Handout 9 - Standard Costing and Variance Analysis

ACCT102 Managerial Accounting October 2011

Cheng Nam Sang 1

Objective: Standard Costing

To understand Standard Costing and To understand Standard Costing and standard setting

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Basic Costing Methods

Manufacturing Costs

Directmaterials

Directlabour Overhead

Actual Costing Actual Actual Actual

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g

Normal Costing Actual Actual Budgeted

Standard Costing Standard Standard Standard

Budgets vs. Standards

Are standards the A standard is a per

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Are standards the same as budgets? A budget is set for

total costs.

punit cost.

Standards are often used when

preparing budgets.

Currently attainable standards are levels of

General terms in standard costing

Currently attainable standards are levels of performance that can be achieved by realistic levels of effort. Allowances are made for normal

defectives, spoilage, waste, and non-productive time.

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productive time.


Cheng Nam Sang 2

Standard Cost

Expected and standard costsExpected and standard costs The building blocks of planning and

control system The Master Budget Expected cost

The cost most likely to be attainedSt d d t

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Standard cost Determined cost per unit that should

be attained (can be expected cost)

Standard Costs

Predetermined.

StandardCosts are

Used for planning labour, materialand overhead requirements.

Benchmarks formeasuring performance.

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measuring performance.

Used to simplify theaccounting system.

General terms in standard costing

Standard cost systems are accountingStandard cost systems are accounting systems that value products according to standard costs only.

Perfection standards (ideal standards) are expressions of the most efficient

f ibl d th b t

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performance possible under the best conceivable conditions, using existing specifications and equipment. No provision is made for waste, spoilage,

machine breakdowns, and the like.

How do we normally set the budget Standard?

Expectation and StandardsExpectation and Standards engineering studies Perfect

Standards / Attainable Standards analysis of historical data Attainable

Standardscontinuous improvement goals

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continuous improvement goals Continuous Improvement Standards

Benchmarking Benchmark Standards


Cheng Nam Sang 3

Accountants, engineers, personnel

Setting Standard Costs

administrators, and production managers combine efforts to set standards based on

experience and expectations.

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Setting Standard Costs

Should we usepractical standardsor ideal standards?

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Engineer ManagerialAccountant

Setting Standard CostsPractical standards should be set at levels that are currently attainable with reasonable and

efficient effort.

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Productionmanager

Setting Standard CostsI agree. Ideal standards,

based on perfection,are unattainable and

discourage mostemployees.

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Human ResourcesManager


Cheng Nam Sang 4

Note

The argument that ideal standards are discouraging has been persuasive for many years. So normal defects and waste were built into the standards.In recent years, Six Sigma, Continuous Improvement and other initiatives have sought to eliminate all defects and waste

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sought to eliminate all defects and waste. Ideal standards, that allow for no waste, have

become more popular. The emphasis is on improvement over time, not

attaining the ideal standards right now.

Recap MCQ

Extra Exercises(Variance Analysis extra

exercises)

EQ1 EQ2

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Setting Direct Material Standards

PriceStandards

QuantityStandardsStandards

Final, deliveredcost of materials,net of discounts

Standards

Use product design specifications.

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net of discounts.

Setting Direct Labor Standards

RateStandards

TimeStandardsStandards

Use wage surveys and

labor contracts.

Standards

Use time and motion studies for

each labor operation

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labor contracts. each labor operation.


Cheng Nam Sang 5

Setting Variable Overhead Standards

RateStandards

ActivityStandardsStandards

The rate is the variable portion of the

predetermined overhead

Standards

The activity is thebase used to calculate

the predetermined

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rate.poverhead.

Standard Cost Card Variable Production CostA standard cost card for one unit of

d t i ht l k lik thiproduct might look like this:

A A x BStandard Standard StandardQuantity Price Cost

Inputs or Hours or Rate per Unit

B

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Inputs or Hours or Rate per Unit

Direct materials 3.0 lbs. 4.00$ per lb. 12.00$ Direct labor 2.5 hours 14.00 per hour 35.00 Variable mfg. overhead 2.5 hours 3.00 per hour 7.50 Total standard unit cost 54.50$

Why do actual results normally differ from the master budget and

sometimes standard as well? sales and other cost-sales and other cost

driver activities were not the same as originally forecasted.

i bl

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revenue or variable costs per unit of activity and fixed costs per period were not as expected.

