Variations Flashcards
What is variance analysis
Allows deviations from budget to be analysed in detail to enable more effective cost control
What is standard costing
Predetermined target costs on a per unit basis
When is standard costing appropriate
In an organisation with repetitive operations where input required to produce each unit of output can be specified
Process for standard costing
- Establishing standard costs for each element e.g material
- Determine actual costs
- Compare to find variances
- Analyse and adapt
5.Monitor and adjust standards to reflect changes in standard usage and/ or prices
How to establish cost standards
Control of costs best measured at the point costs are incurred
Limitations of standard costing
Standards can become outdated
Lack of incentive to achieve beyond the standard
Benefits of standard costing
Control for comparison
Basis for budgeting
Useful for building strategy
Material variance
Cost of the materials are determined by price and quantity used
Total material variance equation
Usage and price
Material price variance equation
(Standard price - actual price) x Actual quantity
Reasons for material price variance
Staff performance, quality of material, market conditions
Material usage variance equation
(Standard quantity - Actual quantity) x standard price
Reasons for material usage variance
Quality of material, faulty machinery, wastage, efficiency of production department
Overall what is better to be higher for material variance
Standard> Actual is favourable
Labour variances
Cost determined by price paid for labour and quantity used
Labour rate variance equation
(Standard price - Actual price) x actual hours
Reasons for labour rate variances
HR performance, Grade of workers, change in market conditions
Labour efficiency variance equation
(Standard hours - Actual hours) x Standard rate
Reasons for labour efficiency variance
Supervision, skill of workers
Total labour variance equation
Efficiency - rate
Variable overhead variance equation
Standard variable overheads - actual variable overheads
Variable overhead expenditure variance equation
Difference between budgeted flexed variable overheads and actual flexed variable overheads
BFVO - AVO
Reasons for Variable overhead expenditure variance
Price changes, efficiency of individual item usage, wastage
Variable overhead efficiency variance equation
(Standard hours - actual hours) x standard overhead rate
Fixed overhead variance equation
BFO - AFC
Budgeted fixed overheads - Actual fixed overheads
Reasons for Fixed overhead variance
Changes in salaries, additional supervisors, property cost changes
what are sales variances for
Analyse performance of the sales function or revenue centres
Calculated using profit margins rather than ales as it would not give an indication of the impact of sales on profit
Sales volume variance equation
Budgeting sales volume - flexed sales volume
Reasons for sales volume variance
If budget is more than flexed it is adverse
Sales staff performance, market conditions, access to good products to sell
Sales price variance equation
(Actual sales price - Standard sales price) x Actual sales volume
Reasons for sales price variance
Sales staff performance, market conditions
Relationship between sales price and sales volume
Usually not linear
