Chapter 11: Standard Costs and Variance Analysis

Question 1

Static budget

Answer 1

Budget developed from a single planned level of activity

Question 2

Flexible budget

Answer 2

A budget developed by using a volume level equal to that actually observed

Question 3

There are three things to watch for when using budgets for performance

Answer 3

1) The data (the activities being monitored and the standards used to evaluate performance) upon which a budget is based must be appropriate and accurate
2) Actual results must be compared to the proper benchmark
3) To evaluate performance, a variance is computed and interpreted

Question 4

Variance analysis

Answer 4

Computation, interpretation, and formulation of appropriate follow-up action

Question 5

Three aspects of performance measurement and evaluation using budgets:

Answer 5

1) Standard setting
2) Preparing flexible budgets and static budgets
3) Computing and interpreting variances

Question 6

Standard

Answer 6

A benchmark for measuring performance

Question 7

Quantity standards (SQI)

Answer 7

Specify how much of a resource should be used to make one unit of a product or provide one instance of a service

Example: One pizza have 10 slices of pepperoni (50g)

Question 8

Price standards (SP)

Answer 8

Specify the price that is expected to be paid for a unit of a resource

Question 9

Standard cost definition

Answer 9

Standard quantity of input required to produce one unit of product or provide one unit of service to a customer multiplied by the standard price of the input.

Question 10

Standard cost equation

Answer 10

SQI x SP

Question 11

There are two different cost objects

Answer 11

1) The standard cost of an input to make one unit of a product
2) The standard cost of making one unit of product or providing one instance of a service

Question 12

Standard cost card

Answer 12

A detailed listing of the standard amounts of direct materials, direct labour, and variable overhead that should go into a unit of product, multiplied by the standard price or rate that has been set for each cost element.

List of every input required to make one unit of output, along with the corresponding quantity standard, standard price, and standard cost

Question 13

Ideal standards

Answer 13

Standards that allow for no machine breakdowns or other work interruptions and that require peak efficiency at all times by the most skilled workers.

Unrealistic but in a ‘perfect world example’

Rare and not sustainable

Act as the ultimate stretch targets

Question 14

Practical standards

Answer 14

Standards that allow for normal machine downtime and other work interruptions and can be attained through reasonable, though highly efficient, efforts by the average worker.

These are tight but attainable

Question 15

There are 3 issues with ideal standards and stretch targets in general

Answer 15

1) Manager must make a conscious effort to ensure that employees are not discouraged by standards/targets that might ruin the morale within the organization
2) Deviations from ideal standards may be hard to interpret and these must therefore be used with caution and not acted upon hastily
3) Ideal standards cannot be used in forecasting and planning, they do not allow for normal inefficiencies, and therefore they result in unrealistic planning and forecasting figures

Question 16

Standard price per unit (SP)

Answer 16

The price that should be paid for a single unit of materials, including allowances for quality, quantity purchased, shipping, receiving, and other such costs, net of any discounts allowed.

Question 17

Standard quantity per unit (SQI)

Answer 17

The amount of materials that should be required to complete a single unit of product, including allowances for normal waste, spoilage, rejects, and similar inefficiencies.

Question 18

Waste and spoilage

Answer 18

The materials that are wasted as a normal part of the production process or that spoil before they are used

Question 19

Rejects

Answer 19

Refer to the direct material contained in units that are defective and must be scraped

Question 20

Direct labour price and quantity standards are usually expressed in terms of:

Answer 20

1) A labour rate

2) labour hours

Question 21

Standard rate per hour (SP)

Answer 21

The labour rate that should be incurred per hour of labour time, including employment taxes, fringe benefits, and other such labour costs.

Question 22

Standard hours per unit

Answer 22

The amount of labour time that should be required to complete a single unit of product, including allowances for breaks, machine downtime, cleanup, rejects, and other normal inefficiencies.

Most difficult standard to determine

Question 23

Variable manufacturing overhead

Answer 23

Generally expressed in terms of rate and the quantity of the base (usually direct labour-hours or machine-hours)

SQI for direct labour x planed Q

Question 24

Standard cost per unit

Answer 24

The standard cost of a unit of product as shown on the standard cost card; it is computed by multiplying the standard quantity or hours by the standard price or rate for each cost element.

Question 25

Fixed manufacturing overhead cost

Answer 25

Should not be driven by the volume of output, and a cost per unit has no economic meaning in the sense that a unit of product “causes” a certain cost to be incurred

They can divide the fixed cost to a per unit basis, see slide 26

Question 26

Unitization of fixed overhead cost

Answer 26

Dividing the fixed costs into per-unit basis to account for FC

Question 27

Static budget

Answer 27

A budget designed for only one level of activity.