Variances The variances of actual results from the

master budget are called master (static) budget variancesbudget variances.

The variances between the flexible budget and actual results are called flexible-budget variances due to pricing and cost control

The differences between the master

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The differences between the master budget and the flexible budget are due to activity levels, not cost control, and are called activity-level variances. due to activity levels NOT cost control


Cheng Nam Sang 6

Standard Cost VariancesA standard cost variance is the amount by which

an actual cost differs from the standard cost.s

t

Standard

Thi i i f bl

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C

o

s This variance is unfavorablebecause the actual cost

exceeds the standard cost.

Standard Cost Variances

I see that there

First, they point to causes ofproblems and directions

for improvementI see that thereis an unfavorable

variance.But why arevariances

important to me?

for improvement.Second, they trigger

investigations in departmentshaving responsibility

for incurring the costs.

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Variance AnalysisManagers focus on quantities and costs

that differ from expectation, a practice known asmanagement by exception

DirectMaterial

management by exception.

A

m

o

u

n

t

Di t

Standard

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Material

Type of Product Cost

A DirectLabour ManufacturingOverhead

Advantages of Standard Costs

Management byPossible reductionsexceptionin production costs

Advantages

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Improved cost controland performance

evaluation

Better Informationfor planning anddecision making


Cheng Nam Sang 7

Emphasis on Favorable variances

Disadvantages ofStandard Costs

PotentialProblems

pnegative may

impact morale.may be

misinterpreted.

Continuousimprovementmay be more

important thanStandard costreports may

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Emphasizing standardsmay exclude other

important objectives.

pmeeting standards.

p ynot be timely.

Incentives to buildinventories.

Static Budget

Use of original budgeted figures to ith th t l ltcompare with the actual results

(Actual results Master budget results)

Ignored changes in activity due to controllable and/or uncontrollable factorscontrollable and/or uncontrollable factors

Not a good performance evaluation device26

How do you solve the bl iproblems on comparison

between Master budget figures and Actual Results?

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Cheng Nam Sang 1

Objectives: Variance Analysis

To understand flexed (or flexible) budget

To understand how to calculate and interpret simple variances

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To be able to prepare a simple variance-based performance report

Why do actual results normally differ from the master budget and

sometimes standard as well? sales and other cost-sales and other cost

driver activities were not the same as originally forecasted.

i bl

2

revenue or variable costs per unit of activity and fixed costs per period were not as expected.

Variances The variances of actual results from the

master budget are called master (static) budget variancesbudget variances.

The variances between the flexible budget and actual results are called flexible-budget variances due to pricing and cost control

The differences between the master

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The differences between the master budget and the flexible budget are due to activity levels, not cost control, and are called activity-level variances. due to activity levels NOT cost control

Standard Cost VariancesA standard cost variance is the amount by which

an actual cost differs from the standard cost.

s

t

Standard

Thi i i f bl

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C

o

s This variance is unfavorablebecause the actual cost

exceeds the standard cost.


Cheng Nam Sang 2


I see that there

First, they point to causes ofproblems and directions

for improvementI see that thereis an unfavorable

variance.But why arevariances

important to me?

for improvement.Second, they trigger

investigations in departmentshaving responsibility

for incurring the costs.

5

Variance AnalysisManagers focus on quantities and costs

that differ from expectation, a practice known asmanagement by exception

DirectMaterial

management by exception.

A

m

o

u

n

t

Di t

Standard

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Material

Type of Product Cost

A DirectLabour ManufacturingOverhead

Advantages of Standard Costs

Management byPossible reductionsexceptionin production costs

Advantages

7

Improved cost controland performance

evaluation

Better Informationfor planning anddecision making

Emphasis on Favorable variances

Disadvantages ofStandard Costs

PotentialProblems

pnegative may

impact morale.may be

misinterpreted.

