Lecture 1 Flashcards
Product costing: Lecture 1 Define the following terms: Prime costs Conversion costs Period costs
Prime costs: Includes all direct manufacturing costs
Conversion costs: comprise all manufacturing costs for transforming direct materials into finished goods
Period-costs: Non-product costs that are expensed in the period in which they are incurred = R&D, Advertising, Corporate OH
Product costing: Lecture 1
Outline the process of absorption costing
Absorption costing: producing product cost by using direct costs + indirect costs. Here direct costs are found through their actual cost whilst indirect costs are estimated using pre-determined rates.
When preparing our operating budget, how do we calculate standard cost??
What is standard cost used for?
How do we prepare the COGS component of the operating budget?
What to remember for bad accounts expense?
Standard cost = DM per unit + DL per unit + VOH per unit + FOH/Denominated level of activity
Standard cost use = for finished good inv and closing inv
Operating budget:
First: Value Opening inventory at standard cost
Second: Calculate how many units produced
Third: Add Overhead, DL and DL. Include total budgeted fixed costs for each as well. Remember standard cost is only for opening and closing inventory.
Fourth: Subtract closing inventory valued at standard cost
Bad accounts expense = calculate % based on % of sales on credit, not total sales…
How do we factor in depreciation when preparing a cash budget?
Subtract depreciation from total overheads, before doing any other calculations such as 50% for cash payments made on overheads this month
Lecture 8: Purposes of the budgeting process
What are the five primary purposes of the budgeting process?
Outline two forms of participative budgeting
Outline the advantages/disadvantages of participative budgeting
outline what exactly budgetary slack is and the central negative consequence of it:
1: Planning
2: Facilitating communication and coordination
3: Allocating resources
4: Controlling operations
5: Evaluating performance and providing incentives
Participative budgeting:
1: Top-down budgeting = senior management imposes targets on lower-level managers
2: Bottom-up budgeting = lower-level managers play an active part in setting their own budgets
Advantages = encourage coordination and communication between managers + Leads to more accurate budget estimates + leads to individuals identifying more closely with the budget targets
Disadvantages = Expensive and time-consuming + may aggravate differences and disagreements + provides opportunities for padding the budgets (budgetary slack)
Budgetary slack = Budgetary slack is the difference between the revenue or cost estimate that a person provides and a realistic estimate of that revenue or cost
= Budgetary slack undermines the credibility and usefulness of the budget as a planning and control tool as it no longer provides a realistic view of future operations.
Lecture 8: Operating budgets
What are the the internal and external factors of the sales budget?
What is the central advantage of using a cash budget?
Sales budget = estimated sales units and revenues
1: Internal factors = past sales levels, new products planned, intended pricing policy and planned advertising and promotion
2: External factors = general economic trends, specific industry trends, politic and legal events, expected activities of competitors and customers
Cash budget advantage = allows planning for timing of cash receipts and payments to ensure no default
Lecture 9: Static vs flexible budget
What is a static budget?
What is a flexible budget?
What is flexible budget variance and sales volume variance?
Static budget = a budget based on one level of output, it is not adjusted or altered after it is set. Total cost = FC + VC x Activity
Flexible budget = a budget adjusted for the actual level of activity
Flexible budget variance = the difference between the actual results and the flexible budget based on actual output
Sales volume variance = the difference between the flexible budget amount and the static budget amount
Lecture 9: Direct materials variances
What two variances can direct materials be broken into?
What are the two standards for direct materials variances?
Direct material variance =
1) price variance = (actual price x actual quantity of input purchased) - (standard price x actual quantity of input purchased)
2) efficiency variance = (actual quantity of input resource used x standard price) - (standard allowance of input resource used x standard price)
Price standard = indicates the cost of materials input under efficient purchasing operations
Quantity standard = used to specify the type and quantity of materials required per unit of finish product
Lecture 9: Direct labour variances
What two variances can direct labour be broken into?
What two standards exist for direct labour?
Direct labour variance =
1) Labour rate variance = (Actual hours x Actual rate) - (Actual hours x standard rate)
2) Labour efficiency variance = (Actual hours x standard rate) - (standard hours x standard rate)
Rate standard = set by the resources department which is the result of collaborative planning agreements, government regulations and other factors
Efficiency standard = set by the production engineering department as a result of ‘time and motion’ studies or technical knowledge, and specifies the standard time it should take to complete a production task.
Lecture 9: Variable overhead variances
What two variances can variable overheads be broken into
What are value added and non-value added costs?
Variable overhead variances =
1) Spending variance = (actual variable overhead incurred) - ( Actual activity level x standard VOH rate)
2) Efficiency variance = (Actual activity level x standard VOH rate) - (Standard activity allowed x standard VOH rate)
Value added costs = one that if eliminated would reduce the value customers obtain
Non-value added cost = opposite to above.
Lecture 9: Fixed overhead variances
What two variances can fixed overhead variance be broken into?
Fixed overhead variance =
1) Spending variance = (Actual fixed overhead incurred) - (Budgeted fixed overhead at normal capacity (super simple = just take normal capacity units and multiply by standard FOH rate per unit)
2) Volume variance = (Budgeted fixed overhead at normal capacity) - (Actual production output x standard FOH per unit (super simple = just take actual units and multiply by standard FOH per unit))
Lecture 9: Manufacturing capacity
In regards to normal capacity, what does a favourable variance and an unfavourable variance for fixed overhead volume variance indicate?
Favourable variance = indicates that production output was greater than normal capacity
Unfavourable variance = occurs when actual output was less than normal capacity
Lecture 9: Uses of variance analysis
What are the three uses of variance analysis?
Performance measurement = can assess the effectiveness and efficiency used by a process, product, department, etc. AND can achieve cost control by assigning variance responsibility to managers.
Continuous improvement = Can use continuous improvement budget standards to indicate to managers that they need to seek active waste reduction and efficiency improvements
Benchmarking = Benchmarking involves comparing the products, functions and activities of an organisation or business unit against another (Internal or external)
Lecture 9: Criticisms of standard costing
Outline the criticisms of standard costing
1) Focus is on the consequences, and not the sources, of costs
2) Variance reports do not provide timely information
3) Variances focus on cost reductions and a narrow focus on segregated departments
4) Standard costing does not incorporate a broader definition of cost (costs of quality, time, customer value)
Lecture 9: variance formulas
List the abbreviated formulas for: Material price variance Material efficiency variance Labour rate variance Labour efficiency variance Spending variance (VOH) Efficiency variance (VOH) Spending variance (FOH) Volume variance (FOH)
Material price variance: (AP - SP) * Q (Q = purchased) Material efficiency variance: (AQ - SQ) * SP (Q = used) Labour rate variance: (AR - SR) * AH Labour efficiency variance: (AH - SH) * SR Spending variance (VOH): Actual VOH - (AA * SVR) Efficiency variance (VOH): SVR * (AA - SAA) Spending variance (FOH): Actual FOH - Budgeted FOH Volume variance (FOH): Applied FOH - Budgeted FOH
