Budgeting 2 and Variance Analysis 1 (LECTURE 8) Flashcards
STANDARD COSTS
For repetitive environments and common operations, we can set up standards for costs, as well as for sales.
How are standard costs set?
- Many businesses use “last year’s” standards.
- Entirely suitable where there is no change from year to year.
- However, it does not encourage efficiency.
- Better to use engineering studies.
Types of standard cost.
BASIC standards remain static from year to year.
IDEAL standards assume nothing will go wrong and be 100% perfect all the time. Sometimes used but despondency can set in.
ATTAINABLE standards demand EFFICIENT, not perfect working and should be used according to theory.
TOTAL MATERIAL VARIANCE
(standard cost for actual production - actual cost)
Rules for using variances.
1) For cost variances, we usually put the standard before the actual in our computation.
2) So a positive number is a favourable variance (F) and a negative number is an adverse variance (A).
MATERIALS PRICE VARIANCE
(standard cost - actual cost) x actual quantity
MATERIALS QUANTITY VARIANCE
(standard quantity (flexed) - actual quantity) x standard price
How do you find total material variance?
Add material quantity variance and material price variance.
TOTAL LABOUR VARIANCE
standard cost - actual cost
LABOUR RATE VARIANCE
(standard rate - actual rate) x actual hours
LABOUR EFFICIENCY VARIANCE
(standard hours - actual hours) x standard rate
TOTAL VARIABLE O/H VARIANCE
standard cost - actual cost
VARIABLE O/H RATE VARIANCE
standard rate - actual rate) x actual hours
How do you calculate fixed overhead variance in a marginal environment?
Calculate a “blanket” fixed O/H variance.
standard cost - actual cost
How do you calculate fixed overhead variance in a marginal environment?
Calculate a “blanket” fixed O/H variance.
actual cost - standard cost
actually fixed O/H expenditure variance
What is total fixed O/H variance split into?
Expenditure and volume components.
The volume variance is split into capacity and efficiency components.
FIXED O/H EXPENDITURE VARIANCE
actual cost - standard cost
TOTAL FIXED O/H VARIANCE
standard cost - actual cost
FIXED O/H VOLUME VARIANCE
(actual production - budgeted production) x standard rate of production
FIXED O/H VOLUME CAPACITY VARIANCE
(actual hours - budgeted hours) x standard rate (hours)
FIXED O/H VOLUME EFFICIENCY VARIANCE
(standard hours - actual hours) x standard rate (hours)
TOTAL SALES MARGIN VARIANCE
actual contribution - budgeted contribution
SALES MARGIN PRICE VARIANCE
(actual margin - standard margin) x actual volume
SALES MARGIN QUANTITY VARIANCE
(actual volume - budgeted volume) x standard margin
DIRECT MATERIALS YIELD VARIANCE
(standard total - actual total) x standard proportion x standard price
DIRECT MATERIALS MIX VARIANCE
(standard proportion - actual proportion) x actual input x standard price
DIRECT MATERIALS MIX VARIANCE
(standard proportion - actual proportion) x actual input x standard price
What are sales variances normally divided between?
price and volume effects
What are volume variances normally divided between?
mix and quantity effect
SALES MARGIN MIX VARIANCE
(actual sales - total actual sales in budget proportions) x standard margin
SALES MARGIN QUANTITY VARIANCE
(total actual sales in budget proportions - budgeted sales) x standard margin
PURCHASE PLANNING VARIANCE
(original target price - general market price at time of purchase) x quantity purchased
PURCHASE EFFICIENCY VARIANCE
(general market price - actual price paid) x quantity purchased
