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Management accounting > Week 8 > Flashcards

Week 8 Flashcards

1
Q

What does Variance mean?

A

This means the variance between actual numbers and the numbers we thought we would have before a certain period.

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2
Q

What do we mean by standard costing?

A

It is a control technique which compares standard costs and revenues with actual results to obtain variances which are used to stimulate improved perfomance.

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3
Q

What is a standard cost?

A

A standard cost is an estimated unit cost e.g. the cost of unit of material, usually expressed on a per unit basis, which is a benchmark for comparison with actual numbers.

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4
Q

Give an example of standard costing being used in real life?

A

Mcdonalds uses standards for quanitiy of meat going into a sandwich, as well as standards for the cost of the meat.

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5
Q

How are standard costs set?

A

Accountants and representatives from other functions such as personnel department managers etc, combine to set standards based on expectations and experience.

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6
Q

When analyising variances we usually talk about what?

A

Quanitiy ( whether i have used too much bananas and milk to make milkshake or too little) and

Price

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7
Q

If the actual cost or quanity is higher than the Budgeted cost what is this called?

A

This is an unfavourable variances

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8
Q

If the actual cost is lower than the Budgeted cost than this is called what?

A

Favourable variance.

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9
Q

What is a static budget?

A

Expected( budgeted) amounts for a single level of planned output, based on one level of output.

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10
Q

What is a flexible buddget?

A

Budgeted amounts are adjusted to recognise the actual level ot output ( it is calculated after the period using actual level of output)

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11
Q

What is a big problem of static budget, which works as an advantage for flexible budgeting?

A

In static budget based variance analysis, variances caused by changes in output cannot be separated from variances caused by changes in price/cost.

Flexible budgets adjust budgeted standards for actual output.

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12
Q

Lets say we have a standard cost card for one unit of product, with inputs of DM, DL AND VOH

Work out total variable standard unit costs?

A
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13
Q

How do you work out static budget variance?

A

Actual results - static budget

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14
Q

Calculate the static budget variance, and explain why this is wrong to do?

A

It is wrong to do because they are based on different units sold, so you cannot compare.

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15
Q

Work out Actual variable cost per unit, budget cost per unit and Flexed bugdet variable cost, then flexible budget variance.

A
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16
Q

Work out Actual revenue per unit, budget revenue per unit and Flexed bugdet revenue, then flexible budget variance.

A
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17
Q

: quickly this doesnt mean anything but what is the difference between margin and profit per unit?

A

: ‘Margin’ = contribution per unit (marginal costing) or profit per unit (absorption costing).

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18
Q

What is sales volume variance?

A

Are those variances which are created because sales volumes is different from budgeted sales volume.

Formula = ( Actual sales- Budget sales)X standard margin ( which can be standard contribution per unit ( MC) oor standard profit per unit ( absorption costing)

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19
Q

What are the 3 level variance analysis?

A
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20
Q

How do you work out static budget variance??

Level 1 variance

A

Actual results - static budget results

Expanded ( Actual unit price X Actual quantity of inputs) - Standard unit price X Standard quanitiy of inputs of budgeted amount)

21
Q

How do we work out flexed budget variance?

Level 2 variance?

A

Actual results - Flexed budget amount

(AR XAQ)-(SR-SQ)

AQ = AQ per unit X Actual volume

SQ = SQ per unit X Actual volume

22
Q

How do we calculate price variance?

A

(Actual price per unit - standard price per unit) X Actual quanitiy

(AP -SP) X AQ

AQ= AQ per unit X Actual volume

23
Q

How do we calculate efficiency variance?

