MA Week 8 Flashcards
Standard costing
A CONTROL technique which compares standard costs and revenues w/ actual results to obtain revenues which are used to stimulate IMPROVED PERFORMANCE
- an ESTIMATED unit cost
- PER UNIT basis
- Benchmark for measuring performance against actual results
Unfavourable (adverse) vs Favourable variances
U (or A) - more costs / reduce income
F - increase revenue / reduce costs
Static budget vs Flexed budget
Problem with Static budget
Why might managers find a Level 2 flexible-budget analysis more informative than a Level 1 static-budget analysis?
Static:
- no adjustment made to budget units; based on 1 level of output
- variances caused by changes in output (non-controllable) cannot be separated from variances caused by changes to price/cost (controllable)
Flexed:
- ADJUSTED (flexed) to various levels of activity. To recognise the actual level of output
A Level 2 analysis enables a manager to distinguish how much the difference between an actual result & a budgeted amount is due to…
- differences between actual and budgeted OUTPUT levels
- differences between actual and budgeted SALES and COSTS due to the FACTORS OTHER THAN just the difference in the volume of output.
Variances caused by changes in OUTPUT cannot be SEPARATED from variances caused by changes in price/cost.
Since flexed budget variance adjusts for ACTUAL output, variances caused by changes in output levels can be separated from variances caused by changing prices & levels of input.
Sales volume profit (/contribution) variance
Variances b/c actual sales volume is diff. from budgeted sales volume
(Actual sales units - Budgeted sales units) * Standard margin
where Std margin = profit (absorption costing) or contribution per unit (marginal costing)
3 levels of variance analysis
*in Service sector, use Labour rates variance + Efficiency variance
- Diff. between Actual & Static budget = Static budget variance
- Diff. between Flexible budget & Static budget = Sales volume variance
- Diff. between Actual & Flexible budget = Flexible budget variance
- Flexible budget variance = Price variance + Usage/Efficiency variance
(for input factors)
Material usage/efficiency - if Unfavourable
7 causes
- DEFECTIVE material
- Excessive WASTE (abnormal loss)
- UNSKILLED labour
- Pilferage - stealing, fraud
- ERRORS in ALLOCATING material to jobs
eg. job-order costing - Obsolete machinery (or highly depreciated)
- may cause wastage
*Take care of interdependencies between materials & labour.
High cost may mean high quality, less wastage. But if workers are unskilled, will also waste.
Who is responsible for Unfavourable material usage variance?
- Production manager is responsible for keeping tabs on UNNECESSARY or extravagant use of materials.
- But Purchase manager will be held accountable if purchase low quality materials to improve direct materials price variance
Material usage - if Favourable
7 causes
- Material used of HIGHER QUALITY than standard i.e. stricter quality control
- More EFFECTIVE USE made of material
- ERRORS in allocating material to jobs
- Automated processes or modern machinery
- SKILLED labour
- TRAINING and development of workforce / MOTIVATED workforce
Material price - if Unfavourable
7 causes
- Price increase
- Careless purchasing
- BETTER QUALITY material
- INFLATION (increase in all prices)
- Not benefitted from bulk discount
- Increased TRANSPORTATION costs
- JUST IN TIME management can lead to material shortages and may have needed urgent orders
- not buying in bulk, might have inflation then, can’t find right supplier, become more expensive goods
Who is responsible for Unfavourable material price variance?
- Generally considered the Purchase manager since mainly purchasing dept. responsible & accountable for placing orders for direct materials
- But may or may not be due to inefficiencies of purchasing dept. (see others reasons in flashcard)
Material price – If Favourable
4 causes
- UNFORESEEN DISCOUNTS received e.g. bulk purchasing leading to discounts
• Greater care in purchasing; cheaper supplier // purchasing manager performed better in NEGOTIATING prices
• LOWER QUALITY material
• Efficient procurement, e.g. ECONOMIC ORDER QUANTITY e.g. economically best courses of action regarding reordering point, ordering cost, carrying cost, order lead time, Purchasing cost per unit
2 characteristics of Fixed overhead variance
- Flexible budget is same as Static budget, as fixed costs cannot be flexed
- Flexible budget variance = Spending variance only
*No efficiency variance b/c managers cannot be more or less efficient in dealing with an amount that is fixed regardless of the output level
Cost variances formulae: Materials Price Materials Usage Labour rate Labour efficiency VO spending VO efficiency FO expenditure
Materials Price: AQ(AP-SP) Materials Usage: SP(AQ-SQ) Labour rate: AH(AR-SR) Labour efficiency: SR(AH-SH) VO spending: AH(AR-SR) VO efficiency: SR(AH-SH) FO expenditure: Actual FO –Budgeted FO
=
AH(AR-SR) SR(AH-SH)
Actl FO–Budget’d FO
4 points about management use of variances
- PERFORMANCE EVALUATION!!!
- Be careful to understand the CAUSES of a variance BEFORE using it as a performance measure
- Consider possible INTERDEPENDENCIES among variances & don’t interpret variances in isolation of each other
eg. automation improving labour efficiency variance,
UNSKILLED labour may improve rate variance but compromised EFFICIENCY - Consider trade-offs between variances, eg. price & efficiency
4 instances that require Standards to be REVISED
- Sudden INCREASE in the PRICE of MATERIALS due to a rapid increase in global market prices (e.g. the price of oil or other commodities)
- Change in WORKING METHODS and procedures that alters the expected direct labour time for a product or service.
^might have less human intervention - Design specifications of MATERIALS used to make a product or provide a service (e.g. Zoom or MS Teams consistently improving the product design, in light of practical challenges)
- Unforeseen changes in the RATE OF PAY to the workforce.
