Chapter 13

What are the variances assocociated with Direct Cost Inputs (DM & DL)?

price and efficiency

Level 3 analysis include:

price variance and efficiency variance for direct cost inputs

What are some examples of fixed costs?

rent, depreciation, salaries

What are the variance associated with operating income?

sales volume & price

What are the variances associated with VMOH?

spending & efficiency

What are the variances assocociated with FMOH?

spending & sales volume

the variable overhead variance is based on the efficiency of:

the cost allocation (cost driver) base being used.

What is the variable overhead efficiency variance?

the difference between the actual quantity of variable overhead cost allocation base used for actual output-budgeted quantity of variable overhead cost allocation base allowed for actual output.ex. hours x hours per unit.

Ineffficiency refers to:

using more DM or DL than anticipated.

What is the appropriate set up for a subdivided static budget for operating income?

Actual PV Flexible SVV Static APxAQ AQxBP BQxBP

Why is the static budget called the static budget?

Because it is based on a static (single) planned output level.

The variable flexible budget variance measures:

The difference between actual and flexible budget overhead amounts.

What is the variable overhead spending variance?

The difference between the actual cost per unit cost allocation base and the budgeted cost per unit allocation base.

What information does a static budget variance give?

The difference between the actual results and the budgeted results. Most specifically the difference in the operating income.

What is budgeted performance?

The expected performance-point of reference for comparisons.

If a company could correctly predict actual output they would get...?

The flexible budget, using anticipated costs and prices, but actual output.

When using the flexible budget, what two variance do you get?

The flexible-budget variance(price) and the sales volume variance.

The main goal of planning variable and fixed costs is:

planning essential activities and be cost effective.

What are the three sources to obtain budgeted input prices and budgeted input quantities?

1. Actual input data from past periods. 2. Data from other companies with similar processes. 3. Developing a standard.

What are the steps to create a budgeted variable overhead rate?

1. Choose a period. 2. Select a cost driver. 3. Select a cost pool- the costs associated with each cost driver. 4. Compute the rate per unit.

What are the three steps to computing a flexible budget?

1. Identify Actual Quanity of Output. 2. Calculate flexible budget for revenues by using budgeted selling price and actual output. 3. Calculate flexible budget for costs based on budgeted variable costs per output unit, actual quantity of output and budgeted fixed costs.

What are reasons why there might be an unfavorable efficiency variance?

Unskilled workers Inefficient work schedule Lack of proper maintanence Standards were set too tight

What are some reasons for this ineffiency with variable overhead?

Unskilled workers ineffecient scheduling bad maintenance standards were too tight rush delivery promised

A simple equation for calculating price variances (in regard to DM and DL) is:

actual price of input-budgeted price of input x actual quanity of input

A simple equation for calculating efficiency variances (in regard to DM and DL) is:

actual quanity of input used- budgeted quantity of input allowed x budgeted price of input.

A simple equation for calculating price (flexible-budget) variance is:

actual selling price-budgeted selling price x actual units sold

A simple equation for calculating sales volume variance is:

budgeted CM per jacket x difference in volume of items sold

How to compute the rate per unit when developing a variable or fixed overhead rate:

budgeted input per unit x budgeted rate per unit

What are some examples of variable costs?

energy, machine maintenance, indirect materials or engineering support

What is a Variance?

A Variance is the difference between actual and expected results.

A static budget can be detailed into a flexible-budget variance, and then a flexible budget can be detailed further into what?

A price variance and an efficiency variance for direct cost inputs

What is an unfavorable variance?

A variance that has a negative effect on operating income.

What is a favorable variance?

A variance that has a positive effect on operating income.

Define "flexible budget".

Calculates budgeted revenues and costs based on actual output, instead of estimated output.

What is standard price?

Carefully determined price to pay for a unit of input, decided on as the standard when budgeting.

What is a standard input?

Carefully determined quantity of input, decided on as the standard when budgeting.

What are the two things that use a third level analysis with price and efficiency variance?

DM and DML

What are some possible reasons for sales volume being unfavorable?

Demand has decreased. Competitors have entered market. Company did not adapt to changes in market. Lack of analysis when preparing budgets. The quality of the product was not as high as expected.

T or F: Fixed costs are related to volume.

False

What is a level 2 variance?

Flexible Budget

What is management by exception?

Focusing management attention where operation is not what it was expected to be.

What are some reasons for price (flexible budget) variance being unfavorable?

Greater quantity of inputs per unit that expected. Incurred higher prices per unit for the inputs

What are some causes of price variance?

Negotiated Prices Lower price supplier Quantity Discount Lack of analysis when budgeting Lower Quality Material

Why might there be a spending variance for variable overhead spending?

Negotiations Oversupply lower quality

T or F: Fixed costs vary in the static and flexible budget.

No, there is never a variance between the static and flexible budget for fixed costs.

What is the most difficult cost to manage?

Overhead

What is the level 2 variance analyis for variable flexible budget variance subdivided into?

Spending variance and Efficiency Variance

What is standard costing?

Standard costing is when companies use a system that traces direct costs to outputs produced. They multiple standard price/rate by standard quantity of inputs allowed for outputs produced. It also allocates overhead costs on the bases of the standard overhead cost rate multiplied by the standard quantities of the allocation bases alloed for the actual outputs.

What is standard cost?

Standard input x Standard Price Decided as the standard when budgeting.

What is a level 1 variance analysis?

Static Budget Variance

What does the sales volume variance indicate?

The impact of selling more or less than anticipated; the volume.

What does the price (flexible-budget variance) indicate?

The impact of the difference between the actual selling price and the budgeted selling price.

Why use variances?

To identify where to exert manager energy, look for ways to improve, measure performance.

T of F Overhead variances involve taking differences between equations as the analysis moves back and forth between actual results and budgeted amounts.

True

T or F Variance Analysis is the most popular costing tool in practice.

True

T or F: Interpretation of FMOH variance is difficult due to the nature of the costs involved and how they are budgeted.

True

T or F: Standard costing is lower than actual or normal costing.

True

T or F:examination of the fixed overhead budget formulae reveals that it is budgeted similar to a variable cost.

True