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Management Accounting 4 > standard costing > Flashcards

standard costing Flashcards

1
Q

What is standard costing?

A

It is the practice of evaluating costs using standards

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2
Q

What are the types of standard costing?

A
  1. Standard Absorption costing
  2. Standard variable costing
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3
Q

When a standard is not met, what do we do?

A

We create a Variance account that is either an expense account(unfavourable) or an income account(favourable)

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4
Q

What is different from standard absorption costing to standard variable costing?

A

Absorption costing
- fixed costs are absorbed into the cost of inventory
- there is a fixed overhead volume variance
- Sales Variance is based on Profit per unit and not Gross Profit

Variable costing
- Fixed costs are expensed and not absorbed into inventory
- there is no fixed overhead volume variance
- Sales variance is based on gross profit per unit

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5
Q

What are all the possible Variances that could arise when dealing with Standard Costing?

A

Word: MLVFS

  • Material Price
  • Material Usage (broken into material Yield and Material Mix)
  • Labour Efficieny
  • Labour rate
  • Labour Idle time
  • Variable overhead efficiency
  • Variable overhead Expenditure
  • Fixed overhead expenditure
  • Fixed overhead volume (broken into efficiency and capacity)
  • Sales Price
  • Sales Volume (broken into Mix and quantity)
  • OTHER ONES TOO
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6
Q

How do you work Material Usage variance?

A
  • You need to a table with the following,
    / on x- axis, have 3 headings
  • Actual input ratio based actual output
  • standard input ratio based on actual output
  • standard input ratio based on standard output
    / on your y axis, you need to list all your different products
  • the difference between “Actual input ratio based actual output” and “ standard input ratio based on actual output” when multiple will be your mix variance and the difference between “standard input ratio based on actual output” and “standard input ratio based on standard output” when multiplied will be your quantity variance
  • they must be multiplied by the STANDARD price that was planned to be paid
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7
Q

How do you work out Labour rate Variance?

A
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8
Q

How do you work out Material Price Variance?

A
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9
Q

How do you work out labour efficiency variance?

A
  • we need to determine how many hours or liters we’re actually used compared to how many are needed in terms of the standard
  • it needs to be multiplied against the standard cost per hour or liter or whatever
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10
Q

How would you work out Variable overhead variance?

A
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11
Q

How do you work out variable overhead expenditure variance?

A
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12
Q

How do you work out the Fixed overhead variances?

A
  • Expenditure and volume
  • Can be calculated using the following columns
    ~ actual units with budgeted input and budgeted rate (applied costs)
    ~ budgeted fixed costs
    ~ actual units with actual input and actual rates (actual cost)
  • The volume is the difference between the first two columns and the expenditure is the difference between the 2nd and 3rd columns
  • volume can be further broken down into efficiency and capacity and calculated as follows
  • Have 3 columns named as follows
    ~ actual units with budgeted input per unit and budgeted rate (applied costs)
    ~ actual units and actual total hours/whatever with budgeted Rates
    ~ budgeted fixed costs (budgeted units, budgeted hours and budgeted rates)
  • The efficiency variance is the difference between the first 2 columns and the capacity variance is the difference between the 2nd and 3rd columns
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13
Q

How do you work out Sales Price Variance?

A
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14
Q

How do you work out Sales Volume Variance?

A
  • This is a combination of sales Mix and salss Quantity Variance
  • Actual inputs and actual output compared to standard inputs and standard outputs, multiplied by the standard
  • contribution margin amount if variab,le costing (if nothing is sad, then assume this)
  • Gross profit margin amount if absorption costing performed
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15
Q

When is a variance favourble or unfavourble?

A

-unfavourable when more resources than the standard per unit, was used
- favourable when less resources than the standard per unit, was used

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16
Q

How does one comment on the Variances?

A
  • speak about the percentage difference of the variances from actual to budgeted amounts
  • translate that percentage into rand amounts affecting profitability line items (like gross profit)
  • speak about why the variance actually came about
17
Q

What journal entry would need to be processed when you have a unfavourable material yield variance?

A

DR material usage variance
DR Work-in Progress
CR Raw Materials

18
Q

what entry would need to be processed when you have an unfavourable material Price variance?

A

DR Raw material
DR Material Price Variance
CR Bank

19
Q

Do our variances help us record our inventory at the value that IAS 2 requires of us?

A

IAS 2 requires us to record inventory at the lower of Cost or NRV and variances will make our inventory valued above or below that amount.

20
Q

What are the general rules for when disposing of variance Journal entries? and why does it work this way?

A
  • When dealing with any variance besides Fixed overhead volume variance, if the variance is unfavourable and came from ABNORMAL WASTAGE, then put the whole variance into Cost of Sales.
  • this is because IAS 2 allows us to allocate normal wastage to the cost of materiel but not for abnormal wastage that needs to be expensed
  • When dealing with Fixed overhead volume variance(even when they spilt), if the machinery is set at normal capacity, and the variable is unfavourable, then the variance must be disposed of into Cost of Sales completely however If you are producing under or over normal capacity, then you need to split it
  • this is because adding back an unfavourable volume variance would increase the value of inventory simply because we produced less goods, IAS 2 doesn’t allow this, inventory does not become more valuable when you produce less units
  • When dealing with every other variance, the variance needs to be rellocated to Cost of sales and Inventory account(s)
  • this is because of all bring inventory back to the lower of NRV or Cost
21
Q

Why do we dispose of the Variance into Cost of Sales and Inventory account(s) OR sometimes just Cost of Sales?