Continuousimprovementmay be more

important thanStandard costreports may

8

Emphasizing standardsmay exclude other

important objectives.

pmeeting standards.

p ynot be timely.

Incentives to buildinventories.


Cheng Nam Sang 3

Static Budget

Use of original budgeted figures to ith th t l ltcompare with the actual results

Ignored changes in activity due to controllable and/or uncontrollable factors

Not a good performance evaluation device

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Flexible Budget(variable budget)

Purpose:Purpose:

to isolate unexpected effects on actual results

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that can be corrected if adverse or enhanced if beneficial.

Flexible Budget (variable budget)

a budget that adjusts for changes in sales volume and other cost-driver activities.

identical to the master budget in format, but managers may prepare it for any level of activity.

based on the same assumptions of (

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revenue and cost behavior (within the relevant range) as is the master budget

incorporating effects on each cost and revenue caused by changes in activity

A simplified chocolate example

Milk Cocoa

Standard 1000kg 500kg 500kg

Actual 900kg 480kg 420kg

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Cheng Nam Sang 4

A simplified chocolate example

Milk Cocoa


Actual 900kg 480kg 420kg


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Standard(for the actual production)

900kg 450kg 450kg

Variance 30 kg (U) 30kg (F)



Price Variance

The difference between

Quantity Variance

The difference between

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The difference betweenthe actual price and the

standard price

The difference betweenthe actual quantity andthe standard quantity

A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantityy y y

Actual Price Standard Price Standard Price

Price Variance Quantity Variance

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Standard price is the amount that should have been paid for the resources acquired.

Actual Quantity Actual Quantity Standard Quantity



y y y


Standard quantity is the quantity allowed for

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Standard quantity is the quantity allowed for the actual output.

Standard input per unit of outputtimes amount of good output.


Cheng Nam Sang 5



AQ(AP - SP)Price Variance Quantity Variance

y y y


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AQ(AP SP)

AQ x AP AQ x SP

AQ x AP

AQ x SP

AQ = Actual QuantityAP = Actual PriceSP = Standard Price



SP(AQ SQ)


y y y


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SP(AQ SQ)

AQ = Actual QuantityAP = Actual PriceSP = Standard Price

SP x AQ SP x SQ

SP x AQ

SP x SQ

Sales Variances

AQ x APQPrice Variance

AQ x SPVolume Variance

SQ x SP

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SQ x SP ______________Total Flexed Variance

A = Actual; S = Standard;Q = Quantity; P = Price; R = Rate; H = Hr

Comprehensive Class Example

FaFa Pte Ltd (Variance Analysis Example.pdf)

See Fa Fa Pte Ltd for details of calculations of sales, material, labour, variable overhead and fixed overhead variances

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Cheng Nam Sang 6

Sales Variances

Price Variance (possible examples) Unplanned change in selling price e.g.

Due to unexpected change in costs Management decision on pricing, volume and

profit trade off

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profit trade-off Response to actions of competitors

Sales Variances

Volume Variance (possible examples) Reduction/Increase in demand e.g.

Increase/reduce in selling price Production or logistics problems creating

stock-out situations

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Recession or competitors price cutting Advances/Problems of competitors

products Over-/under-estimated budget

Cost Variances

Material variances Price; usage

Labour variances Rate of pay; idle time; efficiency

Variable overhead variancesRate; efficiency

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Rate; efficiency Fixed overhead variances

Spending; Volume

Material VariancesAQ x AP

Price VarianceAQ x SP

Usage VarianceSQ x SP _____________

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(Std Quantity for the Total Flexed Variance Actual production/output)i.e. Applied Standard(Aoutput x Std required for the Quantity) x SP


Cheng Nam Sang 7

Class Exercises CQ.1 to3

Pl d lliPlease do your polling

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Material VariancesPrice Variance (possible causes) Cheaper substitutes / shortage of

supplies Bulk purchase discounts Different suppliers General market factors e g oil crisis;

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General market factors e.g. oil crisis; adverse weather

Standard setting issues weighted average? last purchase prices?

