Variance Analysis Flashcards
What is variance analysis?
it is a tool for comparing some measure of performance to a plan, budget, or standard for that measure; it is used for planning and control purposes and can be used to evaluate revenues and costs; comparison of actual results to the annual business plan is the first and most basic level of control and evaluation of operations
actual results may be easily compared with budgeted results; however, usefulness is limited by the existence of budget variances that may be strictly related to volume
budget variance analysis becomes progressively more sophisticated as managers review flexible budget comparisons; the flexible budget allows managers to identify how an individual change in a cost or revenue driver affects the overall costs of a process
What are standard costing systems?
the most common cost-measurement system; standard costs, in the aggregate, measure the costs the firm expects that it should incur during production; in this system, standard costs are used for all manufacturing costs (DM, DL, MOH)
standard direct costs = standard price * standard quantity
standard indirect costs = standard (predetermined) application rate * standard quantity
purposes of this costing system: cost control, data for performance evaluations (variance analysis), and ability to learn from standards and improve various processes
the objective of using a standard costing system is to attain a realistic predetermined or budgeted cost for use in planning and decision making; it also greatly simplifies bookkeeping procedures
T/F: for DM and DL, two variances are typically calculated
True; a price (or rate) variance and a quantity (or efficiency) variance
DM price variance = actual quantity purchased * (actual price - standard price)
DM quantity usage variance = standard price * (actual quantity used - standard quantity allowed)
DL rate variance = actual hours worked * (actual rate - standard rate)
DL efficiency variance = standard rate * (actual hours worked - standard hours allowed)
Fact: at a high level, the analysis of manufacturing overhead compares the actual overhead incurred in a period to the applied overhead in that same period
overhead is estimated and applied based on a predetermined overhead application rate
variable overhead rate (spending) variance = actual hours * (actual rate - standard rate)
variable overhead rate efficiency variance = standard rate * (actual hours - standard hours allowed for actual production volume)
fixed overhead (spending) variance = actual fixed overhead - budgeted fixed overhead
fixed overhead volume variance = budgeted fixed overhead - standard fixed overhead cost allocated to production*
- = based on actual production * standard rate
when standard costing is used, the application of overhead is accomplished in two steps: 1) calculated overhead rate = budgeted overhead costs / estimated cost driver 2) applied overhead = standard cost driver for actual level of activity * overhead rate (from step 1)
T/F: overhead variances represent the analysis of balance in the overhead account after overhead has been applied
True; overapplied overhead (more credit) is favorable, as it will ultimately result in a credit to COGS at the end of the period and therefore a reduction in expenses (and an increase in profits)
underapplied (more debit) is unfavorable, as the eventual debit to COGS will increase expenses and therefore decrease profits
Fact: sales and CM variance analyses can be used to evaluate the effectiveness of an entity’s identification of target markets and its strategies to capture those markets
sales price variance - it measures the aggregate effect of a selling price different from the budget
sales price variance = ([actual sales price / unit] - [budgeted sales price / unit]) * actual sold units
sales volume variance - a flexible budget variance that distills volume activity from other sales performance components
sales volume variance = (actual sold units - budgeted sales units) * standard CM per unit
