Accounting Topic 8 & 9 (Budgeting, Standard costing & Variance Analysis) Flashcards
standard costing
control technique
establishes predetermined estimates of costs (before the period starts) and compares these with actual costs as incurred (similar to budgeting)
variance analysis
comparison between actual figures and standard (budgeted/estimated) figures
evaluation of performance by means of variances, timely reporting should maximise the opportunity for managerial action
- ideal for specific companies, dynamic ones have lots of changes, and unpredictable costs
variance
difference between actual and predetermined/standard
standard costs
predetermined costs, tells us what should happen and what we want to happen, not what has actually happened, based on expectations on how efficient we can be (room for error)
variance analysis is most suited for
- mass production or repetitive assembly work = accurate estimates (costs or resources), heavy machinery, lots of batches with identical products & not very expensive or unique
- buy in bulk from supplier for years, sure about their estimates and do variance analysis = give good idea of how efficient they have been and if met targets
- where inputs for production can be specified - resources materials labour inputs (standard costing is effective)
- stable business = know the processes and materials well, no unpredictable
standard costs are calculated based on expectations of:
- efficiency levels in the use of materials and labour
- expected price of materials, labour and expenses
- budgeted overhead costs and activity levels
purpose of standard setting
control technique, identify where we are being efficient and where we are doing good job
- provide a prediction of future costs that can be used for decision making
- provide challenging target that individuals are motivated to achieve (guidance, direction, realistic and achievable target)
- assist in setting budgets and evaluating performance
- act as a control device by highlighting those activities that do not conform to plan
- simplify the task of tracing costs to products for inventory valuation
budget
quantified monetary plan for a future period, tries to predict the future just like standard costing (plan for the future), info is grouped together, more like a summary and a general plan
- plan tool used in performance evaluation, also an estimation = tells us what should happen what should pay tries to foretell and predict and estimate as accurately as possible the future
- layout of financial statements
TREE = general plan
standard
- predetermined quantity/target
- aims to show resource allocation, list of resources used for each type
- aim to show and tell us how many hours worked, estimation, list resources in detail
- how much to need, planning to use and how much costs us
- use all this info and our budget groups all the info together
BRANCHES - tells you the detail, pick up detailed info to prepare the big budget
similarities between standards and budgets
- future perspective
- both used for control purposes (interrelated & similar)
- use a standard cost as a basis for cost budgets
differences between standards and budgets
- budgets (planned) total aggregate costs
- standards: show resources used for a single task - limited to situations where repetitive actions are performed and output can be measured, dont need to be expressed in monetary terms
standard costing system overview
purpose of variance analysis
- explain the difference between actual and expected results and facilitate performance evaluation and control purposes
- performance evaluation tool
- identify differences and locate problems and then solve them, where does problem lie, inefficient lack training machinery out of date
- monitor performance and solve these problems for good
favourable variance
actual better than expected results
leave alone, happya
adverse variance
actual is worse than expected results
actual costs are higher than standard = problem
look deeper into issue and try to identify what is going wrong
3 types of variances
- variable cost variances
- fixed overhead variances
- sales variances
total sales variance
consists of our sales price variance and our sales quantity variance
cost variance
total production cost variance = total direct materials variance, total direct labour variance, total variable overhead variance, fixed overhead expenditure variance and fixed overhead volume variance
profit variance
comparison between actual profit and standard profit
what we wanted to make vs what we actually made in terms of profit
SP
standard price
AP
actual price
SQ
standard quantity (of actual output)
AQ
actual quantity
BFO
budgeted fixed overhead
AFO
actual fixed overhead
BO
budgeted output
AO
actual output
SR
standard rate
AR
actual rate
SH
standard hours (of actual output)
AH
actual hours
BV
budgeted volume
AV
actual volume
SM
standard margin ( either profit or contribution)
cost variances
3 components of prime costs
1. materials
2. labour
3. variable overheads
general model for variance analysis
materials variances
price - based on actual purchases, diff between what they should have cost and what did they cost
usage - based on actual production diff between what should it have used and what did it use
interpreting material price variance
favourable = purchase of lower grade material at discount, buy larger quantities (adv of quantity discount), change in market price of material, strong bargaining by purchasing department
adverse = more materials were used to produce actual output than were called for by the standard: poor trained workers, improperly adjusted/maintained machines, defective materials (inferior grade materials?)
labour variances
rate - based on hours paid, diff between what should they have cost and what did they cost
idle time - difference between hours paid and hours worked
efficiency - based on actual production diff between how long should it have taken and how long did it take
labour variances interpretation
labour rate variance = adverse = using highly paid skilled workers to perform unskilled tasks
labour efficiency variance = adverse = poor trained workers, poor quality material, poor supervision of workers, poor maintained equipment
variable overhead variances
managers and their influence on cost variances?
variable overhead variances interpretation
expenditure variance - results from paying more/less than expected for variable overhead items and/or excessive use of these items
efficiency variance - controlled by managing the overhead cost driver
fixed overhead variances
- absorption costing
- fixed overhead expenditure & volume variances
adverse = under absorbed overhead
favourable = over absorbed overhead
sales variances
- measures effect on expected profit of:
1. diff selling price to the standard
2. diff volume of sales to original budget
sales variances interpretation
- not meaningful to separate sales into price and volume
- changes in selling price = affect volume
- price elasticity of demand
- adverse price variance = associated with favourable volume variance (inverse correlation)
- external factors not controllable by management (comp, economic recession), direct correlation on sales variance
- better/alternative performance appraisal for sales team (MS, market dynamics, comp prices)
operating statement
- reconciliation of budgeted profit and actual profit
interdependencies of variances
- identified for effective interpretation
- when 2 variances are interdependent one is favourable and the other is adverse = sales variances
