CH 7 study cards

Question 1

DM Price Variance

Answer 1

DM Price Variance: The difference between actual and budgeted costs of direct materials.

Favorable (F): Actual cost is less than budgeted.
Unfavorable (U): Actual cost is more than budgeted.
Formula:
Favorable: OI (Operating Income) > Budgeted Amount
Unfavorable: OI < Budgeted Amount

Question 1

Variance Analysis

Answer 1

Variance: The difference between budgeted and actual results.

Management by Exception: Focus on areas where performance does not meet expectations.

Variance Analysis: Investigate the reasons for performance failures

Question 2

DM Price Variance Formula

Answer 2

Favorable: OI (Operating Income) > Budgeted Amount
Unfavorable: OI < Budgeted Amount

Question 3

Static Budget

Answer 3

A static budget is based on one level of output and is not adjusted for changes in actual output.

Static Budget Variance: The difference between actual results and the static budget amount.

Limitation: Not useful for comparing actual performance since it doesn’t account for changes in activity levels.

Question 4

Flexible Budget

Answer 4

A flexible budget adjusts for changes in actual output and other cost/revenue drivers.
It reflects what the budget would have been if actual output was known at the start.

Flexible Budget Variance (FBV): Actual results minus the flexible budget amount.

Formula:
Sales Volume Variance (SVV) = FBA (Flexible Budget Amount) - SBA (Static Budget Amount)

Question 5

Flexible Budgeting and ABC

Answer 5

Flexible Budgeting and variance analysis can be applied to all levels of the cost hierarchy in Activity-Based Costing (ABC).
Levels: Adjust the budget based on cost hierarchy levels like unit level, batch level, and product sustaining level.
Key uses of variance analysis:
Effectiveness
Efficiency
Investigate critical items and significant variances for continuous improvement.

Question 6

Benchmarking

Answer 6

Benchmarking: Comparing performance against the best period ever or competitors to identify areas for improvement.

Internal Benchmarking: Compare performance against previous periods.

External Benchmarking: Compare performance with competitors.

Gap analysis: Identify the difference between best and worst performers and work on improvement strategies.

Question 7

Standards (Budgets)

Answer 7

Standards (Budgets) are predetermined expectations of performance.
Constant: Set at the beginning of the year and doesn’t change.
Facilitates standard costing systems.
Used for control, evaluation, and improvement.
Feedback: From price/efficiency variances to adjust performance.

Question 8

Control Features of Standard Costs

Answer 8

End-of-Period Adjustment: Address under- or over-allocated overhead.
Benchmarking: Used to set internal performance standards.
Continuous Improvement Program: Encourage ongoing efforts to improve.

Question 9

Journal Entries for Variance

Answer 9

Favorable Variance: Credit entry (e.g., spend less than planned).
Unfavorable Variance: Debit entry (e.g., spend more than planned).
Close Variance Accounts: At the end of the period, variance accounts are closed into Cost of Goods Sold (COGS) if they are immaterial.