Accounting Ch 8

Deficiencies of static planning budget

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Labor rate variance

AH(AR/hour-SR/hour) if actual hourly rate of pay>standard rate specified, unfavorable

Materials price variance

AQ(AP/unit-SP/unit) favorable if actual purchase price is less than standard purchase price; purchasing manager typically in control over price paid for goods; factors that influence prices paid include how many units are ordered, how the order is delivered, whether the order is a rush order, and the quality of materials purchased

Labor efficiency variance

SR/hour(AH-SH) causes of unfavorable labor efficiency: poorly trained or motivated workers, poor quality materials, requiring more labor time, faulty equipment causing breakdowns and work interruptions, poor supervision of workers, and inaccurate standards, insufficient demand for company's products

Standard

a benchmark for measuring performance

Variable overhead efficiency variance

difference between actual level of activity and standard activity allowed, multiplied by the variable part of the POHR

Price variance

difference between actual price of an input and its standard price, multiplied by the actual amount of the input purchased; purchasing manager's responsibility

Spending variances

difference between how much a cost should have been, given the actual level of activity, and the actual amount of the cost; if actual cost>expected cost, variance is unfavorable; could be due to paying a higher price for inputs than should ahve been paid, using too many inputs for the actual level of activity, a change in technology, etc

Quantity variance

difference between how much of an input was actually used and how much should have been used and is stated in dollar terms using the standard price of the input; production manager's responsibility

Revenue variance

difference between what the total revenue should have been, given the actual level of activity for the period and the actual total revenue; if actual revenue>expected revenue, variance is favorable; if actual revenue<expected revenue, variance is unfavorable; so favorable if the avg selling price is greater than expected; could be due to change in selling price, diff mix of products sold, change in amount of discounts given, or poor accting controls

Variable overhead rate variance

measures 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

Standard hours per unit

most difficult standard to determine; should include allowances for breaks, personal needs of employees, cleanup, and machine downtime

Variable MO standards

multiply direct labor hours per unit by POHR

Standard rate per hour (DL)

should include hourly wages, employment taxes, and fringe benefits

Standard quantity per unit (DM)

should reflect the amount of material required for each unit of finished product as well as an allowance for waste

Standard price per unit (DM)

should reflect the final, delivered cost of the materials

Static planning budget

suitable for planning but inappropriate for evaluating how well costs are controlled; if actual level of activity differs from what was planned, it would be misleading to compare actual costs to the static, unchanged planning budget; 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

Flexible budget

take into account how changes in activity affect costs; an estimate of what revenues and costs should have been, given the actual level of activity for the period; actual costs are then compared to what the costs should have been for the actual level of activity during the period rather than to the static planning budget; if adjustments for the level of activity are not made, it is hard to interpret discrepancies between budgeted and actual costs; what revenues and costs should have been given actual level of activity; fixed costs don't change

Variance analysis cycle

used to compare budgets to actual results for the purposes of solving problems and evaluating performance; begins with preparation of performance reports in the accounting department and these highlight variances which are the differences between the actual results and what should have occurred according to the budget

Materials quantity variance

SP/unit(AQ-SQ) unfavorable when quantity of materials used in production is greater than the quantity that should have been used according to the standard; excessive materials can result form faulty machines, inferior materials quality, untrained workers, and poor supervision

Management by exception

a management system that compares actual results to a budget so that significant deviations can be flagged as exceptions and investigated further; enables managers to focus on the most important variances while bypassing trivial discrepancies between the budge and actual results

Planning budget

prepared before the period begins and is valid for only the planned level of activity (ch 7 budgets)

Standard cost card

shows the standard quantities and costs of the inputs required to produce a unit of specific product

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