Lecture 9: Variance Analysis ll

Question 1

Q: What do external financial accounting regulations require for inventory valuation?

Answer 1

A: Inventories must be valued at full absorption manufacturing cost.

Question 2

Q: What does valuing inventory at full absorption cost mean for fixed overheads?

Answer 2

A: Fixed overheads must be allocated to products and included in closing inventory valuations.

Question 3

Q: What additional variance is calculated in an absorption costing system?

Answer 3

A: A volume variance, which arises due to fixed overheads.

Question 4

Q: How must sales margin variances be expressed under absorption costing?

Answer 4

A: In unit profit margins, not contribution margins.

Question 5

Q: Are volume and sales margin variances useful for control purposes?

Answer 5

A: Not particularly; they are mainly for profit measurement and inventory valuation.

Question 6

Q: What is required in a standard absorption costing system regarding fixed overheads?

Answer 6

A: Predetermined fixed overhead rates must be calculated.

Question 7

Q: What are the 3 steps to develop a budgeted fixed-overhead rate?

Answer 7

The 3 steps to develop a budgeted fixed-overhead rate:

1) Choose time period – Usually 12 months.

2) Select cost-allocation base – E.g., standard labour-hours (denominator level).

3) Identify fixed overhead costs – Group all fixed manufacturing costs into one cost pool.

Question 8

Q: Example: If 26,000 labour-hours are budgeted for 13,000 suits, what is the standard hour per unit?

Answer 8

If 26,000 labour-hours are budgeted for 13,000 suits, what is the standard hour per unit?

2 labour-hours per suit (26,000 ÷ 13,000).

Question 9

Q: What is included in fixed manufacturing overhead costs?

Answer 9

included in fixed manufacturing overhead costs are Items like depreciation, lease costs, and plant manager’s salary.

(E.g., Budget = £286,000 for 2022)

Question 10

Q: How do you calculate Allocated Fixed Overhead (FOH)?

Answer 10

Allocated FOH = Standard Input per Unit × Actual Output × Standard Absorption Rate (SAR)

Question 11

What is the allocated FOH if:

Actual Output = 10,000 units

Standard input = 2 hours/unit

SAR = £11/hour

Answer 11

if:

Actual Output = 10,000 units

Standard input = 2 hours/unit

SAR = £11/hour

Allocated FOH = 10,000 × 2 × £11 = £220,000

Question 12

What is the production-volume variance if:

Budgeted Fixed Overhead = £286,000

Allocated Fixed Overhead = £220,000

Answer 12

if:

Budgeted Fixed Overhead = £286,000

Allocated Fixed Overhead = £220,000

£66,000 Adverse (A) variance, because actual production was below the level used for budgeting.

Question 13

Q: What are the two main types of fixed-overhead variances under absorption costing?

Answer 13

the two main types of fixed-overhead variances under absorption costing are:

1) Expenditure variance

2) Volume variance

Question 14

Q: How is the total fixed overhead variance calculated?

Answer 14

Total Variance = Volume Variance + Expenditure Variance

Question 15

Q: Should the production-volume variance always be seen as an economic cost of unused capacity?

Answer 15

A: No — caution is needed when interpreting it that way.

Question 16

Q: Why should we be cautious when interpreting the production-volume variance?

Answer 16

A: Because some unused capacity may be intentionally maintained to handle unexpected demand surges and keep customer satisfaction high.

Question 17

Q: What is a second reason to be cautious when interpreting the production-volume variance?

Answer 17

A: It only considers costs, not price reductions needed to increase demand and utilize unused capacity.

Question 18

Q: When does a production-volume variance occur?

Answer 18

A: When the actual production level differs from the denominator level used to calculate the budgeted fixed-overhead rate.

Question 19

Q: What does an adverse production-volume variance indicate?

Answer 19

A: Extra fixed costs were incurred for planned capacity that was not used.

Question 20

Q: What is the starting point of a reconciling statement on an absorption basis?

Answer 20

the starting point of a reconciling statement on an absorption basis is Budgeted Profit

Question 21

What are the two sales variances included in the reconciling statement?

Answer 21

the two sales variances included in the reconciling statement are:

Sales Volume Variance (based on standard profit)

Sales Price Variance

Question 22

What are the two material cost variances?

Answer 22

the two material cost variances:

Material Usage Variance

Material Price Variance

Question 23

What are the two labour cost variances?

Answer 23

the two labour cost variances are:

Labour Efficiency Variance

Labour Rate Variance

Question 24

What are the two variable overhead variances?

