Need to know

Question 1

What is the formula for price variance?

Answer 1

AQ * AP compare to AQ * SP

Question 2

What is the formula for quantity variance?

Answer 2

AQ * SP compared to SQ * SP

Question 3

How do you work out SQ?

Answer 3

Actual units produced * SQ per unit.

Question 4

How do you work out OAR?

Answer 4

Budgeted OH / budgeted hours (this is budget quantity * standard hours per unit)

OR

Budget OH / no . of budget hours

Question 5

What is the formula for fixed OH expenditure variance?

Answer 5

Budget OH compare to actual OH.

Question 6

What is the formula for fixed OH capacity variance?

Answer 6

Budget OH compared to ((actual labour used * (budget OH/ budget sales * fixed OH))

Question 7

What is the formula for fixed OH efficiency variance?

Answer 7

((actual labour used * (budget OH/ budget sales * fixed OH)) compared to (actual units sold * fixed OH * (budget OH/ budget sales * fixed OH)).

Question 8

What is the formula for fixed OH volume variance?

Answer 8

Standard quantity of actual production of labour hours * OAR

Question 9

How do you work out a reconciliation of standard costs?

Answer 9

(Total standard costs / standard units produced) * actual units produced

Question 10

Why might there be favourable material price variances?

Answer 10

-Cheaper material used
-Lower quality of material

Question 11

Why might there be adverse material usage variances?

Answer 11

-Cleaning caused more waste
-More material required
-Lower quality caused more waste

Question 12

Why might there be favourable labour rate variances?

Answer 12

-Less overtime
-Less skilled labour

Question 13

Why might there be adverse labour efficiency variances?

Answer 13

-Time wasted due to blockages
-Less skilled labour

Question 14

How do you work out TPAR for each product?

Answer 14

return per factory hour / conversion cost per hour

Question 15

How do you work out return per factory hour?

Answer 15

Throughput contribution / no. of bottleneck hours used per product

Question 16

How do you work out conversion cost per hour?

Answer 16

Total factory costs / total bottleneck hours used

Question 17

How do you work out TPAR company wide?

Answer 17

Total contribution/ total bottleneck hours used

Then

Above divided by conversion cost per unit.

Question 18

What does the TPAR show?

Answer 18

TPAR>1 = return exceeds cost so PROFIT

TPAR<1 = costs exceeds return so LOSS

Question 19

How do you interpret the results of throughput accounting (TPAR)?

Answer 19

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…

Question 20

What is throughput accounting?

Answer 20

Throughput is used for short term decisions, used to alleviate a constraint.
Labour is not short term so it is not included.

Question 21

How would you interpret variances in the cost per unit under activity based costing and absorption costing?

Answer 21

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.

Question 22

What are the consequences of not having an ABC system?

Answer 22

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.

Question 23

Which industries such ABC and which suit AC?

Answer 23

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.

Question 24

How do you work out ABC indirect OH?

Answer 24

Total OH for a product / no. of units for that product

Question 25

How do you work out total ABC cost per unit?

Answer 25

ABC indirect OH + Direct costs

Question 26

How do you work out AC indirect OH?

Answer 26

Total OH / total labour hours

• Then multiply this by no. of labour hours per unit to get AC indirect OH

Question 27

How do you work out AC cost per unit?

Answer 27

AC indirect OH + Direct costs

Question 28

How do you produce an opening statement reconciling standard absorption cost of actual production to actual cost ?

Answer 28

1. Create cost card
   Sales price
   Less: standard cost (* standard amount needed) for each item including fixed OH
2. Multiply actual units by the cost card amount to get reconciliation of standard cost
3. Add up all the variances calculated (if negative take these away)
4. Take away total variances from reconciliation of standard cost to get actual cost

*** should be equal to all actual costs added together

Question 29

How do you work out variances after increases and splitting them into different components?

Answer 29

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

Question 30

What are some consequences of not using ABC?

Answer 30

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.

Question 31

What to remember for relevant costs?

Answer 31

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.

Question 32

What are relevant costs?

Answer 32

“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