Accounting 2 Exam 2
Selling Price Variance (SPV) Equation
Actual Quantity ( Actual Selling Price - Budgeted Selling Price )
Direct Method
- Allocates support department costs only to operating departments, not back to other support departments. - *Need to know how to calculate using this method*
Direct Materials Price Variance (DMPV) Equation
Actual Quantity of DM x (Actual Price - Standard(budgeted) price
Step Down Method
- Allocates support department costs partially to other support departments and full to operating departments - One support department's costs get allocated to the other based on amount of usage - the other support department's costs are only allocated to operating departments
What is a Support Department?
- Assist other departments (both other support departments and operating departments) - They do not directly create an end product or service
Reciprocal Method
- Fully Allocates support department costs to other support departments, and then to other operating departments (more precise process) - This method requires solving two linear equations with two unknowns
Relevant Costs for Keep or Replace Equipment - what costs matter?
- Market price of old equipment - Cost of new equipment - Operating cost of new vs old - Any other costs of new
Why Budgeting?
- Quantifies Plans - Communicates the Plan - Creates Motivation and Ownership - Allows for Benchmarking -Compare to Actual Performance and Adjust
Relevant Costs for Product Mix questions - what costs matter?
- Selling Price of each product - Materials of each product - Labor of each product - Contribution Margin of each product - Demand * Max out product that is most profitable / units of limited resources
What are Common Costs?
- The costs of operating a facility, activity, or like cost object that is shared by two or more users - They are used because each user obtains a lower cost by sharing than if each user acted alone
Budget Variance
- The difference between Actual Operating Income and Budgeted Operating - The difference in operating income
Sales Volume Variance
- The difference between Budgeted Operating Income and Flex Operating Income - The difference attributable to selling more -or fewer- units) -The difference in operating income due to difference in unit sales
Flex Budget Variance
- The difference between the Flex Operating Income and Actual Operating Income - The difference between what really happened and what would have happened at that sales volume if everything else went according to plan - The difference in operating income due to something other than unit sales
Direct Labor Price Variance (DLPV) Equation
Actual Quantity of Labor x (Actual Price (of labor) - Standard Price
Why do this if the numbers under Variable and Absorption Costing is the same?
- They aren't always the same -Net income is the same here because we sold everything we produced -There are times we produce more than we sell--We sell more than we produce (beginning inventory) -We have different outcomes for Variable and Absorption net income in those cases
Decision Making: Product Mix with Constrained Resources
- We want to determine how much of each product to make - This decision is more complex when we cannot acquire as much of our inputs (the ingredients for our manufacturing process) at any quantity we want
Absorption Costing
-A method of calculating the cost of production where Direct Materials, Direct Labor, and Manufacturing Overhead (of all types are included in the cost of manufacturing -Required by the GAAP for external financial reporting but can resulting misleading product cost info and poor managerial decisions
Variable Costing
-A method of calculating the cost of production where Direct Materials, Direct Labors, and Variable Overhead (not fixed overhead) are included in the cost of manufacturing -Cannot be used for external financial reporting
The flex budget re-calculates the budget, using....
-Actual units, but budgeted numbers for everything else -Allowing us to see what our operating income would be if everything had gone as budgeted, except for unit sales
Stand Alone Method
-Determines the weight for cost allocation by considering each cost object as a separate entity - It's a Pro-Rata method, as if the users are using the common team separately
Product Costs consist of...
-Direct Materials -Direct Labor -Manufacturing Overhead
Major Disadvantages of Absorption Costing
-Only sends fixed material overhead to income statement when products are sold --> This can be bad when manager over produces with intent to minimize income statement expenses
All our manufacturing costs were considering...
-Product Costs -The costs of making our products
Why do we use Flex?
-The flex budget strips out the fact that we didn't make / sell the same number of units as we planned -If we don't calculate a flex budget, part of the difference between budget and actual is the difference in units -The flex budget lets us separate that from other causes
We must understand the situation our client is faced with, quantify the situation into the cost and benefits of using __________________, and choose the equipment that provides the ________ _______
1. Both equipment 2. Most benefit
Another way to think about costs... Product costs=
1. Direct Materials 2. Direct Labor 3. Variable Overhead (Fixed overhead does not become part of product cost)
Methods for Supporting Department Allocations
1. Direct Method 2. Step Down Method 3. Reciprocal Method
Relevant Costs for Make or Buy - What costs matter?
