Chapter 7 Flashcards
A control system has three key components?
- A standard performance level
- measurement of actual performance
- Comparison of actual versus standard performance
How does a cost control system work?
It sets a standard cost (estimated average cost per unit), measures actual costs, and compares them to standard costs to determine cost variances that help identify areas needing adjustment
What Types of Budgets are there in Variance analysis? And what is their use?
Budgeted Output Quantity * Standard Costs = Static Budget (standard budget) => Forecast
Actual Output Quantity * Actual Costs = Actual Budget
=> State of Nature at end of period
Actual Output Quantity * Standard Costs = Flexible Budget
=>Show revenues and expenses that should have occurred at the actual level of activity
What are standard costs and for what are they established?
Standard costs reflect how many units should be consumed (standard input quantity) per unit of output and at what unit cost (standard input price) => Benchmark
Established for:
Material prices and quantities
Labor rates and time required
What are cost variances?
Deviations of Standard and actual states
DM-Price Variance
AQ x (AP - SP)
DM-Quantity Variance
SP x (AQ - SQ)
DL-Rate Variance
AH x (AR - SR)
DL-Efficiency Variance
SR x (AH - SH)
Purchase Price Variance
AQP x (AP - SP)
What is a favorable variance?
A variance is favorable when actual costs are less than standard costs, indicating better-than-expected performance
What is an unfavorable variance?
A variance is unfavorable when actual costs exceed standard costs, pointing to inefficiencies, higher prices, or more time/labor consumed than planned
What is management by exception in variance analysis?
Managers should focus on significant deviations from the expected or standard values, as these require intervention
How does controllability affect variance investigation?
Managers focus on variances that are within their control and weigh the costs and benefits of investigating them
