costs
an unfavorable variancein cost of goods sold is determined by comparing the actual results(10000untis) and the flexible budget (10000units), wha type of variance is described
spending variance
revenue and spending variances
subtract flexible budget from actual results
an unfavorable materials quantity variance occurs when
the actual amount of material used is greater than the standard amount of material allowed for the actual output
Activity Revenue
the difference between a revenue or cost item in the flexible budget and the same item in the static planning budget. An activity variance is due solely to the difference between the actual level of activity used in the flexible budget and the level of activity assumed in the planning budget
Revenue Variance
the difference between the actual total revenue and what the total revenue should have been, given the actual level of activity for the period. If actual revenue exceeds what the revenue should have been, the variance is labeled favorable. If actual revenue is less than what the revenue should have been, the variance is labeled unfavorable.
if managers consider it unwise to change workforce based on changes in work load
the direct labor workforce is fixed in the short run
when using a standard cost system
the information in the variance reports may be too old to be useful and an undue emplhasis on labor efficiency variances can create pressure to build excess inventory
whenever the direct labor efficiency variance is unfavorable, .
the variable overhead efficiency variance will be unfavorable
The standard rate per unit that a company expects to pay for variable overhead equals
the variable portion of the predetermined overhead rate.
labor variance favorable v unfavorable
the variance is labeled favorable (F) because the actual hourly rate is less than the standard hourly rate. If the actual hourly rate had been greater than the standard hourly rate, the variance would have been labeled unfavorable (U).
Comparing a static planning budget to actual costs only makes sense if the cost is variable
true
Treating fixed costs as variable is necessary for product costing
true
treating fixed costs as if they are variable can lead to bad decisions
true
STp inc. has a variable overhead rate variance of 4000 U, a variable overhead efficency variance of 1500F , a fixed overhead vudget varince of 2000F and a fixed overhead volume variance of 10000U from the info, it can be determined that overhead was
underapplied
fixed costs (not effects by change in activity) are often more controllable than
variable costs
Variable overhead rate variance = (AH × AR) − (AH × SR) Variable overhead rate variance = AH(AR − SR) Variable overhead rate variance = 1,050 hours ($6.80 − $6.00) Variable overhead rate variance = $840 U Variable Overhead Efficiency Variance: Variable overhead efficiency variance = (AH × SR) − (SH × SR) Variable overhead efficiency variance = SR(AH − SH) Variable overhead efficiency variance = $6.00 per hour (1,050 hours − 1,000 hours) Variable overhead efficiency variance = $300 U where: AH = Actual quantity of labor-hours used in production SH = Standard quantity of labor-hours allowed for the actual output AR = Actual rate per labor-hour SR = Standard rate per labor-hour (Variable portion of the predetermined overhead rate)
variable overhead variances
when using a standard cost system, the over or under applied overhead equals the sum of the overhead ________ for the period
varinances
A flexible budget adjusts to show
what costs and revenue should be for the actual level of activity.
revenue and spending variances in the end will help
why net operating income differs
