Principles of Accounting II, Chapter 23, McGraw Hill

Management By Exception

Management process to focus on significant variances and give less attention to areas where performance is close to the standard.

A cost variance equals the difference between the quantity variance and the price variance.

True

Standard costs are preset costs for delivering a product or service under normal conditions.

True

Janitor Supply produces an industrial cleaning powder that requires 40 grams of material at $0.10 per gram and .25 direct labor hours at $12.00 per hour. Overhead is assigned at the rate of $18 per direct labor hour. What is the total standard cost for one unit of product that would appear on a standard cost card?

$11.50 Direct material per unit = 40g * $0.10/g = $4.00 Direct labor per unit = .25 hours * $12/hr. = $3.00 Overhead per unit = .25 hours * $18/hr. = $4.50 Total standard cost = $4.00 + $3.00 + $4.50 = $11.50 per unit

Hassock Corp. produces woven wall hangings. It takes 2 hours of direct labor to produce a single wall hanging. Bartels' standard labor cost is $12 per hour. During August, Bartels produced 10,000 units and used 21,040 hours of direct labor at a total cost of $250,376. What is Bartels' labor efficiency variance for August?

$12,480 unfavorable.

The standard materials cost to produce 1 unit of Product R is 6 pounds of material at a standard price of $50 per pound. In manufacturing 8,000 units, 47,000 pounds of material were used at a cost of $51 per pound. What is the total direct materials cost variance?

$3,000 favorable.

Summerlin Company budgeted 4,000 pounds of material costing $5.00 per pound to produce 2,000 units. The company actually used 4,500 pounds that cost $5.10 per pound to produce 2,000 units. What is the direct materials price variance?

$450 unfavorable.

Variance

A difference between an actual amount and a budgeted amount.

International Integrated Reporting Council

A global coalition that is establishing integrated reporting guidelines.

Integrated Reporting

A short report that shows how an organization's strategy, governance, and performance relates to value creation.

A flexible budget performance report compares the differences between:

Actual performance and budgeted performance based on actual sales volume.

Controllable Variance

Actual total overhead incurred minus budgeted total overhead. Equals the sum of both overhead spending variances (variable and fixed) and the variable overhead efficiency variance.

When standard manufacturing costs are recorded in the accounts and the cost variances are immaterial at the end of the accounting period, the cost variances should be:

Closed to cost of goods sold.

Standard Costs

Costs that should be incurred under normal conditions to produce a product or component or to perform a service.

Quantity Variance

Difference between actual and budgeted revenue or cost caused by the difference between the actual number of units and the budgeted number of units.

Price Variance

Difference between actual and budgeted revenue or cost caused by the difference between the actual price per unit and the budgeted price per unit.

Cost Variance

Difference between the actual incurred cost and the standard cost.

Spending Variance

Difference between the actual price of an item and its standard price.

Efficiency Variance

Difference between the actual quantity of an input and the standard quantity of that input.

Overhead Cost Variance

Difference between the total overhead cost applied to products and the total overhead cost actually incurred.

Volume Variance

Difference between two dollar amounts of fixed overhead cost; one amount is the total budgeted overhead cost, and the other is the overhead cost allocated to products using the predetermined fixed overhead rate.

Favorable Variance

Difference in actual revenues or expenses from the budgeted amount that contributes to a higher income.

Unfavorable Variance

Difference in revenues or costs, when the actual amount is compared to the budgeted amount, that contributes to a lower income.

Variable budget is another name for:

Flexible budget.

Standard Costing Income Statement

Income statement that reports sales and cost of goods sold at their standard amounts, and then lists the individual sales and cost variances to compute gross profit at actual cost.

Fixed Budget

Planning budget based on a single predicted amount of volume; unsuitable for evaluations if the actual volume differs from predicted volume.

Flexible Budget

Planning budget based on several predicted amounts of sales or other activity measure; also called a variable budget.

Benchmarking

Practice comparing and analyzing company financial performance or position with other companies or standards.

Standard costs are used in the calculation of:

Price and quantity variances.

Variance Analysis

Process of examining differences between actual and budgeted revenues or costs and describing them in terms of price and quantity differences.

Budget Report

Report comparing actual results to planned objectives; sometimes used as a progress report.

Fixed Budget Performance Report

Report that compares actual revenues and costs with fixed budgeted amounts and identifies the differences as favorable or unfavorable variances.

Flexible Budget Performance Report

Report that compares actual revenues and costs with their variable budgeted amounts based on actual sales volume (or other level of activity) and identifies the differences as variances.