Management Accounting Flashcards
STATIC & FIXED BUDGET VARIANCES
A static or fixed budget variance is the level 1 of variance analysis and will tell you what the dollar
value difference is between what your budget is and the actuals.
FLEXIBLE BUDGET VARIANCES
A flexible budget variance will tell you what the overall variance is of the budget using the actual
results of the business.
Sales Volume
Variance (Flexible budget quantity variance)
(Actual
Quantity - Budgeted Quantity) x Budgeted Price
Sales Price Variance (flexible budget price variance)
Actual Price - Budgeted Price) x
Actual Quantity.
Static Budget Variance
Flexible Budget Quantity Variance + Flexible
Budget Price Variance
Full absorption cost-based pricing
- Target selling price = variable production costs per unit + fixed production costs per unit + markup.
- Conclude on the target selling price.
- Calculate operating profit based on expected number of units sold. (this is where account for the fixed costs, including S&G. Also account for the production costs here).
- Operating margin = operating profit/revenue.
Variable production costs = DM + DL + VOH (EXCLUDES S&A)
Full absorption cost pricing - summary
1) Target selling price = variable production costs per unit + allocation of fixed production costs per unit + markup.
Variable production costs = DM + DL + VMOH (EXCLUDES S&A)
Full absorption TP
Target selling price = variable production costs per unit + fixed production costs per unit + markup.
Variable production costs = DM + DL + VOH (EXCLUDES S&A)
Full aborption costing
ALL costs of production are treated as product costs (DM, DL, MOH; all costs DIRECTLY attributable to manufacturing) and included in inventory
Selling, general, and administrative costs
Selling, general, and administration, not matter if its variable, does not get included in variable production costs per unit. Also fixed S&A does not get included in determining the price as it gets expensed to the I/S and never gets added to inventory
Demand-based pricing
- Calculate expected operating profit per price level = (price × quantity) – (costs × quantity).
- Operating margin = operating profit/revenue.
- Conclude on the target selling price.
- Compare operating margins under both methods to determine the highest margin.
- Conclude on the price to charge.
qualitative factors of absorption cost-based pricing:
”- Advantage: reliability
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“- Advantage: ease of use
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“- Advantage: other valid
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“- Disadvantage: accuracy of information given new product
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“- Disadvantage: margins expected
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“- Disadvantage: assumptions regarding book sales volume
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“- Disadvantage: impact of competition
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“- Disadvantage: other valid
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qualitative factors of demand-based pricing:
”- Advantage: customer considerations
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“- Advantage: demand curve
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“- Advantage: impact of high demand
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“- Advantage: other valid
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“- Disadvantage: market research reliability
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“- Disadvantage: other valid
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CM
CM = rev - VC
Break even
BE ($) = FC / CM % per unit
BE (units) = FC / CM$ per unit
Target profit
volume = (FC + profit req’d) / CM per unit
Gross margin %
GM = Gross profit [rev - COGS] / total sales
Gross margin $
GM $ = rev - cost
sales commission
Sales commission is not subtracted from the contract sales value to determine gross margin, as it is part of selling costs, not product costs, for financial reporting purposes.
MOH costs excluded
Sales commission and website hosting are not directly attributable to the manufacturing process and should not be included.
Contribution Margin (scenarios)
● Special Orders
● Optimal Product mix
● Break-Even Analysis
Responsbility centres
1) cost centre
2) profit centre
3) investment centre
4) revenue centre
transfer pricing
1) Variable cost pricing (incremental costs only)
2) absorption cost pricing (Full cost)
3) market price
4) negotiated price
principles of evaluating responsibility centres
● Control
○ Management should have control over what they are measured on. For example, if
management is measured on their abilities to keep costs low, but they are required to
take a set transfer price from another division, they have no control over their
outcomes. This would be an evaluation method that lacks control.
● Alignment
○ Management’s measures should be aligned with the goals of the company as a
whole. Management should not be incentivized to take actions that would not be in
the best interest of the company as a whole. While that sounds obvious, a common
example is when management is incentivized to increase short term profits to
achieve their performance bonus at the expense of long term shareholder value.
● Holistic
○ Management’s measures should encourage decisions that are in the best interest of
the business as a whole, and not just their division. While similar to alignment, holistic
measures focus on incentives across divisions to ensure that one division doesn’t
focus solely on themselves.
Direct Material Price (VA explaination)
difference between the actual and expected price of the materials.
Increase or decrease in commodity prices
New supplier
Change to a better or poorer quality of material
Direct Material efficiency (VA explaination)
often means there was more or less waste than expected.
Direct labour rate (VA explaination)
difference between the expected amount paid per hour and the actual amount paid per hour.
Overtime hours
Use of contract or replacement workers
Union renegotiation
Direct labour efficiency (VA explaination)
difference between the actual and expected efficiency of the workers
Level of experience and training
Quality of materials
Amount of supervision
Machine downtime
Efficiency measures
how well organization uses its resources (e.g. financial, HR) to fulfill its mission
;inputs linked to this is how much company can get from the resources consumed
Effectiveness measures
how well an organization actually achieves its mission
Relevant costing considerations in excluded in included costS:
Excluded: sunk costs, costs that don’t differ, costs that already occured or will continue to occur
included: opp. costs (when operating at capacity) and incremental costs/changes/savings
What to consider when perofrming relevant costing
ENSURE ANALYSES ARE CONSISTENT WITH EACH OTHER. include/exclude the same types of costs
o Multiple product break-even analysis
Calculate the CM for each product
Calculate the weighted average of each product’s CM
o Where: W/A = (CM P1 * P1 product mix %) + (CM P2 * P2 product mix %)
Occupancy costs
Sunk cost, as incurred regardless of whether the boutiques go ahead
Assumptions
o Discuss assumptions or factors impacting calculation, or reasonableness (add in a sentence for free marks). Always, ALWAYS, do on day 2
identify factor –> what will happen if something (that’s part of the calc; i.e. case facts e.g. like cheese sales) changes, how will this impact the result (number of bottles).
opprotunity costs
Realiability of information
o Case facts will lead me to reading it as a red flag. So, use WIR format
Always be recommending.
