Need to know Flashcards
What is the formula for price variance?
AQ * AP compare to AQ * SP
What is the formula for quantity variance?
AQ * SP compared to SQ * SP
How do you work out SQ?
Actual units produced * SQ per unit.
How do you work out OAR?
Budgeted OH / budgeted hours (this is budget quantity * standard hours per unit)
OR
Budget OH / no . of budget hours
What is the formula for fixed OH expenditure variance?
Budget OH compare to actual OH.
What is the formula for fixed OH capacity variance?
Budget OH compared to ((actual labour used * (budget OH/ budget sales * fixed OH))
What is the formula for fixed OH efficiency variance?
((actual labour used * (budget OH/ budget sales * fixed OH)) compared to (actual units sold * fixed OH * (budget OH/ budget sales * fixed OH)).
What is the formula for fixed OH volume variance?
Standard quantity of actual production of labour hours * OAR
How do you work out a reconciliation of standard costs?
(Total standard costs / standard units produced) * actual units produced
Why might there be favourable material price variances?
-Cheaper material used
-Lower quality of material
Why might there be adverse material usage variances?
-Cleaning caused more waste
-More material required
-Lower quality caused more waste
Why might there be favourable labour rate variances?
-Less overtime
-Less skilled labour
Why might there be adverse labour efficiency variances?
-Time wasted due to blockages
-Less skilled labour
How do you work out TPAR for each product?
return per factory hour / conversion cost per hour
How do you work out return per factory hour?
Throughput contribution / no. of bottleneck hours used per product
How do you work out conversion cost per hour?
Total factory costs / total bottleneck hours used
How do you work out TPAR company wide?
Total contribution/ total bottleneck hours used
Then
Above divided by conversion cost per unit.
What does the TPAR show?
TPAR>1 = return exceeds cost so PROFIT
TPAR<1 = costs exceeds return so LOSS
How do you interpret the results of throughput accounting (TPAR)?
Does the TPAR show that the product mix should imply a profit or a loss?
Which product can’t be made due to the bottleneck? Why is this - This product is still profitable but lacks required machines hours to completely make it.
Actually mention the values (e.g. 2.40).
The most profitable product to make with a shortage is…
The least profitable is…
What is throughput accounting?
Throughput is used for short term decisions, used to alleviate a constraint.
Labour is not short term so it is not included.
How would you interpret variances in the cost per unit under activity based costing and absorption costing?
Under absorption costing, if labour hours are similar for both products, the cost will be similar as AC uses labour hours to apportion costs. This will be different from ABC which uses all the OH’s and these are very different for each product.
What are the consequences of not having an ABC system?
One product is priced too low while the other is priced too high. AC for a product may not even cover the full cost under ABC. ABC is grouped into activities and these vary differently from each product where as under AC activities are very similar.
Which industries such ABC and which suit AC?
d) ABC will benefit industries with very high overheads and very low direct costs asit gives a more accurate reflection of the true overhead cost. High tech industries where much of the
overhead is incurred in areas other than production,such as development costs or specific product marketing, would most benefit from ABC. Also complex products produced in small
batches would also mean ABC would be more appropriate.
AC will benefit industries with very low overheads and high direct costs. Traditional manufacturing industries producing large quantities of homogeneous products in long production runs
would probably not benefit significantly from ABC.
How do you work out ABC indirect OH?
Total OH for a product / no. of units for that product
How do you work out total ABC cost per unit?
ABC indirect OH + Direct costs
How do you work out AC indirect OH?
Total OH / total labour hours
- Then multiply this by no. of labour hours per unit to get AC indirect OH
How do you work out AC cost per unit?
AC indirect OH + Direct costs
How do you produce an opening statement reconciling standard absorption cost of actual production to actual cost ?
- Create cost card
Sales price
Less: standard cost (* standard amount needed) for each item including fixed OH - Multiply actual units by the cost card amount to get reconciliation of standard cost
- Add up all the variances calculated (if negative take these away)
- Take away total variances from reconciliation of standard cost to get actual cost
*** should be equal to all actual costs added together
How do you work out variances after increases and splitting them into different components?
Compare:
Actual quantity * actual cost
Actual quantity * revised standard cost
Actual quantity * normal standard cost
AQ * AC - AQ * RSC = operational variances
AQ * RSC - AQ * SC = planning variance
What are some consequences of not using ABC?
c) AC will tend to undercost the high volume products and overcost the lower volume products. ABC takes account of the complexity of the products and therefore allocates overhead on
a fairer basis. By using AC incorrect pricing decisions could be made leading to selling too cheaply and incurring losses or setting the price too high and losing potential sales.
ABC is superior in this case.
What to remember for relevant costs?
Depreciation is not included as it is not a relevant cost - it is a sunk cost.
Read the question and follow any upgrades or expects.
Keep costs associated with buying in capital costs, and costs associated with running in running costs. It is the running costs that you analyse as savings per year.
What are relevant costs?
“Relevant costs are the costs appropriate to a specific management decision. They are those future costs which will be affected by a decision to be taken. Non-relevant costs will not be affected by the decision. “
Future, differential cash flows