Usage Variance Sub-standard materials

Material Variances

Sub standard materials Mechanical breakdown leading to

spoilage Unrealistic standards Measurement errors e.g. unrecorded

materials leading to o erstating act al

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materials leading to overstating actual usage in the current period but understating usage in the following period

Operating inefficiencies

Labour Variances

AHp x ARpRate (Spending) variance

AHp x SRIdle time variance

AHw x SREfficiency variance

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Efficiency varianceSH x SR ________________(SH for actual production) Total flexed variancei.e. Applied Standard(Aoutput x Std hour required) x SR


Cheng Nam Sang 8

Class Exercises file CQ.4

Please do your polling

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Labour VariancesRate of Pay Variance (possible causes) Unexpected overtime rush orders?

U t d dj t t Unexpected pay adjustments Using different grades of labour

Idle Time Variance (possible causes) Machinery problems

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Machinery problems Strikes Illness and absenteeism Failure to allocate all productive time

accurately

Labour Variances

Efficiency Variance (possible causes) Quality of raw material resulting

less or more labour efforts Learning curve problem General morale or personal

problems or other human problems

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p p Wrong standards / unattainable

standards

Recap MCQ

CQ 5 CQ 6 CQ 7

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CQ 8

Please do your polling


Cheng Nam Sang 9

Another Attempt(See Class Exercises CQ.9)

1 MPV = $74 400 U1. MPV = $74,400 UMUV = $128,000 U

2. LRV = $14,500 ULEV = $90,000 U

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Variable Overhead Variances

AHw x ARRate (spending) var.

AHw x SREfficiency var.

SH x SR _______________

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(SH for actual production) Total flexed variancei.e. Applied Standard

(Aoutput x Std hour required) x SR

Variable Overhead Variances

Rate (Spending) and Efficiency Variances Difficult for interpretation due to the

overhead rate per unit/hour being likely to be amalgamation of many different cost elements

Choice of activity base/cost driver

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y Careful analysis of actual costs Breakdown of the standard cost into its

constituent parts e.g. material, labour

Fixed Overhead VariancesActual

Spending variance

Budget(Boutput x SH) x PORDenominator Hr x POR

AppliedSH x SR(S f

Volume variance

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(Std Hr for the actual output _______________@ std rate) (Aoutput x SH) x POR Total Variance

(over-/under-applied fixed overhead)


Cheng Nam Sang 10

Fixed Overhead Variances(Normal Textbooks approach)

Garrison et al Asian ed. also shows this method of calculating volume variance (see p.600)calculating volume variance (see p.600)

Identify pre-determined overhead rate which covers both variable and fixed overheads Separate variable and fixed overheads as only fixed overhead

component is relevant for the fixed overhead variance analysis Defined: Denominator Activity and Denominator Hour (see

p.598, 600)

Volume variance = Fixed component of the predetermined overhead rate

x (Denominator hours Standard hours allowed)

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Fixed Overhead Variances Spending variance (also refers as budget variance)

shows the budgeting errors on fixed overhead.

Volume variance reflects the capacity and effectiveness (not efficiency) of utilizing the facility, such as production facility (planned volume vs actual volume). This can be affected by management decision to change the

utilization of facility due to change of market condition, but can also be caused by uncontrollable events such as machine

breakdown.

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Total fixed overhead variance (effectively is the over-/under-applied fixed overhead)

Flexible Budget Performance Report

Master Budget

Activity Variances

Flexed Budget

Revenue & Spending Variances

Actual Results

$ $ $ $ $ $ $ $ $ $Revenue Direct materials Cost Labour Cost Variable production overhead Fixed production overhead

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Net Income

Variance Analysis Cycle

Identifyti

Receive l ti

Takecorrective

Analyze variances

questions explanations actions

Conduct next periods

operations

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Prepare standard cost performance

report

Begin

operations


Cheng Nam Sang 11

Potential Problems in Variance Analysis and Standard Costing

Dysfunctional behaviour (budget gaming) Dysfunctional behaviour (budget gaming) Interactions among variances Aggregated nature of variances Lack of timeliness of variances Outdated/irrelevant standards

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Outdated/irrelevant standards

Your Chance to do another Comprehensive Exercise

Meng Meng Pte Ltd

(Dont forget there may be unannounced quiz!) q )

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Objectives achieved?

