M/A - Variance Analysis Flashcards
Explain what standard is and what standard cost
Standard - predetermined amount for sales price, cost, or amount of manufacturing inputs
Standard cost - benchmarks to plan and evaluate both the cost and the quantity of input used in manufacturing goods and providing services
- Standard and budget can be used interchangeably
-Standard are usually set on per unit basis and often focus on the standard cost of resources required to produce one unit
How are standard cost cards used
- Outline quantity usage and cost of material & labour & overhead for each product
Ex. Source of standard cost is & the average price or amount used over several years
Predetermined value of engineering studies
What is the difference between practical and ideal standard
Ideal standard - based on optimal operating environment
Practical standards - are high benchmarks but are also more realistic and attainable
Explain what a costing system is and the 3 types of costing system
Costing systems - are ways of monitoring costs in an organization using processes, control, and report
3 Types
1. Actual costing system - traces actual product cost to objective as a way to measure total product cost
2. Normal costing system - traces actual direct cost rates to the actual quantity, cost allocation, and pre-determined overhead rates are fairly accurate.
3. Standard costing system - product cost based on standard, focuses on cost deviation from standard.
Drawback - variance from a standard is usually evaluated after some time has passed
What is the difference between effectiveness and efficiency
Effectiveness - About doing things in a way that meets the organization’s objectives
Efficiency - doing things with the least amount of effort or waste
What is the difference between favorable and unfavourable
- Favourable variance - Variance has a favorable impact on income (increase in revenue or decrease in expenses)
- Unfavourable variance - Variance has an unfavorable impact on income (decrease revenue or increase expenses)
What are the four steps for the variance analysis
Step 1 - Set the objective of the analysis and calculate the variance
- The intention of the analysis should be clear and will help structure how the analysis is performed
Step 2 - Determine which variance will be investigated
- Not worth the time and effort to fully analyze all variance
- Management accountants decide which variances are significant enough for investigation
Ex. Cost/benefit - Potential benefit from investigation
Frequency, Ability to control, Nature of the firm
Step 3 - Seek an explanation
- Expected result differs from achieved. Performed both fixed and variable expenses
- Variance discrepancy is rarely due to the budget process itself
Step 4 - Draw Conclusion
- Most appropriate and useful conclusion must be drawn based on analysis and advice must be based on facts and be relevant to the business
It is important to note that favorable is not necessarily good and unfavorable does not necessarily mean bad
What are some examples of approaches to use in investigating variances
- Determine if the variance amount exceeded a predetermined critical value. Investigate variance
- Plot the variance on a control chart and if the process seems to be going out of control or to be already out of control, then investigate the variance
- Perform a decision analysis to decide whether to investigate a variance
- Cost variances are widely used in manufacturing settings, but they can also be used in services organization
DL - The Budget did not include a scheduled pay increase, Additional staff were required to finish the job promptly, and staff left the organization
Explain how static budget variance is used and the major roles
- Summarize expected financial consequences of management plan operation for the upcoming period
- Is approved by the board and provides financial implication of static budget to the market in some format
Static budget variance - provides an overall picture of whether planned result were achieved, and they are a useful starting point for investigating sales revenue and fixed csot
Level 1
Actual result - static budget amount
Static budget variance = (SQSP) - (AQAP)
AQ - actual volume of units
AP - Actual price per unit of output
SQ - Standard volume of units (budget)
SP - Standard price per unit of output (budget)
Explain how a flexible budget variance is used
Flexible budget - allows the organization to evaluate cost control when actual production is production
- Adjust budget to reflect what actually occurred
Actual result Flexible budget Static budget
(AQAP) (AQSP) (SQSP)
Level 2
Flexible budget variance - (AP-SP)AQ
Actual result - Flexible budget variance
Sales volume variance - (AQ-SQ)*SP
Flexible budget amount - static budget amount
Explain how cost variance and fixed overhead variance
Level 3
- The flexible budget variance can be further broken down into two more variances price & efficiency variance
Actual result Midpoint Flexible budget
(APAQ) (AQAP). (SQ for actual output*SP)
Price/ rate variance - (AP - SP) *AQ
Focuses on the difference between actual and standard input rate * actual input quantity
Efficiency variable cost variance -( AQ - SQ of actual output ) *SP
- usage variance holding rate constant removes effect difference any change in rate
- Budget quantity of input allowed for actual output
Ex. DM & DL efficiency variance compares
Explain what the mix and yield variance is and how it is used
Mix variance - Difference between the actual and standard mix, given actual units sold and standard price per unit
Yield variance - Difference between actual and standard units of input allowed for actual output, given standard weighted average price per unit of input
Midpoint 1 (AQSP = ATQAM%SP)
Midpoint 2 (ATQSM%SP)
Flexible budget = (STQSM%*SP)
ATQ - Actual total units of input
AM% - Actual mix %
SP - standard price
STQ - standard total units of input allowed for actual output
SM% - standard mix %
Mix variance = (AM% -SM%) ATQSP
Yield variance = (ATQ - STQ) SM%SP
Sales quantity variance of deviation from total sales
Efficiency variance = mix variance + yield variance
Explain how fixed overhead variance is used
- Organizations that use a standard costing system have additional general ledger account
- Management accountant needs to distinguish between actual cost variances that are artificially created and standard costing system
Actual fixed overhead cost
Static budget (equal flexible budget)
Fixed overhead applied
Fixed overhead variance (FOH over/underapplied
Fixed overhead spending/ budget variance
Production volume variance( Fixed cost volume variance)
Explain revenue variance, CM variance and static analysis
- Since the static budget variance includes the effect of both sales quantities and selling price, often useful to break the overall variance down
- It comes from comparing the flexible budget revenue to static budget revenue
Sales mix variance (each product) = (Actual sales mix % - budget sales mix %) * (Actual units of all product sold * budgeted contributed margin per unit
Sales quantity variance ( Actual units of all products sold - budgeted units of product sold) * budgeted average contributed per unit
Budget average CM per unit = sum of budgeted sales mix % * budgeted contribution margin per unit for all products (BACM = BM% *BCM)
What is the formula for market share and market size
Market size - An organization % of the total revenue in an industry
(Actual market size in units - budgeted market size in units)* budgeted market share % * budgeted average CM per unit
Market share variance
(AMS%- BMS%)AMSBACM
