Module 5 : Direct cost variance

Question 1

Principle of “Peeling an Onion (Variance Analysis)

Answer 1

4 level (from level 0 to level 3)

Question 2

Level 0

Answer 2

Actual-values vs. static budget for key factors such as operating profit

Question 3

Level 1

Answer 3

Actual-values vs. static budget for various factors

Question 4

Level 2

Answer 4

Actual-values vs. flexible vs. static budget for various output factors (e.g. price-/ sales- volume-variance)

Question 5

Level 3

Answer 5

Actual-values vs. flexible vs. static budget
for various input factors (e.g. price-/efficiency
variance input)

Question 6

Static
budget : definition

Answer 6

the static budget is based on the level of planned output (volume, sales) [static, since it only shows a planned output level]

Question 7

Static : calculation

Answer 7

Prices of the static budget (Ps) x Volume of the static budget (Ms)

Question 8

Flexible budget : definition

Answer 8

A flexible budget calculates budgeted revenues and budgeted costs based on the actual output in the budget period (using budget prices)

–> can be created for each activity level within the relevant area regarding cost behavior

Question 9

Flexible budget : calculation

Answer 9

Prices of the static budget (Ps) x Actual volume (Ma)

Question 10

Actual-values: definition

Answer 10

The actual values correspond to the actual income and costs based on the actual performance in the budget period

Question 11

Actual values : calculation

Answer 11

Actual price (Pa) x Actual volume (Ma

Question 12

Direct cost - variable cost

Answer 12

• change in total in proportion to changes in the related level of total activity or volume of output
• Direct costs are variable costs in the most cases

Question 13

Reasons for Deviations

Answer 13

• Poor quality of work in production
  -Inadequate qualifications
  of employees
  -Bad product design
  -Supplier problems
  -Too many rush orders
  from sales

Question 14

Process for Efficiency Deviations and Implications

Answer 14

It is essential to:
 Understand the causes of the deviations
 Ensuring the learning processes to avoid deviation

Question 15

Management’s Use of Variances

Answer 15

• Price and efficiency variances provide feedback to initiate corrective actions
• Standards are used to control costs and guide manager’s to appropriate investigations of variances
• Managers use variance analysis to evaluate performance after decisions are
  implemented
• Understand why variances arise, learn, and improve future performance

Question 16

Benchmarking

Answer 16

Benchmarking is the continuous process of comparing your firm’s performance levels against the best levels of performance in competing companies or in companies having similar processes

Question 17

Why Do Organizations Use Cost-Variance Analysis?

Answer 17

Large deviations can indicate that companies should consider adapting their strategy or their processes

Question 18

Price variance

Answer 18

measures the difference between the actual price paid for inputs and the standard (expected) price, multiplied by the actual quantity of inputs used. It helps in evaluating the effectiveness of purchasing decisions.

Question 19

Production volume variance

Answer 19

Fixed overhead cost (flexible budget) - Allocatead overhead cost form the actual output

Question 20

Efficiency variance

Answer 20

measures the difference between the actual quantity of inputs used and the standard quantity of inputs allowed for the actual level of output, multiplied by the standard cost per unit of input

Question 21

Efficience variance : calculation

Answer 21

EfficiencyVariance=(ActualQuantity−StandardQuantity) × StandardCostperUnit

Question 22

Price variance (calculation)

Answer 22

PriceVariance=(ActualPrice−StandardPri ce)
×ActualQuantity

Question 23

Output (sales)-volume variance

Answer 23

Flexible Budget - Static budget

Question 24

Direct cost - Variance in Variable cost

Answer 24

L1 : Static budget variance
L2: Volume variance and flexible budget variance
L3 : Flexible budget variance and price variance

Question 25

Indirect cost - Variable cost variance

Answer 25

L1 : Static budget variance
L2 : Volume Variance and flexible bugdet variancde
L3 : efficiency variance and spending variance

Question 26

Indirect cost - Fixed cost variance

Answer 26

L1 : Static budget variance
L2 : Volume Variance and Flexibile budget variance
L3: Spending variance and production variance