Chapter 11 - Cost & Variances

Question 1

Management by exception

Answer 1

Practice of giving attention primarily to significant deviations from expectations.

Question 2

Static Budget Variance

Answer 2

Total variance composed of:

1. Flexible budget variance: variation of costs given actual level of production. Actual minus Flexible Budget AQ (SP - AP) Flexible budget=Standard input allowing for actual output
2. Sales-volume variance: variation on units given constant costs and selling prices. Flexible minus Static Budget SP (SQ - AQ)

Question 3

For substitutable inputs one can divide the efficiency/qty material variance into:

Answer 3

1. Mix variance: AQ ( SMSP - AMSP)
2. Yield variance SMSP (SQ - AQ) where SMSP (SQ * SP/(SQ) = WEIGHTED AVERAGE

Question 4

Sales volume variance vs Sales price variance

Answer 4

Sales volume variance: change in contribution margin due to change between budgeted and actual volume. SCM * (AQ - SQ) Composed of sales qty variance: SUCM * (Total AQ * Standard Mix - Standard Unit Sales) AND sales mix variance: SUCM *(AQ-Total AQ * Standard Mix) OR Actual units sales * (SUCM FOR STANDARD MIX - SUCM FOR ACTUAL MIX) VS Sales price variance: difference between expected sales price for a given quantity AQ * (AP - SP)

Question 5

Fixed Overhead Variances (allocation base and application rate)

Answer 5

Spending Variance: budget OVERHEARD - actuals USING budgted rate Production Volume variance: (budget application rate * (standard cost driver per unit * actual units)) - budget overhead

Question 6

Variable Overhead Variance (allocation base and application rate)

Answer 6

Spending variance: actual allocation base * (budgeted application rate - actual application rate) Efficiency variance: budgeted application rate * (standard cost driver per unit * actual units - actual allocation base)

Question 7

Overhead models: Two way vs Three way vs Four way

Answer 7

Two way: Controllable and Uncontrollable variance Spending + Efficiency Prod. Volume fixed + variable Three way: Spending + Efficiency Prod. Volume fixed variable 0 4 way Spending Efficiency Prod.Volume fixed 0 variable 0

Question 8

Good Question regarding prices change when you dont have nor prices nor quantity (normalize to a level)

Answer 8

A company’s gross profit for Year 2 and Year 1 was as follows:

Year 2

Year 1

Sales

$ 950,400

$ 960,000

Cost of goods sold

(556,800)

(576,000)

Gross profit

$ 393,600

$ 384,000

Assuming that Year 2 selling prices were 15% lower than Year 1 selling prices, what was the decrease in gross profit caused by the selling price change?

A.$134,400

B.$142,560

C.$144,000

D.$167,718

Answer (D) is correct.
Given a 15% decrease in prices, Year 2 sales were 85% of Year 2 sales at Year 1 prices. Hence, Year 2 sales at Year 1 prices equal $1,118,118 ($950,400 ÷ 85%). Sales and gross profit were $167,718 ($1,118,118 – $950,400) lower because of the decrease in prices.

Question 9

Items not allocated to Segment Margin

Answer 9

Segment margin is the contribution margin for a segment of a business minus fixed costs. It is a measure of long-run profitability. Thus, an allocation of the corporate officers’ salaries should not be included in segment margin because they are neither variable costs nor fixed costs that can be rationally allocated to the segment. Other items that are often not allocated include corporate income taxes, interest, company-wide R&D expenses, and central administration costs.