A
  • when we are prorating variances, at the beginning you need to consider what stock the variances relate to, whether that be raw materials, or now WIP or even FINished goods, it depends where the item is sitting that the variance is about. Lastly it could have been sold and therefore is sitting in Cost of Sales
  • the reason that we need to prorate the variances is in order to ensure that our Cost of Inventory aligns with the rules of IAS 2. When we have a positive Variance, it can result in our stock being overvalued and not at the lower of NRV or cost. When we have negative variances, it can also result in our stock not being at Cost or NRV but being understated.
  • and we need to consider where the inventory is sitting because in order to prorate the variances, we need to know which accounts to move the inventory into
  • if the inventory has been sold, then we need to move it into Cost of Sales because its not with us anymore
  • if its still on hand we can reverse it into the account where the inventory is sitting
  • material Price Variance is the only variance that is slightly different because some of the items are not sitting in inventory accounts or cost of Sales but in the usage variance account because the variance would be affected by the price we paid for the amount we over or under used.
22
Q

When spliting the Variance between cost of Sales and Inventory, how do you know what inventory accounts to take it to?

A
  • We need to understand when it arose so that we know if its applicable to raw materials or WIP or finished goods or all
  • then we need to trace the relevant units or value of inventory through the accounts at the end of the year to find out where they are sitting, we can do this through the use of T accounts
  • ONLY material Price variance needs to be allocated ALSO PARTLY to the material usage variance because of the fact that some of the usage variance is greater because of the price that was paid
  • EVERY OTHER VARIANCE DOESN’T GO TO RAW MATERIALS BUT RATHER WIP, FINISHED GOODS OR COST OF SALES(if its not on hand anymore
23
Q

When reconciling profit from using standard costing, how do we get from Budgeted profit to the Flexed budget profit?

A
  • Add/substract sales volume variance
  • Add/subtract Fixed overhead volume variance
24
Q

When reconciling profit from using standard costing, how do we get from the Flexed budget profit to the actual Profit?

A
  • Add/subtract all other variances besides Sales and fixed overhead volume variance(s)
25
Q

What does the disposal Journal entry for unfavourable material Price Variance?

A

DR Raw materials
DR Material Usage Variance
DR WIP
DR Finished Goods
CR Unfavourable Material Price Variance

(expenses would have had a debit balance, thats why we credit material prive variance)

26
Q

What is the general Rule that we can use to Prorate Variances very quickly?

A

1 - Calculate all your variances and add them together
2 - Work out where all your units are sitting
3 - remove the Material Price Variance and do that separately (some of it needs to be moved to the Usage Variance and make sure to take note if it decreases it or increased it)
4 - take the total of the rest of the variances and figure out out must FInished goods and cost of Sales must increase (if total variance is adverse) or decrease (if total variance is favourable). Then make sure to adjust them all into finished goods, WIP and cost of Sales according to where the units are sitting.

27
Q

How do you work out sales Quantity and Sales mix variance?

A
  • You need to a table with the following,
    / on x- axis, have 3 headings
  • Actual input ratio based actual output
  • standard input ratio based on actual output
  • standard input ratio based on standard output
    / on your y axis, you need to list all your different products
  • the difference between “Actual input ratio based actual output” and “ standard input ratio based on actual output” when multiple will be your mix variance and the difference between “standard input ratio based on actual output” and “standard input ratio based on standard output” when multiplied will be your quantity variance
  • they must be multiplied by the STANDARD
  • contribution margin amount if variable costing (if nothing is sad, then assume this)
  • Gross profit margin amount if absorption costing performed
28
Q

What other Variances could arise?

A

The variance in Idk

29
Q

What is the general method to calculate variances?

A
  • You need to draw out a table that has 3 columns
  • budgeted input of stuff into each good at the budgeted price times actual units
  • actual input of stuff purchased at standard price times actual units
  • actual price paid for actual input (normally given to you)
  • The difference between the first column and second column is the usage or efficieny variance and the difference between the second and third column is the price variance
  • Generally In all these things we have to start using the actual amount of units made because
  • There are a few exceptions you’ll see
  • materials usage variance
  • fixed overheads
  • sales variance
30
Q

How do you work out the budgeted fixed overhead aollcation rate?

A

Rate = actual fixed overheads / budgeted amount of hours needed or whatever the cost driver is, but the budgeted amount of that

31
Q

What does it mean to Prorate variances?

A

It means to reverse them and re allocate those costs or incomes back into inventory where it came (kinda, income is different)

32
Q

How do we decide how to split the variances between the inventory accounts?

A

We always split it according to where the cost that the variance arose from is sitting..

Example 1: Raw materials is sitting in all the units, and a certain amount of cost of raw material was allocated to all units, work out how much cost of raw material is sitting in each inventory account and then divide the variance into those accounts in proportion

Example 2: work out what labour cost was incurred, then how much each unit has, and then how much cost in total is sitting in each inventory account (will depend on how much units are in there)

Management Accounting 4 (27 decks)

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