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