8. Accounting for control

Question 1

Who sets the standards?

Answer 1

They are a collective effort of various individuals including management accountants, industrial engineers, human resource managers, sales managers, other service department managers and employees.

Question 2

Why is it useful to have an “ideal” and a “pratical” standard?

Answer 2

Ideal standard - can act as a goal, aim..

Practical standard - Realistic, safe

Question 3

What is a “variance”?

Answer 3

“A variance is the effect of a factor on the budgeted profit.”

Question 4

What is a “favourable variance”?

Answer 4

A variance which will have the effect of increasing profit above that which was budgeted for

Question 5

What is a “adverse variance”?

Answer 5

A variance which will have the effect of decreasing profit below that which was budgeted for

Question 6

What does “flexing the budget” mean?

Answer 6

Flexing the budget means revising it to what the budget
would be if the planned level of output is equal to the
actual level.

Question 7

What is important when “flexing the budget”/ preparing the “flexed” budget?

Answer 7

Keep every element of the budget the same (cost per unit, sale per unit), ONLY adjust for the quantity of output

Question 8

Why don’t we change TFC when “flexing the budget”?

Answer 8

Flexing the budget only adapts the budget for OUTPUT, TFC is not affected by output

Question 9

What is the “Sales volume variance”?

Answer 9

Sales volume variance is the difference between the original budget and flexed budget profit figures

Question 10

What is the “Sales price variance”?

Answer 10

Sales price variance is the difference between the actual sales figures and flexed budget figures

Question 11

What is the “Direct material variance”?

Answer 11

The difference between actual direct material and flexed direct material is called total direct material variance:

Question 12

What is the “Material cost per unit variance”?

Answer 12

Direct material usage variance = (Actual usage - Flexed usage) x budget material cost per unit (46,300kg - 46,000kg) x 1 £/kg = £300 (A)

Question 13

What is the “Direct material usage variance”?

Answer 13

(Actual usage - Flexed usage) x budget material cost per unit (46,300kg - 46,000kg) x 1 £/kg = £300 (A)

Question 14

What is the “labour efficiency variance”?

Answer 14

(Actual labour hours - flexed labour hours) x budget labour rate (5,920 hours - 5,750 hours) x 4 £/hour = £680 (A)

Question 15

What is the “labour rate variance”?

Answer 15

(actual labour rate - budget labour rate) x actual labour hours (3.92 £/hour - 4 £/hour) x 5920 hours = £480 (F)

Question 16

What are some “problems with variances and standards”?

Answer 16

• Standards can quickly become outdated
• Difficult to demarcate management responsibilities
• No incentive to achieve beyond the standard
• Standards may create perverse incentives
• Factors beyond the control of the manager may affect a variance