Module 5 : Direct cost variance Flashcards
Principle of “Peeling an Onion (Variance Analysis)
4 level (from level 0 to level 3)
Level 0
Actual-values vs. static budget for key factors such as operating profit
Level 1
Actual-values vs. static budget for various factors
Level 2
Actual-values vs. flexible vs. static budget for various output factors (e.g. price-/ sales- volume-variance)
Level 3
Actual-values vs. flexible vs. static budget
for various input factors (e.g. price-/efficiency
variance input)
Static
budget : definition
the static budget is based on the level of planned output (volume, sales) [static, since it only shows a planned output level]
Static : calculation
Prices of the static budget (Ps) x Volume of the static budget (Ms)
Flexible budget : definition
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
Flexible budget : calculation
Prices of the static budget (Ps) x Actual volume (Ma)
Actual-values: definition
The actual values correspond to the actual income and costs based on the actual performance in the budget period
Actual values : calculation
Actual price (Pa) x Actual volume (Ma
Direct cost - variable cost
- 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
Reasons for Deviations
- Poor quality of work in production
-Inadequate qualifications
of employees
-Bad product design
-Supplier problems
-Too many rush orders
from sales
Process for Efficiency Deviations and Implications
It is essential to:
Understand the causes of the deviations
Ensuring the learning processes to avoid deviation
Management’s Use of Variances
- 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
Benchmarking
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
Why Do Organizations Use Cost-Variance Analysis?
Large deviations can indicate that companies should consider adapting their strategy or their processes
Price variance
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.
Production volume variance
Fixed overhead cost (flexible budget) - Allocatead overhead cost form the actual output
Efficiency variance
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
Efficience variance : calculation
EfficiencyVariance=(ActualQuantity−StandardQuantity) × StandardCostperUnit
Price variance (calculation)
PriceVariance=(ActualPrice−StandardPri ce)
×ActualQuantity
Output (sales)-volume variance
Flexible Budget - Static budget
Direct cost - Variance in Variable cost
L1 : Static budget variance
L2: Volume variance and flexible budget variance
L3 : Flexible budget variance and price variance
Indirect cost - Variable cost variance
L1 : Static budget variance
L2 : Volume Variance and flexible bugdet variancde
L3 : efficiency variance and spending variance
Indirect cost - Fixed cost variance
L1 : Static budget variance
L2 : Volume Variance and Flexibile budget variance
L3: Spending variance and production variance
