Week 8- Variance analysis Flashcards
What is standard costing?
Standard costing is a control technique which
compares standard costs and revenues with
actual results to obtain variances which are used
to stimulate improved performance.
Accountants and representatives from other
functions such as engineers, personnel
department managers, and production managers
combine efforts to set standards based on
experience and expectations.
Ideal standards assume peak efficiency at all
times. They are therefore not going to be achieved
in most cases.
Practical standards allow for normal machine
downtime and other work interruptions and that
can be attained through reasonable, though highly
efficient, efforts by an average worker.
They are challenging but achievable targets and are
therefore most frequently used.
What is a standard cost?
– A standard cost is an estimated unit cost.
– Usually expressed on a per unit basis.
– Benchmark for measuring performance against actual
results.
What are variances? They may relate to changes in what? What are U and F variances?
- Quantity
- Price
• Variances which reduce income or increase
costs are unfavourable (or adverse ) U (or A)
• Variances which increase revenue or reduce
costs are favourable (F)
What is a statis budget?
Expected (budgeted) amounts for a single
level of planned output.
Based on one level of output: no adjustment
is made to budgeted units
What are flexible budgets?
Expected (budgeted) amounts for a range of
output levels (“flexed” version of static
budget).
Budgeted amounts are adjusted (ie flexed) to
recognise the actual level of output. A flexed
budget is calculated after the period end
using the actual level of output
What are deficiencies of statis budgets?
• Problem: 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. Thereby, variances caused by
changes in output levels can be separated from
variances caused by changing prices and levels of input.
static budget variance
static budget variance=actual results - static budget amount
Sales volume profit (or contribution) variance
The sales volume variances are those variances which are created
because actual sales volume is different from the budgeted sales
volume .
Sales volume variance in the context of contribution and profits:
(Actual Sales Units – Budget Sales Units ) × Standard Margin
Where Standard margin = Standard contribution per unit
(marginal costing)
Or
Standard profit per unit (absorption costing)
What are the 3 levesl of variance analysis
Static budget variance: flexible budget variance + sales volume variance
flexible budget varience: price variance + efficiency variance (for input factors)
static budget variance
flexible budget variance
Formula sheet
ex: Flexible budget variance= actual cost - flexible cost
What are price and efficiency variances?
•Price and efficiency variances are concerned
with the actual and budgeted prices and
quantities of inputs (such as direct materials
purchased or used).
FMsheet
Material Usage (Efficiency) - If unfavourable:
- Defective material
- Excessive waste (abnormal loss)
- Unskilled labour
- Pilferage
- Errors in allocating material to jobs
- Obsolete machinery (or highly depreciated)
Who is responsible for Unfavourable
MATERIAL USAGE VARIANC?
•Production manager is responsible to keep
tabs on unnecessary or extravagant use of
materials.
•If purchase manager purchases low quality
materials to improve the direct materials price
variance then purchasing department would be
held accountable for the variance.
Material Usage - If favourable:
Material used of higher quality than standard i.e. stricter quality control • More effective use made of material • Errors in allocating material to jobs • Automated processes or modern machinery • Skilled labour • Training and development of workforce OR motivated workforce
Material Price - If unfavourable:
-Price increase
• Careless purchasing
• Better quality material
• Inflation (increase in all prices)
• Not benefitted from bulk discount
• Increased transportation costs
• Just in time management can lead to material
shortages and may have needed urgent orders
-damaged goods sold for lower price
-original sales price was unrealistic and was lowered