Do you understand Standard Costing and t d d tti ?standard setting?

What is a flexible (or flexed) budget? Do you understand the basic principles in

calculating and interpreting variancesCan you compute simple variances?

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Can you compute simple variances? Can perform simple variance

interpretation/analysis? What is a performance report?

ACCT 102 Managerial Accounting

Variance Analysis

Cheng Nam Sang 1

Variance Analysis: Example FaFa Pte Ltd produces soap in bulk. The standard cost per drum is made up as follows: Raw Materials 100 kg costing $2 per kg Labour 12 hours costing $3 per hour Variable production overheads 12 hours costing $2.5 per hour Fixed production costs per month are budgeted at $90,000. For April, budgeted production was 7,500 drums. The company budgeted to sell all 7,500 units at $450 per unit. The actual costs incurred in the period were: Raw materials (900,000 kg purchased) $1,755,000Labour (110,000 hours paid, 102,000 hours worked) $341,000Variable production overheads $280,000Fixed production costs $86,000 During April 7,800 drums of soap were actually produced. There were no raw materials inventories at the start or end of the period. The actual sales for the period were 7,200 drums at price of $480 each. Assumptions: 1. We are operating a total absorption costing system, so that all production

costs are absorbed into units produced; and 2. The basis for absorbing fixed overheads is labour hours. Despite the

advent of ABC, this is the most commonly used absorption basis in practice.


Variance Analysis

Cheng Nam Sang 2

Standard Cost Card for soap $Raw materials (100 kg x $2) 200Labour (12 hours x $3) 36Variable production overheads (12 hours x $2.5) 30Fixed production overheads (12 hours x $1) NB1 12 278 NB 1 Fixed overhead absorption (or applied) rate:

Produce 7,500 drums, each taking 12 hours to produce. Total budgeted hours = 7,500 x 12 = 90,000 Fixed overhead budgeted = $90,000 Fixed overhead absorption rate per hour = $90,000 / 90,000

= $1 per hr Actual vs Master Budget (Static Variances)

Budgeted production = 7,500 drums Budgeted Actual Variance Actual production = 7,800 drums $ $ $ Revenue 3,375,000 3,456,000 81,000 FDirect materials Cost 1,500,000 1,755,000 255,000 ULabour Cost 270,000 341,000 71,000 UVariable production overhead 225,000 280,000 55,000 UFixed production overhead 90,000 86,000 4,000 F 2,085,000 2,462,000 377,000 U

Flexible Budget vs Master Budget (Activity Variances)

Flexed Budget: Sales = 7,200 drums Master Flexed Variance Prodn = 7,800 drums $ $ $ Revenue 3,375,000 3,240,000 135,000 UAll Costs @ Standard Costs: Direct materials Cost 1,500,000 1,560,000 60,000 ULabour Cost 270,000 280,800 10,800 UVariable production overhead 225,000 234,000 9,000 UFixed production overhead 90,000 90,000 0 2,085,000 2,164,800 79,800 U


Variance Analysis

Cheng Nam Sang 3

FaFa Pte Ltd Flexible Budget Performance Report

For the month of April

Master Budget

Activity Variances

Flexed Budget

Revenue & Spending variances

Actual Results

$ $ $ $ $ Revenue 3,375,000 135,000 U 3,240,000 216,000 F 3,456,000 Direct materials Cost 1,500,000 60,000 U 1,560,000 195,000 U 1,755,000 Labour Cost 270,000 10,800 U 280,800 60,200 U 341,000 Variable production overhead 225,000 9,000 U 234,000 46,000 U 280,000 Fixed production overhead 90,000 0 U 90,000 4,000 F 86,000 2,085,000 79,800 U 2,164,800 297,200 U 2,462,000