Prepared before the start of the operating year (end)

Question 28

Calculating the Budgeted Variable Manufacturing Costs, Two Alternative Cost Formulas

Answer 28

1) Standard Cost Times Output Level Approach (C=SCxQ)

2) Standard Price Times Standard Quantity Approach (C=SPxSQ)

Question 29

1) Standard Cost Times Output Level Approach (C=SCxQ)

Answer 29

The budgeted variable production cost of each input is prepared using the standard cost of the input from the standard cost card

Budgeted cost will be driven by the level of output, Q

Question 30

2) Standard Price Times Standard Quantity Approach (C=SPxSQ)

Answer 30

The cost driver is the total quantity of an input required to make a given volume of output

This total quantity of an input-labeled as “SQ” must be calculated using the information on the standard of input (SQI) on the standard cost card

Question 31

Variance

Answer 31

The difference between an actual financial result and the corresponding budgeted amount is called variance

Actual - budgeted = the difference (variance)

Can be favourbale or unfavourbale

Question 32

Static budget variances

Answer 32

The differences between the actual results and the amounts budgeted in the static budget.

Question 33

(f)

Answer 33

Favourable

Question 34

(U)

Answer 34

Unfavorable

Question 35

To determine if favorable or unfavorable:

Answer 35

First determine if the variance is a revenue variance or a cost variance

If the variance concerns revenue, margin, or income than a positive difference is a favorable variance (actual income is higher than the budgeted income)

If the variance concerns expenditures, a positive difference is an unfavorable variance (actual expenditures are exceeded the budgeted amount)

Negative revenue, margin, or income variances are unfavorable (actual profits is less than budgeted)

Negative cost variances are favourable (actual expenditure is less than the budgeted amount)

Question 36

The _____ budget is not an ideal basis for performance evaluation

Answer 36

Static

Question 37

Flexible budget

Answer 37

A budget that is designed to cover a range of activity and that can be used to develop budgeted costs at any point within that range to compare with actual costs incurred.

Any budget based on an activity level different from the planned activity level, and is prepared using the same budget data and standard cost card information as the static budget

Question 38

Flexing a budget

Answer 38

Only the volume of activity is changed or flexed, and a different budget is prepared

If the planned activity level is the same as the actual activity level there is no need to flex the budget

• Total variable costs change in direct proportion to changes in activity.
• Total fixed costs remain unchangedwithin the relevant range.

Question 39

What is the difference between the flexible and status budget?

Answer 39

Based on different activity level

Question 40

Sales volume variances

Answer 40

Differences between the amounts budgeted in the flexible budget and the static budget, arising out of variations in activity level, not cost control.

Question 41

Flexible budget variances

Answer 41

Differences between the amounts budgeted in the flexible budget and the actual results.

The variances are calculated and evaluated as either favourbale or unfavourbale in the exact same way as the static budget performance report

Question 42

To understand the source of the flexible budget cost variance we must consider two differences

Answer 42

1) Between the price paid for an input (AP) and the price specified by the standard cost card (SP)
2) Between the quantity of input used (AQ) and the quantity of input allowed for the activity level in the flexible budget (SQ)

Question 43

The price difference gives rise to a ____ variance

The quantity difference gives rise to a ____ variance

Answer 43

Price

Quantity

Question 44

Variance analysis

Answer 44

The process of computing and interpreting variances.

Question 45

Flexible budget variance analysis

Answer 45

The task of computing the price variance and the quantity variance for each type of manufacturing cost and properly interpreting the results.

Question 46

Materials price variance

Answer 46

A measure of the difference between the actual unit price paid for an item and the standard price, multiplied by the quantity purchased.

Question 47

Standard quantity of an input allowed for the actual quantity of output

Answer 47

The amount of materials that should have been used to complete the period’s output as computed by multiplying the actual number of units produced by the standard quantity per unit.

The proper benchmark against what to compare the actual usage of an input

Question 48

Materials quantity variance

Answer 48

A measure of the difference between the actual quantity of materials used in production and the standard quantity allowed, multiplied by the standard price per unit of materials.