A

(Actual quanitiy of inputs - standard quanity of inputs for actual output) X standard unit price

( AQ-SQ) X SP

AQ = AQ per unit X Actual volume

SQ = SQ per unit X Actual volume

24
Q
A

Material Usuage variance = ( AQ-SQ) X SP

AQ = AQ per unit X volume

SQ = SQ per unit x Actual volume

AQ = 22000/10000 = 2.2 X 10000 = 22000

SQ = 2 x 10000 = 20000

SP = 30

(22200 - 20000) x 30 =66000 U

Material price Variance = ( 31 - 30) X 22200 = 22000 U

Total flexible budget variance = 82200( this is a controllable cost, we have spent more)

25
Q

What are the reasons for Material price to be unfavourable 3 reasons?

A

1) Price increase ( due to JIT)
2) Better quality material ( this is why material usuage could be favourable)
3) Increased transportation costs

26
Q

Who is responsible for material price variance?

A

Purchasing manager

27
Q

What are reasons for a favourable material price variance?

2 reasons

A

1) Poorer quality materials ( sell cheap)
2) Discount given for buying bulk

28
Q

2 reasons What are reasons for a unfavourable Material usuage variance?

A

Unskilled labour ( wasting materials

Poor quality material ( so you use more of it)

29
Q

Who is responsible for an unfavourable material usuage variance?

A

Production manager

30
Q

3 reasons What are some reasons for a favourable material usuage variance?

A

Higher quality materials

More efficient use of material ( automation)

Skilled labour

31
Q

The case: The General Manager of Holby City hospital is concerned about the costs associated with a hip replacement operation. Costs for hip replacement operations (ops) are consistently higher at Holby City Hospital than the “Best Practice Tariff” determined by the Department of Health. After an initial analysis, the General Manager decides to further investigate discrepancies between actual and planned costs for direct labour per treatment.

Given information:

  • Hip replacement operations in the last reporting period: – Actual number of operations: 120 (planned: 130) – Actual direct labour: 400 hours (doctors) & 900 hours (nurses)
  • The standard direct labour times per one hip replacement operation is 2.5 hours for doctors and 8 hours for nurses.
  • Doctors’ hourly pay was budgeted at £50. Actual total direct labour costs for doctors was £24,000.
  • Nurses’ hourly rates were budgeted at £22. The actual hourly rates were also £22.

Work out labour price and efficiency variance for doctors and nursers?

A

Effiieciency variance

(AH-SH) X SR

Price/ rate variance

(AR - SR) X AH

Doctors

AH = 400

SH = 120 x 2.5hrs = 300 hrs

SR = £50/hr

AR = 24000/400 = £60/hr

Labour efficiency = (AH-SH) X SR

(400 - 300) X 50 = 5000U

Labour rate variance

(AR - SR) X AH =

(60-50) x 400 = 4000U

Nursers

AH 900

SH = 120 x 8hrs = 960

SR = 22

AR = 22

labour efficiency variance = (900-960) x 22 = 1320 F

(22-22) x 900 = 0 Labour price variance for nursuers.

32
Q

The case: The General Manager of Holby City hospital is concerned about the costs associated with a hip replacement operation. Costs for hip replacement operations (ops) are consistently higher at Holby City Hospital than the “Best Practice Tariff” determined by the Department of Health. After an initial analysis, the General Manager decides to further investigate discrepancies between actual and planned costs for direct labour per treatment.

Given information:

  • Hip replacement operations in the last reporting period: – Actual number of operations: 120 (planned: 130) – Actual direct labour: 400 hours (doctors) & 900 hours (nurses)
  • The standard direct labour times per one hip replacement operation is 2.5 hours for doctors and 8 hours for nurses.
  • Doctors’ hourly pay was budgeted at £50. Actual total direct labour costs for doctors was £24,000.
  • Nurses’ hourly rates were budgeted at £22. The actual hourly rates were also £22.

What is the flexed budget for Doctors?

A

Price variance + Efficiency variance

=5000 + 4000 = 9000 U

33
Q

What may be the reasons for Doctors spending more time on a hip replacement operation, seen in the unfavourable efficiency variance from doctors?