ACCT 102

Variance Analysis

Cheng Nam Sang

Flexible Budget Variances (Detailed breakdown) Sales Variances $ $ Variances AQ x AP = 7,200 x $480 = 3,456,000 (Actual Sales)

216,000 F Price AQ x SP = 7,200 x $450 = 3,240,000

(135,000) U Volume SQ x SP = 7,500 x $450 = 3,375,000 81,000 F Total Flexed

COSTS Raw Material Variances $ $ Variances AQ x AP = 900,000 x $1.95 1,755,000 (Actual Cost)

(45,000) F Price AQ x SP = 900,000 x $2 1,800,000

240,000 U Usage SQNB2x SP = (7800 x 100) x $2 1,560,000 195,000 U Total Flexed (Actual output x std RM quantity) x SP

60,000 U Activity BQ x SP = (7500 x 100) x $2 1,500,000 (Budgeted Cost) = (Budgeted output x std RM quantity) x SP NB2 SQ = Standard Quantity for actual output = 7,800 drums x 100 kg = 780,000 kg

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ACCT 102

Variance Analysis

Cheng Nam Sang

Labour Variances $ $ Variances AHp x AR = 110,000 x $3.1= 341,000 (Actual Cost)

11,000 U Rate AHp x SR = 900,000 x $3 = 330,000

24,000 U Idle Time AHw x SR = 102,000 x $3 = 306,000

25,200 U Efficiency SHwNB3x SR = (7800 x 12) x $3 = 280,800 60,200 U Total Flexed (Actual output x std Labour Hr) x SR

10,800 U Activity BH x SR = (7500 x 12) x $3 = 270,000 (Budgeted Cost) = (Budgeted output x std Labour Hr) x SR NB3 SHw = Standard Hours worked for actual output = 7,800 drums x 12 hours = 93,600 hours Variable Overhead Variances $ $ Variances AHw x AR = 280,000 (Actual Cost)

25,000 U Rate AHw x SR = 102,000 x $2.5 = 255,000

21,000 U Efficiency SHwNB3x SR = (7,800 x 12) x $2.5 = 234,000 46,000 U Total Flexed (Actual output x std Labour Hr) x SR

9,000 U Activity BH x SR = (7,500 x 12) x $2.5 = 225,000 (Budgeted Cost) = (Budgeted output x std Labour Hr) x SR Fixed Overhead Variances (Different from the rest) $ $ Variances Actual Cost = 86,000

(4,000) F Spending Budgeted Cost = (7500 x 12) x $1NB1 90,000 (Budgeted output x Std labour Hr) x SR Denominator Hr x POR (3,600) F Volume SHwNB3x SR = (7800 x 12) x $1 93,600 (7,600) F Total Flexed (Actual output x std Labour Hr) x SR

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Variance Analysis

Cheng Nam Sang 6

Further reference

1 In this example, we assumed no Raw Material Inventory. If purchased quantity is more than used quantity then there is inventory at the end of the period. The proforma should be: AQ (purchased) x AP Price variance AQ (purchased) x SP Inventory @ standard cost AQ (used) x SP Usage variance SQ (for actual production) x SP

2 If you need to analyse sales or material mix and yield variances Sales Variances AQ x AM x AP Price variance AQ x AM x SP Mix variance AQ x SM x SP Quantity variance SQ x SM x SP Material Variances AQ x AM x AP Price variance AQ x AM x SP Mix variance AQ x SM x SP Yield variance SQ x SM x SP (Standard Quantity at standard price in standard mix for actual production)

ACCT 102 Management Accounting Class Exercise

Cheng Nam Sang 1

Far West Ltd produces high-quality leather wallets. The company uses a standard cost system and has set the following standards for materials and labour: Leather (6 strips @ $8) $48 Direct Labour (1.5 hours @ $12) 18 Total Prime Cost $66 During the year, Far West produced 10,000 leather wallets. Actual leather purchased was 61,000 strips at $7.96 per strip. There were no beginning and ending inventories of leather. Actual direct labour was 15,600 hours at $12.50 per hour. Required CQ1. Compute the costs of leather and direct labour that should have been incurred (i.e. flexible

budget) for the production of 10,000 leather wallets.

