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MN20501- Intermediate Accounting > Variance Analysis > Flashcards

Variance Analysis Flashcards

1
Q

What is budgetary control?

A

Actual results are compared to planned outcomes- significant differences are called variances

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2
Q

What is control?

A
  • Monitoring and looking back to determine what
    actually happened
  • Taking corrective action over variances
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3
Q

What are standard costs?

A

The expected costs under normal conditions

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4
Q

What is the purpose of standard costs?

A

Used as a benchmark for standards when completing variance analysis

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5
Q

What do standard costs tends to be expressed in terms of?

A

Expressed on a per unit basis

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6
Q

What is a cost card?

A

List of standard costs of what a business has set

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7
Q

What are the main two types of standards when concerning standard costs?

A

Quantity standards and price standards

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8
Q

What are quantity standards?

A

How much of an input
should be used to make
a product or provide a
service

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9
Q

What are price standards?

A

How much should be
paid for each unit of input

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10
Q

What does the expression of standard costs depend on?

A

the type of company. E.g manufacturing per unit of airline per travelled km

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11
Q

Compare standard costs and budgets

A

Standard costs = target costs to make one unit of product
Budget = target costs at the total planned level of production

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12
Q

What do standard costs facilitate?

A

management by exception – focuses attention on significant
deviations from standards.

Act as a benchmark

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13
Q

What are tolerance limits?

A

Managers express a benchmark using standard costs, if the actual costs fall out of this limit not good

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14
Q

What is variance?

A

Difference between what happens and what you express in the budget

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15
Q

When is variance analysis possible?

A

when there are standards

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16
Q

What do detailed price and quantities allow for?

A

the variance to be broken down further to uncover
specific factors causing the variance

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17
Q

What is adverse variance?

A

Unfavourable
variance- actual worse than budgeted

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18
Q

What is favourable variance?

A

Actual sales/costs better than budgeted

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19
Q

What must you do in the exam in variance analysis labelling?

A

Always label F or A/U depending on how favourable the variance is

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20
Q

What is the problem with variance analysis by taking the budget away from the actual? How can you counteract this?

A

No adjustments have been made, need to consider amount of production

Use a flexed budget

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21
Q

What is a flexed budget?

A

Adjust original budget to the actual level of output so that what should happen at that production level

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22
Q

What costs need to be flexed and which ones don’t need to?

A

Variable costs and sales are flexed. Fixed costs are not.

23
Q

How are budgets flexed?

A

Just off a relative basis. If you only produce 900 but budgeted 1000, divide by 1000 and times by 900

24
Q

What are usually the key variances that a company would calculate?

A

Raw materials and labour

25
Q

What is the total direct material variance?

A

Actual Direct Material Cost – Flexed Budget Direct Material Cost

26
Q

How can we go into more detail about what the answering how to solve the total direct material variance?

A

(AP x AQ) – (SP x SQ)

AP = Actual material price (per unit of
material)
AQ = Actual quantity of material used to
make actual output
SP = Standard material price (per unit of
material)
SQ = Standard quantity of material used,
flexed to actual output (i.e., budgeted
material usage at actual output level)

27
Q

How can total direct material variance = (AP x AQ) – (SP x SQ) be broken down?

A

= (AP x AQ) – (AQ x SP) + (AQ x SP) – (SP x SQ)
= (AP – SP) x AQ + (AQ – SQ) x SP

Where (AP – SP) x AQ is direct material price variance

and (AQ – SQ) x SP is the direct material usage variance

28
Q

What can adverse direct material price mean?

A
  • Poor buying decisions; poor
    negotiation skills of buying
    manager
  • Change in market conditions,
    e.g., unexpected material
    shortage
29
Q

What can adverse direct material usage show?

A
  • Faulty machinery
  • Poor material quality leading to wastage
  • Poor worker performance
  • Misconduct e.g., theft
30
Q

How do we calculate total direct labour variance?

A

Actual Direct Labour Cost – Flexed Budget Direct Labour Cost

31
Q

How do we calculate total direct labour variance?