A

Inexperienced/junior doctors

Unrealistic (even dangerous) expectations for efficiencies and therefore wrong standard length of times

34
Q

Why was labour price variance higher than expected shown by the Labour price variance for doctors being higher than expected?

A

Some medics may have worked overtime and therefore cost more

Skills shortages may have required hiring at different pay rates

35
Q

What is the formula for Variable overhead efficiency and spending variance and expand them?

A

VO spending: AH(AR-SR)

VO efficiency: SR(AH-SH)

AH per unit x Actual volume

SH = SQ per unit X actual volume

36
Q

Work out Variable overhead efficiency variance and variable overhead price variance?

A

As you can see the bases is machine hours so we use that.

(AH-SH) X SR

We need to find machine hours per output unit so for actual results ( 4500/10000)

and

for static its = 4800/12000 = 0.4 machine hour unit of input

This is because = AQ = AQ per unit x actual volume

and SQ = Sq per unit x actual volume

AH = 4500 (0.45 X 10000 )

SH = 4000 ( 0.4 x 10000)

SR = £30

AR - £29

VOEV = (AH-SH) X SR = ( 4500-4000) x £30 = £15000U

VOPV = ( AR - SR) X AH = ( £29-30) x 4500 = 4500 F

37
Q

What is the flexed budget variance for this And what is the sales volume variance ?

A

Material price variance + efficiency variance

(4500) + 15000 = 10500 U

Its the difference between flexed budget and static budget.

£144000 - 120000

= 24000F

38
Q

What is the interpretation of the variable overhead efficiency variance and price variance?

They were ( 4500 - 4000) x 30 = 15000U

( 29 - 30) x 4500 = 4500 F

A

VOH eficiency = Sofiya operated with a higher than budgeted variable overhead cost per machine hour.

VOH price = sofiya operated with a lower than budgeted variable overhead cost per machine hour

39
Q

Show the 3 levels of variable overhead variance analysis?

A
40
Q

What could be a reason for the variable overhead efficiency unfavourable variance for this?

A

Actual absorption basis (e.g. labour hours or machine hours) used have been higher than the budgeted machine hours. It could be for a number of reasons e.g. planning errors, old machinery, poor quality of raw materials and therefore more difficult to work with for labour etc.

41
Q

What could be possible reason for VOH spending unfavourable variance?

A

Suppliers of various overhead services (e.g. electricity supplies) may have changed their prices, which have not yet been reflected in updated standards.

42
Q

Now how do we work out Fixed overhead variances ( efficiency and spending?

A

You cannot as FOH, is more or less efficient, this means the flexed budget variance = the flexible budget variance

Before we said spending + usuage = flexed budget variance but now its just spending

Also we can not flex the FOH, so for the level 1 variances flexed and static budget = the same, also you cannot flex fixed cossts so sales volume variance = 0.

So FO expenditure = Actual FO - budgeted FO.

43
Q

Now so summarise what are all the variances we need to know for the exam

Material price

Material usuage

Labour rate

Labour efficiency

Vo spending

Vo efficiency variance

Fo expenditure

A
44
Q

What are management uses of variances, but why should we be careful when using it?

A

Key use of variance analysis: performance evaluation.

• Be careful to understand the causes of a variance before using it as a performance measure.

45
Q

Why shouldnt we look at variances in isolation?

A

There can be tradeoffs between variances e.g. price and efficiency

46
Q

Why must standards be develop to respond to rapid changes in Digital world?

A

Sudden increase in the price of materials due to a rapid increase in global market prices (e.g. the price of oil or other commodities)

and many more etc.

47
Q

What are 3 critiscms of standard costing in the modern world?

A

1) No incentive to achieve beyond the standards
2) May be time consuming and tedious to install and keep up to date.
3) Only financial aspect is investigated; misses out on quality, service, customer satisfaction etc.

48
Q

Remind me again how to work out flexed budget variance ?

A

( AP X AQ) - ( SP X SQ of actual output)

49
Q
A

Management accounting (10 decks)

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