Material Laboura) $796,000 $125,000b) $480,000 $180,000c) $800,000 $120,000d) $477,600 $187,500e) $485.560 $195,000

CQ2. Compute the total static (budgeted) variances for material and labour.

Material Laboura) $5,560 F $15,000 Fb) $5,560 U $15,000 Uc) $2,440 F $7,800 Ud) $2,440 U $7,800 Fe) None of the above

CQ3. Break down the total variance for materials into a price variance and usage variance

Price Variance Usage Variancea) $2,440 F $8,000 Ub) $2,440 U $8,000 Fc) $5,560 F $2,440 Fd) $5,560 F $2,440 Ue) None of the above

CQ4. Break down the total variance for labour into a rate variance and an efficiency variance

Rate Variance Efficiency Variancea) $15,000 F $7,800 Ub) $15,000 U $7,800 Fc) $7,800 F $7,200 Fd) $7,800 U $7,200 Ue) None of the above

CQ5. The Standard quantity of materials allowed is computed by the equation

a) Unit quantity standard x Standard output b) Unit quantity standard x Actual output c) Unit quantity standard x Practical output d) Unit quantity standard x Normal output e) None of the above

ACCT 102 Management Accounting Class Exercise

Cheng Nam Sang 2

CQ6. The standard direct labour hours allowed is given by the question

a) Unit labour standard x Normal output b) Unit labour standard x Practical output c) Unit labour standard x Standard output d) Unit labour standard x Actual output e) Unit labour standard x Theoretical output

CQ7. The total (flexible budget) variance is given by the equation

a) (AP x AQ) (SP x SQ) b) (SP x AQ) (AP x SQ) c) (SP x AQ) (SP x SQ) d) (AP x SP) (AQ x SQ) e) None of the above

CQ8. Investigating variances from standard is

a) always done b) done if the variance is outside an acceptable range c) not done if the variance is expected to recur d) done if the variance is less than 10 percent of standard cost e) none of the above

CQ9. At the beginning of the year, Paul & Mary Ltd had the following stand cost sheet for one

of its chemical products: Direct materials (5 kg @$3.20) $16 Direct labour (2 hrs @$9.00) 18 Standard prime cost per unit 34 The actual results for the year are as follows: i) Unites produced: 140,000. ii) Materials purchased: 744,000 kg @$3.30 iii) Materials used: 740,000 kg iv) Direct labour: 290,000 hours @9.05.

Required

a. Compute price and usage variances for materials b. Compute the labour rate and labour efficiency variances


Cheng Nam Sang 1

Flexible Budget & Variance Analysis 1. provide expected revenues and costs for several levels of activity. a. Continuous budgets b. Flexible budgets c. Master budgets d. Static budgets 2. are budgets for a single activity level. a. Flexible budgets b. Master budgets c. Static budgets d. Both b and c are correct. 3. The Zachary Fitness Company has the following budgeted costs for the production of its only product,

exercise machines: Variable manufacturing costs $30.00 per unit Shipping expenses (selling) $ 1.00 per unit Administrative $ 0.50 per unit Fixed manufacturing costs $50,000 per month Fixed selling and admin. costs $35,000 per month What are Zachary's expected costs for 1,000 units of product to be produced and sold in March? a. $30,000 b. $31,000 c. $85,000 d. $116,500. 4. The flexible budget is based on the same assumptions of revenue and cost behavior (within the relevant

range) as is the:

a. master budget b. static budget c. both a and b d. neither a nor b

5. Which of the following is descriptive of an activity-based flexible budget:

a. based on budgeted costs for each activity center and related cost driver b. based on actual costs for each activity center and related cost driver c. is limited to no more than ten activity centers d. a and c

6. The key differences between the traditional flexible budget and the activity-based flexible budget is:

a. the traditional should be used when a significant portion of the costs vary with cost drivers other than units of production

b. some manufacturing costs that are fixed with respect to units are variable with respect to cost drivers, other than units, used for an activity-based flexible budget

c. traditional flexible budgeting is dramatically increasing in popularity d. the larger the company, the more likely the activity-based flexible budget will not be used