Answer 24

the two variable overhead variances:

1) Variable Overhead Efficiency Variance

2) Variable Overhead Expenditure Variance

Question 25

What are the two fixed overhead variances in the reconciling statement?

Answer 25

the two fixed overhead variances in the reconciling statement: 1) Fixed Overhead Expenditure Variance 2) Fixed Overhead Volume Variance

Question 26

What is the final figure in a reconciling statement on an absorption basis?

Answer 26

the final figure in a reconciling statement on an absorption basis is actual profit

Question 27

Q: How do marginal and absorption costing reconciliation statements differ?

Answer 27

marginal and absorption costing reconciliation statements differ in two key ways: absorption includes the Fixed Overhead Volume Variance absorption values the Sales Volume Variance at standard profit per unit (vs. contribution per unit in marginal costing)

Question 28

Direct material price variance ?

Answer 28

Direct material price variance = (Standard Price – Actual Price) x Actual Quantity

Question 29

Material usage variance = ?

Answer 29

Material usage variance = (Standard Quantity – Actual Quantity) x Standard Price

Question 30

Direct Labour Rate Variance ?

Answer 30

Direct Labour Rate Variance = (Standard Rate – Actual Rate) x Actual Number of labour Hours

Question 31

Direct Labour Efficiency variance =?

Answer 31

Direct Labour Efficiency variance = (Standard Number of Hours – Actual Number of Hours) x Standard labour Rate

Question 32

Variable O/H expenditure variance=?

Answer 32

Variable O/H expenditure variance = (Standard Rate – Actual Rate) x Actual level of activity used (e.g. hours)

Question 33

Variable O/H efficiency variance = ?

Answer 33

Variable O/H efficiency variance = (Standard level of activity used – actual level of activity used e.g. hours) x Standard Rate applied

Question 34

Fixed O/H Expenditure Variance = ?

Answer 34

Fixed O/H Expenditure Variance = Budgeted Fixed O/H expenditure - Actual Fixed O/H expenditure (AFO)

Question 35

Fixed O/H Volume Variance = ?

Answer 35

Fixed O/H Volume Variance = Budgeted Fixed OH – Allocated Fixed OH based on actual output Or (Actual Production – Budgeted Production) x Standard FOH/unit

Question 36

Sales margin price variance = ?

Answer 36

Sales margin price variance = (Standard Price – Actual Price) x Actual Volume

Question 37

Sales margin volume variance = ?

Answer 37

Sales margin volume variance = Standard Profit x (Budgeted Volume – Actual Volume)

Question 38

what are the Advantages of Standard Costs?

Answer 38

Advantages of Standard Costs: Standard costs area key element ofthe management byexception approach. Standards canprovide benchmarksthat promote economy and efficiency. Standards can greatly simplifybookkeeping. Standards cansupport responsibilityaccounting systems.

Question 39

what are 7 Potential Problems with Standard Costs ?

Answer 39

Potential Problems with Standard Costs : 1) Standard cost variance reports are usually prepared on a monthly basis and may contain information that is outdated. 2) If variances are misused to negatively reinforce employees, morale may suffer and employees may make dysfunctional decisions. 3) Labor variances assume that the production process is labor-paced and that labor is a variable cost. These assumptions are often invalid in today’s automated manufacturing environment 4) where employees are essentially a fixed cost. 5) Just meeting standards may not be sufficient; continuous improvement may be necessary to survive in a competitive environment. 6) In some cases, a “favorable” variance can be as bad or worse than an unfavorable variance. 7) Excessive emphasis on meeting the standards may overshadow other important objectives such as maintaining and improving quality, on-time delivery, and customer satisfaction.

Question 40

Why might standard costing become less used in modern manufacturing?

Answer 40

Because it's less effective and more costly in fast-changing environments.

Question 41

Q: What are 4 key reasons standard costing may be less useful today?

Answer 41

4 key reasons standard costing may be less useful today are: Time-consuming and expensive to operate Outdated standards can make variance comparisons misleading Rapid change in business makes standards lose control/motivation value Overhead variances are often too complex for managers to use effectively

Question 42

Q: Why can standard costing and variance analysis be difficult in practice? what are 4 key reasons why actual results may differ? 4 key reasons why actual results may differ from standard?

Answer 42

A: Because actual results often differ from standards for many reasons. Measurement errors in actual outcomes Outdated standards due to changed conditions Operational inefficiency or efficiency Random, uncontrollable factors