1. Incremental Costs 2. Relevant Benefits
We must understand the situation our client is faced with, quantify the situation into _________ ________, and assess the _________ ________ of the alternative
1. Incremental Costs 2. Total impact
We must understand the situation our client is faced with, quantify the situation into the cost of __________________, and maximize production of our most ____________ __________
1. Producing each item 2. Profitable Products
All these costs are __________, they are in our finished goods inventory account the balance sheet and flow through to cost of goods sold on our Income Statement when we sell our products
1. Product Costs
The items to be looked at as the causes of these differences in Operating Income are:
1. Selling Price Variance 2. Direct Materials - Price / Input - Amount used 3. Direct Labor Variance - Price / Input - Amount used
Methods to Allocate Common Costs:
1. Stand Alone Method 2. Incremental Cost Method
Benefits of Absorption
1. Takes into account all manufacturing costs to produce 2. Complies with GAAP 3. More Accurate picture of profitability
Variance Analysis Step 1:
Calculating the flex budget
Budgeting
Coming up with expectation and plans about how our company will operate and compete
Increment Costs
Costs that are different under alternative choices
Cost Variance Analysis Chart: Direct Labor Variance
Direct Labor Price Variance and Direct Labor Quantity Variance (efficiency)
Cost Variance Analysis Chart: Direct Materials Variance
Direct Materials Price Variance, Direct Materials Quantity Variance (efficiency))
What is an Operating Department?
Directly add value and sells a product / service
Variance Analysis Step 2:
Examine and Label Differences
Second Ranked is the...
First Incremental User and is allocated costs up to its Stand Alone Cost
Cost Variance Analysis Chart: Budget Variance
Flex Budget Variance and Sales Volume Variance
a Variance is *Unfavorable*...
If the effect is a decrease on operating income when compared to the budgeted amount
A Variance is *Favorable*...
If the effect is that it increases operating income when compared to the budgeted amount
**Sunk Cost**
Ignore the cost of the old equipment
Another way to say this is that Direct Materials, Direct Labor, and Overhead are...
Inventoriable
For the flex budget...
Manufacturing Overhead is going to be the same as the budgeted amount, as are marketing and other selling costs
Other Variances that we will be skipping...
No OH variance No Variance in non-manufacturing costs - Advertising -Marketing
Why is comparing budget to actual performance not ideal?
Only comparing budget to actual doesn't compare apples to apples--some differences are due to difference in units sold
Fixed Overhead costs are considered a _________ , not a part of the manufacturing inventory
Period Expense
First Ranked is the...
Primary User and is allocated up to its Stand Alone Cost of using the Common Cost
Fixed cost doesn't change during.....
Production changes
Incremental Cost Method
Ranks the individual users by which user is most responsible for the cost, then uses this ranking to allocate costs
Flex
Recalculate the budget / income statement, using all budgeted budget info, except for units
Which budget should a company make first?
Revenue Budget
Relevant Benefits
Reward from one option over another
Cost Variance Analysis Chart: Flex Budget Variance
Selling Price Variance, Direct Materials Variance, and Direct Labor Variance
Benefits of Variable Costing
Shows incremental cost of production
Direct Materials Efficiency Variance (DMEV) or DM Quantity Variance Equation
Standard Price of DM x (Actual Quantity - Standard Quantity @ Actual Output)
Direct Labor Efficiency Variance (DLEV) Equation
Standard Price of Direct Labor x (Actual Quantity - Standard Quantity @ Actual Output)
Steps for Common Costs
Step 1: What is the discount price? Step 2: Find each users Pro-Rata percent usage Step 3: Multiply Pro-Rata percent by discount price
How much should be allocated to Audit and Tax under the Incremental Cost Method, assuming Tax is the Primary User?
Step 1: What would the Primary user pay alone? Step 2: Allocate stand alone price to Primary user. Step 3: Allocate the rest to Audit *I----> discount price
Responsibility Accounting
System that provides information that management can use to evaluate the performance of a department's manager
What are Variances?
The difference between our plan and what actually happened
Each Responsibility Accounting Reports shows
The performance for what that entity / department / etc. is responsible for
Inventoriable
They become our cost of Inventory
The final step in budgeting is comparison to actual and determining ________ , so we can adjust going forward
Variance
Netting Variances Together
We net variances together to explain differences between budgeted and actual numbers
Decision Making: Keep or Replace Equipment
We want to determine how much it will cost over the asset's life and compare the two pieces of equipment
Decision Making: Make or Buy
We want to determine whether we should produce a product (or input) ourselves or outsource the production to another company
Why is Variance Analysis helpful?
When we understand why (specifically) our expectations were off, we can adjust and do a better job budgeting and executing the budget in the future