A

(AR x AH) – (SR x SH)

AR = Actual labour wage rate, £ per hour
AH = Actual labour hours used to make
actual output
SR = Standard labour wage rate, £ per hour
SH = Standard labour hours flexed to actual
output (i.e., budgeted labour hours for the
actual output level)

32
Q

What can total direct labour variance = = (AR x AH) – (SR x SH) be broken down into?

A

= (AR x AH) – (AH x SR) + (AH x SR) – (SR x SH)
= (AR – SR) x AH + (AH – SH) x SR

where (AR – SR) x AH is direct labour rate variance

and (AH – SH) x SR is direct labour efficiency variance

33
Q

What can explain adverse labour rate?

A
  • Change in labour market
    conditions
  • Use of higher skilled labour
34
Q

What can explain adverse labour efficiency?

A

Poor worker performance
* Poor supervision
* Faulty machinery/poor
maintenance
* Inadequate training
* Poor quality materials slowing
down production

35
Q

What does the quality of variance analysis depend largely on?

A

on the quality of standards used

36
Q

How do you calculate the fixed overhead spending variance?

A

Budgeted fixed OH – actual fixed OH

37
Q

What is included in the fixed OH
and what could cause it to
increase?

A
  • Increase in supervisor salaries?
  • Increase in indirect machine
    costs due to poorer quality
    material used?
38
Q

Exercising control over fixed overheads is more challenging
compared to direct labour and direct material, why is this?

A

responsibility for
overhead costs is more difficult to determine

39
Q

What is the fixed overhead variance assumption?

A

The implicit assumption here is that the business uses a marginalcosting system, in which all fixed costs including fixed production overheads are treated as period costs and not assigned to specific
products.

40
Q

If an absorption costing system was used instead for Fixed overhead variance, what happens?

A

all production costs including fixed production overheads would be assigned to products. It would then be possible to calculate both FOH
spending variance and volume variance

41
Q

What are the two sales variances needed for the exam?

A

Sales margin volume variance

Sales price variance

42
Q

How do you calculate sales margin volume variance? (Not needed for exam)

A

=(Actual sales volume - static budget sales volume) x standard contribution margin per unit

where standard contribution margin per unit = standard sales price per unit - standard variable costs per unit

43
Q

How do you calculate sales price variance?

A

=(Actual price per unit - standard sales price per unit) x actual sales volume

44
Q

What are some of the considerations of setting standard costs?

A

Who sets the standards?
What information needs to be gathered and how
is it gathered?
What kind of standards should be used?

45
Q

What are set seperately?

A

Price and quantity standards are set separately

46
Q

Buying and usage of inputs are two different
spheres of activity and responsibility, why?

A
  • Different timings
  • Different personnel responsible
47
Q

Setting standard costs: What kind of information is needed to set standards?
How might it be gathered?

A

Historical data analysis

Engineering studies

External benchmarking

48
Q

What are engineering studies?

A

Detailed technical analysis and interviews to estimate input usage and
prices

49
Q

What is external benchmarking?

A

Input consumed and input prices of peer firms with similar production
processes – but such data usually limited

50
Q

Setting standard costs: What are 3 types of standards?

A

Basic standards

Currently attainable standards

Ideal standards

51
Q

What are basic standards?

A

Standards left
unchanged over
long periods

52
Q

What are currently attainable standards?

A
  • Difficult but not impossible to
    achieve
  • Allowances made for normal
    spoilage, machine breakdowns etc
  • Achievable under efficient
    operating conditions
53
Q

What are ideal standards?

A

Achievable only
under the best of
circumstances

54
Q

What are limitations of standard costs and variance analysis ?

A

Not applicable in all production settings, more suited to highly
standardized, repetitive production.
- Standards become obsolete quickly in certain environments
– volatile prices, and/or fast changing production processes

Undesirable consequences of using standard costs as a control tool, e.g., neglecting quality in quest to attain favourable price variances
- Unrealistic standards may demotivate employees

Use of standards may inhibit “out of the box” thinking –promote
mentality of conforming to existing standards rather than
outperforming or setting new standards

MN20501- Intermediate Accounting (6 decks)

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