(AQ-SQ) x SP

Question 49

Three control issues

Answer 49

1) Timing of the isolation of variances
2) Responsibility for the variances
3) Eliminating variances in the future

Question 50

1) Timing of the isolation of variances

Answer 50

“the sooner the better”

The sooner MGMT knows the sooner problems can be evaluated and corrected

Question 51

Bill of materials

Answer 51

A listing of the quantity of each type of material required to manufacture a unit of product

Question 52

ALWAYS USE __________ FOR STANDARD COST AND VARIANCE ANALYSIS

Answer 52

PRACTICAL STANDARD (exam answer)

Question 53

work in process in job-order costing should have a separate work-in-process account for each job (job#90, 92, 93 etc)

Answer 53

work in process in job-order costing should have a separate work-in-process account for each job (job#90, 92, 93 etc) (Exam answer)

Question 54

Effective managers will want to observe ______, measure _______, and evaluate _________

Answer 54

Appropriately
Accurately
Fairly

Question 55

Do not mistake SQ for SQI

Answer 55

Recall that the quantity standard specifies the amount of input to make one unit of output, this is SQI

The standard cost card will not show SQ, the total quantity of an input, because SQ will vary with the level of production planned

Question 56

Why a static budget is not an ideal basis for performance analysis

Answer 56

It is unable to distinguish control over activity from control over costs

It is impossible to properly focus on cost control when an activity level change has occurred at the same time

For example, if you planned to sell 1800 watches and 2000 were sold, a change in the budget had occurred and now we need to adjust for this change to properly evaluate the months results from a cost control perspective

Question 57

Quantity difference between AQ and SQ is the quantity variance

Answer 57

Remember that the quantity difference by itself is not the variance, however, the variance is obtained by multiplying the quantity difference (AQ-SQ) by the standard price (SP)

Question 58

2) Responsibility for the variances

Answer 58

The materials price variance should be the responsibility of the individual who has the decision rights over the price - the person who approves a price to e paid to suppliers

Question 59

Variable overhead spending variance (rate variance)

Answer 59

The difference between the actual variable overhead cost incurred during a period and the standard cost that should have been incurred based on the actual activity of the period.

difference between the actual variable overhead cost and the cost from applying the standard rate to the actual quantity of the allocation base consumed during the production

Question 60

Variable overhead rate variance =

Answer 60

(AR-SR) x AH

Variable predicted to be $3, turned out to be $2.85, 3-2.85 = 0.15

0.15/hour x 5400/hours = 810F

Question 61

Alternative for variable overhead

Answer 61

Actual cost - SR x AH

$15,390-$3/hour x 5,400hours
=810F

Question 62

The concept of efficient in managing variable overhead is directly related to

Answer 62

whether the resources being used as the cost driver has been used efficiently

Question 63

Variable overhead efficiency variance

Answer 63

The difference between the actual activity (direct labour-hours, machine-hours, or some other base) of a period and the standard activity allowed, multiplied by the variable part of the predetermined overhead rate.

Question 64

Variable efficiency variance =

Answer 64

AQ-SQxSR

(5400 hours-5000 hours)x$3 hour

Question 65

Variable overhead efficiency variance =

Answer 65

AQxSR-SQxSR

5400 hours x $3/hour - 5000 hours x $3/hour

Question 66

Fixed costs of manufacturing include

Answer 66

Facility costs such as property taxes, insurance, heating and power costs, costs for supplies that are periodically purchased in lump-sum quantities, salaries of factory managers and production personnel, lease costs of machinery and equipment and so on

Question 67

At the beginning of the planning/budgeting cycle, management must

Answer 67

estimate and budget the total amount of costs that the company is expecting to incur

The budgeted amount will stay fixed over the range of values for the main activity level driver

Question 68

Predetermined fixed overhead application rate =

Answer 68

Budgeted fixed manufacturing overhead cost / Estimated activity level of the allocation base

Question 69

Three distinct amounts pertaining to fixed manufacturing cost:

Answer 69

1) Actual fixed overhead cost
2) Budgeted fixed overhead cost
3) Allocated (applied) fixed overhead cost

Question 70

Fixed overhead budget variance

Answer 70

Difference between the budgeted fixed overhead cost and the actual cost.

When the actual cost is different from th enumerator of the rate (the budgeted fixed overhead cost), the difference is this

Question 71

Denominator activity level (practical capacity of the facility)

Answer 71

The activity level used to compute the predetermined overhead allocation rate.

The estimated activity level of the allocation base for the operating period

Question 72

Fixed overhead volume variance (production volume variance)

Answer 72

Difference between the budgeted cost and the allocated cost; also called the production volume variance.

Question 73

Volume variance

Answer 73

The variance that arises when actual output during a period is different from the planned output. It is a measure of how well the organization’s facilities are utilized.

