Standard Costing & Variance Analysis Flashcards
What are the budgetary control steps?
- Preparation of budget
- Recording actual achievements
- Investigating differences
- Taking action where necessary and/or revising budget
Possible reasons for variances?
- Actual output level differed from budgeted output
- More/less of resource needed to produce each unit of output than expected (e.g. materials, labour or electricity)
- More/less input/sales prices than expected
What does flexing the budget do?
Recalculates original budget to reflect actual output level achieved -> compare ACTUAL vs STANDARD sales revenue, input quantities and costs
Types of variances to quantify effects of differences in revenue, input and costs
- Sales
- Variable costs
- Fixed overhead
Variance analysis steps
- Reconstruct original budget (based on target units from standard cost schedule)
- Original budgeted profit vs actual profit achieved -> favourable/adverse
- Flexed budget (based on actual output)
- Calculate variances
- Operating statement
- Comments on overall profit, variances, causes
Fixed Overheads applied in flexed budget
Based on ACTUAL output using ORIGINAL per unit absorption rate (from original expectation output) from standard cost schedule
What does total volume variance represent?
Additional profit business should have earned from increase in output assuming other expectations are met
Types of sale variances?
- Sales Price variance
- Sales Volume variance
-contribution
-margin -> FOH volume variance
Sales price variance
(AP/unit - SP/unit) x AQ sold
Isolate change in selling price by keeping Q units constant
What does sales price variance reflect?
Difference between standard selling price per unit from ORIGINAL budget vs ACTUAL selling price achieved from ACTUAL results
Types of sales volume variances?
- Sales contribution volume variance
- Sales margin volume variance
Sales contribution volume variance formula
(AQ sold - SQ sold) x Standard Contribution/unit
Isolate change in output by keeping contribution per unit constant
Sales margin volume variance formula
(AQ sold - SQ sold) x Standard Profit Margin/unit
Isolate change in output by keeping margin per unit constant
Sales volume variance analysis
Positively related
Positive variance: favourable (AQ > SQ)
Negative variance: adverse (AQ < SQ)
Types of variances in terms of variable costs
- Material price variances
- Material efficiency (usage) variances
Material price variance formula
(AP of material - SP of material) x Actual Q used
Isolate change in price by keeping quantity constant
Material efficiency formula
(AQ used - SQ used) x Standard Price of Material
Isolate change in Q used by keeping price constant
Price and efficiency variance for VC analysis
Inversely related
Negative variance: favourable (AP or AQ < SP or SQ)
Positive variance: adverse (AP/AQ > SP/SQ)
Types of fixed overhead variances
- Volume variance (required after calculating sales margin volume variance)
- Spending variance
Spending variance formula
Actual FOH expense @ actual units - Original FOH expense @ expected units
Fixed overhead volume variance formula (if calculated sales margin volume variance)
Original FOH expense @ expected units - Actual Units x Standard P per unit (e.g. 2 labour hours @ $6)
Fixed overhead variances analysis
inversely related
negative variance: favourable
positive variance: adverse
Operating statement format to present variances
4 columns: (1) Description, (2) Favourable, (3) Adverse, (4) Final figures
Descriptions:
Budgeted profit
Sales price variance
Sales volume variance
(difference between total F and A)
Standard profit (budgeted profit - difference)
Cost variances
Materials price
Materials efficiency
Variable Overhead spending
Variable Overhead efficiency
Fixed Overhead spending
Fixed Overhead efficiency
(difference between total F and A)
Actual profit (standard profit - difference)
Variance comments
- Identify large (important) and small (unconcerned with) variances
- Total variance btwn actual and budgeted profit (favourable/adverse)
- List most significant individual variances
- Suggest reasons for variances and link different variances together
Comment on adverse sales price variance
Due to drop in price per unit, either because
(1) competitive/economic conditions out of firm’s control or (2) deliberate to raise sales volume
Comment on favourable volume variance
Due to AQ > SQ
Insufficient to compesate for fall in actual sales price per unit
Deliberate drop in sales price to raise sales volume is not financially worthwhile
Comment on adverse material price variance
Due to increased price per kg, either because
(1) switch in supplier or
(2) supply shortage which forces price up
Comment on favourable material efficiency variance
Suggests material price increased because of choosing to purchase higher quality materials -> less wastage
If decision was deliberate: continue because net result is favourable
Comment on adverse labour variance
Small magnitude but net variance is adverse so warrants investigation
Favourable price variance
Adverse efficiency variance either because
(1) hire lower-skilled staff: cheaper but take longer to perform same tasks or
(2) mistakes made when working faster to produce higher level of output
Comment on variable overhead variance
Small magnitude and net variance favourable
Adverse efficiency variance linked to labour because based on labour hours
Improvement in labour will also improve VOH
Unnecessary to investigate further
Comment on fixed overhead variance
Adverse but of small magnitude
Unnecessary to investigate further too
