Variance Analysis Flashcards
What are standard costing systems?
they are the most common cost-measurement systems; standard costs, in the aggregate, measure the costs the firm expects that it should incur during production; in a standard costing system, standard costs are used for all manufacturing costs
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
evaluating results: an actual cost lower than standard cost is a favorable variance while an actual cost higher than standard cost is an unfavorable variance
evaluating control: if a variance from standard could have been prevented, it is called a controllable variance; if not, the variance is known as an uncontrollable variance
What is the DM price variance formula?
DM price variance = actual quantity purchased * (actual price - standard price)
What is the DM quantity usage variance formula?
DM quantity usage variance = standard price * (actual quantity used - standard quantity allowed)
What is the DL rate variance formula?
DL rate variance = actual hours worked * (actual rate - standard rate)
What is the DL efficiency variance formula?
DL efficiency variance = standard rate * (actual hours worked - standard hours allowed)
Over/under applied overhead
if the actual amount of overhead incurred in the period exceeds the amount applied, overhead will be considered underapplied and the overhead account will have a net debit balance; this will result in an unfavorable variance because the actual amount of overhead incurred is higher than expected
if the actual amount of overhead incurred is less than the amount applied, overhead will be considered overapplied and the overhead account will have a net credit balance; the variance will be favorable because the actual overhead incurred is less than expected
Variable and fixed overhead variances
the overall manufacturing overhead variance can be broken into variable and fixed overhead variances; the variable overhead variance can be further broken into a rate (spending) variance and an efficiency variance
the fixed overhead variance can be divided into a budget (spending) variance and a volume variance; although the variable and fixed overhead spending variances can be combined for calculation purposes, they service different functions from a strategic/analytical perspective
What is the VOH rate (spending) variance formula?
VOH rate (spending) variance = actual hours * (actual rate - standard rate)
this variance tells managers whether more or less was spent on variable overhead than expected
What is the VOH efficiency variance formula?
VOH efficiency variance = standard rate * (actual hours - standard hours allowed for actual production volume)
this variance is tied to the efficiency with which labor hours are utilized; the efficiency variance isolates the amount of total variable overhead variance that is due to using more or fewer direct labor hours than what was budgeted (assuming that direct labor hours is the cost driver)
What is the FOH budget (spending) variance formula?
FOH budget (spending) variance = actual fixed overhead - budgeted fixed overhead
companies budget an amount for fixed overhead costs every period, and this variance focuses at a high level on whether more or less was spent than budgeted
What is the FOH volume variance formula?
FOH volume variance = budgeted fixed overhead - standard fixed overhead cost allocated to production
standard fixed overhead cost allocated to production = actual production * standard rate
fixed overhead costs are typically applied using a rate derived from budgeted fixed overhead costs and expected volume (the cost driver); when the actual volume produced differs from the amount used to calculate the fixed overhead application rate, there will be a variance
Interpretation of overhead variances
overhead variances represent the analysis of balance in the overhead account after overhead has been applied; 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 increase in profits)
underapplied overhead (more debit) is unfavorable, as the eventual debit to COGS will increase expenses and therefore decrease profits; each component of the variance computation follows the same logic
What is sales variance analysis?
the sales variance (the difference between actual sales revenue and budgeted sales revenue) has two main components: the sales price variance and the sales volume variance
the sales price variance measures the aggregate effect of an actual sales price that differs from the budgeted sales price
sales price variance = actual quantity sold * (actual price - standard price)
the sales volume variance is a flexible budget variance that quantifies the degree to which total sales variances are traceable to variances in sales volume or the number of units sold
sales volume variance = standard price * (actual quantity - standard quantity)
What is sales mix variance?
it considers the impact of multiple products on the projected and actual sales volume of an organization; anticipated sales revenue is often derived form the sale of multiple products with different contribution margins; if sales volume meets projections but occurs in a ration different from the anticipated sales mix, sales revenue and net income may differ from the budget
sales mix variance = (actual sales mix ratio for a product - budgeted sales mix ratio for a product) * total number of units of all products sold * budgeted contribution margin per unit of product