Reliant on activity control and not cost control

Question 74

Cost control over fixed manufacturing overhead as two parts

Answer 74

1) Concerns whether actual spending for fixed overhead cost compares favourably with the amount budgeted in the static as well as the flexible budget
2) Concern the implications of a volume difference between the quantity of the allocation base to which the predetermined overhead rate is applied to allocate the fixed overhead and the denominator activity level of the allocation base

Question 75

Budget variance

Answer 75

Difference between the actual fixed overhead cost and the amount budgeted in the flexible budget

A measure of the difference between the actual fixed overhead costs incurred during the period and budgeted fixed overhead costs as contained in the flexible budget.

Actual fixed overhead cost - Budgeted fixed overhead cost

Question 76

Normal costing system

Answer 76

One where the overhead allocation is based on a predetermined overhead application rate, and the rate is applied to the actual quantity of the allocation base consumed during a period

Question 77

Standard costing system

Answer 77

Overhead allocation is based on a predetermined overhead application rate, and the rate is applied to the standard quantity of the allocation base allowed for the actual quantity of output produced in a period

Question 78

If the normal and actual production levels are the same, then the denominator activity level and standard hours allowed for the output of the period are the same,

Answer 78

and there is no volume variance

Question 79

If the actual production is less than normal production, the the denominator activity level is greater than the standard hours allowed for the output of the period, and the volume variance is _______

Answer 79

unfavourable

Less = bad

Question 80

If the actual production is greater than normal production, the the denominator activity level is less than the standard hours allowed for the output of the period, and the volume variance is _______

Answer 80

favourable

More = good
aka Standard more than denominator

Question 81

If a variance is ___% or more it is significant

Answer 81

5

Question 82

Management by exception

Answer 82

A system of management in which standards are set for various operating activities, with actual results then compared with these standards. Any differences that are deemed significant are brought to the attention of management as exceptions.

Question 83

Advantages of standard costs

Answer 83

Page 545, fuck this cunt of a textbook

Question 84

Potential problems with standard costs

Answer 84

Page 545, fuck this cunt of a textbook

Question 85

The managers in charge of production would generally be responsible for controlling the _______________ variance.

Answer 85

Labour efficiency

Question 86

Which of the following variances is caused by a difference between the denominator activity in the predetermined overhead rate and the standard hours allowed for the actual production of the period?

Answer 86

fixed overhead volume variance.

Question 87

A company’s static budget estimate of total overhead costs was $200,000 based on the assumption that 20,000 units would be produced and sold. The company estimates that 30% of its overhead is variable and the remainder is fixed. What would be the total overhead cost according to the flexible budget if 24,000 units were produced and sold?

Answer 87

First, determine the budgeted variable overhead as follows:

$200,000 budgeted overhead cost x 30% (variable portion) = $60,000

Next, determine the budgeted variable overhead per unit as follows:

$60,000 ÷ 20,000 units = $3.00 per unit

Then, determine the budgeted fixed overhead as follows:

$200,000 budgeted overhead cost x 70% (fixed portion) = $140,000

Finally, the flexible budget at 24,000 units is determined as follows:

(24,000 units x $3.00 per unit variable overhead) + $140,000 fixed overhead = $212,000

Question 88

Baxter Company uses a standard cost system in which manufacturing overhead is applied to units of product on the basis of direct labour-hours. The variable portion of the company’s predetermined overhead rate is $3 per direct labour-hour. The standards call for 2 direct labour-hours per unit of output. In March, the company produced 2,000 units using 4,100 direct labour-hours and the actual variable overhead cost incurred was $12,050. What was the variable overhead spending variance?

Answer 88

Spending var. = (AH x AR) − (AH x SR)

                   = ($12,050) − (4,100 x $3)

                   =   $250 F

Question 89

Standard Costing

**General Approach ***

Answer 89

1. Determine the Standard Quantity per Unit
2. Determine the Standard Price (or Rate) per Unit
3. Determine the Standard Cost per Unit

Standard Quantity per Unit x Standard Price (or Rate) per Unit = Standard Cost per Unit

Question 90

Determining Standard Costsiii) Variable Manufacturing Overhead

Answer 90

1. .Determine the Standard Quantity (of allocation base) per Unit
2. Determine the Standard Rate per Unit
3. Determine the Standard Cost per Unit

Standard Quantity (Hours) per Unit x Standard Rate per Unit = Standard Cost per Unit

Question 91

Determining Standard Costsiv) Total

Answer 91

i) Standard cost of material (per unit)+ii) Standard labour cost (per unit) + iii) Standard variable manufacturing overhead cost (per unit)=iv) Total standard cost (per unit)

Question 92

There are two primary reasons for unfavourable variable overhead variances:

Answer 92

1. Spending too much for resources.

2. Using the resources inefficiently.

Question 93

Material Price Variance:

Answer 93

should be the responsibility of the individual who has the decision rights over the price (i.e. purchasing manager).

