Chapter 5 - Variance analysis Flashcards
What are the 4 types of standard?
- Attainable
- Basic
- Current
- Ideal
What is a variance?
Difference between actual and budget
What are the 3 main groups of variances?
- Sales
- Variable cost
- Fixed overhead
What are sales variances?
Differences between:
- Actual and standard sales prices
- Budgeted and actual sales volume
How is a sales price variance calculated?
(actual selling price x actual units sold) - (standard selling price x actual units sold)
How is sales volume variance calculated?
Actual - budgeted
What are the different ways variance in units can be valued?
- Standard profit per unit
- Standard contribution per unit
- Standard revenue per unit
How can sales price cause sales variances?
- Higher than expected discounts (adverse)
- Lower than expected discounts (favourable)
- Low price offers (adverse)
- Industry wide price change (adverse/favourable)
How can sales volume cause sales variances?
- Direct selling efforts (adverse/favourable)
- Marketing efforts (adverse/favourable)
- Changes in customer needs (adverse/favourable)
- Failure to satisfy demand (adverse)
- Changes demand (adverse)
How is direct material total variance calculated?
Actual direct material cost - standard direct material cost of actual production
What 2 sub variances can total material variance be split into?
- Direct material price variance
- Direct material usage variance
What is a total direct material variance?
Difference between standard material cost of output and material cost incurred
How is direct material price variance calculated?
Actual purchase price - standard purchase price per kg x (actual quantity of material purchased/used)
How is price variance calculated when raw material inventory is valued at standard cost?
- Calc based on material purchased
- Inventory carried forward valued at standard cost
How is price variance calculated when raw material inventory is valued at actual cost?
- Calc based on material used
How is direct material usage variance calculated?
Actual quantity used - (standard quantity of material specified for actual production x standard purchase price)
How can material price cause material variances?
- Use of different supplier (adverse/favourable)
- Bulk purchase (favourable)
- Small orders (adverse)
- Supplier price increase (adverse)
- Unexpected buying costs (adverse)
- Buying procedures (adverse/favourable)
- Change in material quality (adverse/favourable)
How can material useage cause material variances?
- Scrap rate (a/f)
- material quality (a/f)
- Defective materials (a)
- better quality control (f)
- More efficient work procedures (f)
- Changing labour mix (a/f)
- Changing materials mix (a/f)
How is the direct labour total variance calculated?
Actual cost of direct labour - standard direct labour cost of actual production
What does the total direct labour variance indicate?
Difference between standard direct labour cost of the output which has been produced and the actual direct labour cost incurred
What does the direct labour rate variance indicate?
Actual cost of any change from the standard labour rate of remuneration
What is the direct labour efficiency variance defined as?
Standard labour cost of any change from the standard level of labour efficiency
How is the direct labour rate variance calculated?
Actual rate per hour - (standard rate per hour x actual hours paid for)
How is the direct labour efficiency variance calculated?
Actual hrs worked - (standard hrs specified for actual production x standard hr rate)
What should the efficiency variance be split into when idle time occurs?
- Idle time variance
- Efficiency variance during active work hours
If there is no standard idle time in the budget, what is the idle time variance?
Always adverse
When does the direct labour idle time variance occur?
When hour paid exceeds hours worked and there is an extra cost caused by idle time
How can changes in labour rate affect labour variances?
- Increase in pay (a)
- Payment of bonusses (a)
- Variance with standard cost (a/f)
- Change in average rates of pay (a/f)
How can changes in labour efficiency affect labour variances?
- More/less time then expected to complete work (a/f)
- Labour more/less experienced than standard (a/f)
- Change in composition of workforce (a/f)
- Improved working methods (f)
How is a variable production overhead total variance calculated?
Actual cost of variable production overheads - (standard variable overhead cost of actual production)
How can a total variable production overhead variance be analysed further?
- Variable production overhead expenditure variance
- variable production overhead efficiency variance
What does a variable production overhead expenditure variance indicate?
Actual cost of any change from the standard rate per hour
What is the variable production overhead efficiency variance?
Standard variable overhead cost of any change from the standard level of efficiency
When there is idle time, what is the variable production overhead expenditure variance?
Standard variable overhead cost of the active hours worked - actual variable overhead cost
How is the total cost variance calculated?
Actual fixed production overheads incurred - standard fixed production overhead cost absorbed by the actual production
How is fixed production overhead expenditure variance calculated?
Actual fixed production overhead - budgeted fixed production overhead
How is fixed production overhead volume variance calculated?
Actual output in units - budgeted output in units x FOAR per unit
Does the fixed overhead volume variance occur in MC?
No
If FOH is absorbed based on hours, how can the FOH volume variance be subdivided?
- Capacity variance
- Efficiency variance
What are the potential causes of fixed and variable overhead variances?
- FOH expenditure adverse variances caused by spending over budget
- FOH volume variance caused by changes in production volume
- Variable production overhead expenditure variances caused by changes in machine running costs
When should variances be reported to management?
End of each control period
What concept should be followed when reporting variances?
Responsibility accounting, variances reported to individual managers
What is the formula for standard contribution?
Contribution to sales ratio x unit price
How is the sales volume contribution calculated?
Sales volume variance in units x standard contribution per unit
What is the formula for the fixed overhead volume variance?
(budgeted - actual production volume) x standard absorption rate per unit
What can explain an adverse material usage variance?
- Lower quality materials purchased
- Less experienced employees
What variances would be impacted by a switch from AC to MC?
- Sales quantity profit variance
- Fixed overhead capacity variance