Question 94

Quantity Variances:

Answer 94

it is generally the responsibility of the production department to see that materials usage is kept in line with standards.

Question 95

Labour Variances

Answer 95

Price variance for direct labour is commonly termed labour rate variance.The quantity variance for direct labour is called the labour efficiency variance

Labour rate variance: LRV=(AR-SR)xAH

Labour efficiency variance:
LEV=(AH-SH)xSR

Question 96

The manager in charge of production would generally be responsible for controlling the____________

Answer 96

labour efficiency variance

Question 97

Advantages of Standard Costs

Answer 97

Possible reductionsin production costs

Management byexception

Better Informationfor planning anddecision making

Improved cost controland performanceevaluation

Question 98

Appendix 11A: General Ledger Entries to Record Variances

Answer 98

-Standard costs and variances do not formally need to be in accounting records

Question 99

General Ledger Entries to Record Variances

Answer 99

Inventories and cost of goods sold can be valued at their standard costs which eliminates the need to keep track of the actual cost of each unit.

The difference between actual and standard costs are entered into special accounts that accumulate the various standard cost variances.

Closing entries are made at the end of the accounting period to adjust the financial statements to reflect the actual costs.

Question 100

To isolate the variance, note the following:

Answer 100

1) Liabilities (purchases and expense) are recorded at the actual values; entries to accounts payable are recorded as AQxAP
2) Inventoriable assets like raw materials added to or removed from inventory are recorded as AQxSP
3) Resources (materials, labour, overhead) are applied to production (work in process) at standard quantities allowed for the actual production volume valued at standard prices: SQxSP
4) Finished goods are transferred from work in process to finished goods inventory at the full standard cost, including applied fixed overhead: QxSC
5) Cost of goods sold is also recorded at standard cost, including applied overhead: QxSC

Question 101

Direct materials (accounts) purchase of materials
Example: XYZ company purchased 18kg of material from supplier at a price of $600 per KG for a total cost of $10,800:

Answer 101

Raw Materials (18kg for 500/kg)                   9000
Materials price variance (18kgx100/kg,U)     1800
  Accounts payable (for buying 18kg at 600/kg)    10800

Question 102

Quantity Variance (accounts)

Answer 102

Work in process (materials: 10kg at $500/kg)   5000
Materials quantity variance([11kg-10kg]x500)    500
   Raw Materials(11kg at 500/kg)                                5500

Question 103

Direct labour variance (accounts)

Answer 103

Work in process (labour:SHxSR=3000 @ $20)  60,000
Direct labour hour flexible budget variance      18,000 
   Wages Payable(AHxAR=400hrs @ 19.50/hr)       78000

Question 104

Variable manufacturing overhead variances (indirect labour)

In June XYZ paid 10,000 for maintenance and utilities, and 10,800 for indirect labour

Answer 104

Variable manufacturing overhead 20,800
Accounts payable 10,000
Wages payable 10,800

Question 105

Variable manufacturing overhead variances (direct labour)

Answer 105

Work in process 15,000

Variable manufacturing overhead 15,000

Question 106

To record the flexible budget variance and close the variable manufacturing overhead account

Answer 106

Flexible budget variance (MOH) 5,800

Variable manufacturing overhead 5,800

Question 107

Fixed manufacturing overhead variance

To record the incurrence of manufacturing overhead cost

Answer 107

Fixed manufacturing overhead 11,750
Accounts payable 10,000
Prepaid insurance, factory 750
Property taxes payable 1,000

Question 108

To isolate the flexible budget variance (accounts)

TO clear FMOH control and isolate the flexible budget variance

Answer 108

Fixed manufacturing overhead control 250

Flexible budget variance 250

Question 109

Entries to close the variance accounts
XYZ company closes the variances to the cost of goods sold (COGS)

FAVOURBALE

Answer 109

Variance account XXXX

Cost of goods sold XXXX

Question 110

Entries to close the variance accounts
XYZ company closes the variances to the cost of goods sold (COGS)

UNFAVOURBALE

Answer 110

Cost of goods sold XXXX

Variance account XXXX

Question 111

The entry to close out the materials price variance

To close the materials price variance account to cost of goods sold

Answer 111

Cost of goods sold 1,800

Materials price variance 1,800

Question 112

The entry to close out the labour rate variance

Answer 112

Labour rate variance 2,000

Cost of goods sold 2,000