Cheng Nam Sang 2

7. Flexible budgets allow for financial performance evaluation because actual results can be compared with a. the expected prices and variable costs per unit and fixed cost for the period. b. the continuous budget for the period. c. the static budget for the period. d. the master budget for the period. 8. The flexible budget is prepared using the:

a. estimated levels of activity of the closest competitor b. historical levels of activity c. actual levels of activity d. most conservative levels of activity

9. measure how effective managers have been in meeting the planned level of sales. a. Continuous-budget variances b. Flexible-budget variances c. Master-budget variances d. Sales-activity variances 10. measure the efficiency of operations at the actual level of activity. a. Zero-based budget variances b. Flexible-budget variances c. Master-budget variances d. Sales-activity variances Use the following information for questions 11 through 14. The Blake Company has developed the following standards for one of their products. Direct materials: 30 pounds x $3 per pound Direct labor: 10 hours x $8 per hour Variable overhead: 10 hours x $2 per hour The following activity occurred during the month of November: Materials purchased: 500,000 pounds at $3.20 per pound Material used: 460,000 pounds Units Produced: 15,000 units Direct labor: 145,000 hours at $7.90 per hour Actual variable OH: $295,000 The company records the materials price variance at the time of purchase. 11. The materials price variance is a. $0. b. $92,000 unfavorable. c. $100,000 favorable. d. $100,000 unfavorable. 12. The labor usage variance is a. $39,500 favorable. b. $39,500 unfavorable. c. $40,000 unfavorable. d. $40,000 favorable.


Cheng Nam Sang 3

13. The variable overhead spending variance is a. $5,000 favorable. b. $5,000 unfavorable. c. $10,000 favorable. d. $10,000 unfavorable. 14. The variable overhead efficiency variance is

a. $10,000 unfavorable b. $ 0 c. $10,000 favorable d. cannot be determined


Cheng Nam Sang 4

Flexible Budget & Variance Analysis 1. [b] 2. [d] 3. [d] From the information provided, Zachary's flexible-budget cost formula is $85,000 + $31.50 X, where X is the

number of units produced. Inserting 1,000 for X gives $85,000 + ($31.50 x 1,000) which equals $116,500. 4. [c] 5. [a] 6. [b] 7. [a] 8. [c] 9 [d] 10. [b] 11. [d] As stated, the company determines the price variance based on the material purchased. Therefore, the price

variance is ($3.20 - $3.00) x 500,000 pounds which is $100,000. The variance is unfavorable since the actual price paid ($3.20) exceeds the standard price ($3.00).

12. [d] The labor usage variance is found by multiplying the standard labor rate ($8) by the difference between the

actual hours worked (145,000) and the number of hours that should have been taken to produce 15,000 units (150,000 = 15,000 x 10 hrs./unit). The resulting variance is $40,000, which is favorable because fewer hours were worked than should have been for the production level achieved.

13. [b] Spending variance = (AH x AR) (AH x SR) = AH x (AR SR)

= 295,000 (145,000 x 2) = 295,000 290,000 = 5,000 Unfavourable

14. [c] The efficiency variance is the difference between the actual quantity of the cost-driver activity and the

standard quantity allowed, which is then multiplied by the standard rate. The actual quantity of 145,000 hours is less than the standard allowed of 150,000 hours. The 5,000 hour difference is multiplied by the standard rate of $2 to arrive at a $10,000 favorable variance.

Efficiency variance = AH x SR SH x SR = (145,000 x 2) [(15,000 x 10) x 2] = 290,000 300,000 = 10,000 Favourable

ACT 102 Management Accounting: Variance Analysis

Cheng Nam Sang 1

1 The activity base that is used for a flexible budget for an overhead cost should be: A) direct labor-hours. B) units of output. C) expressed in dollars, if possible. D) the cause of the overhead cost. 2. The following costs appear in Malgorzata Company's flexible budget at an activity

level of 15,000 machine-hours:

Total Cost Indirect materials ............... $7,800 Factory rent ....................... $18,000

What would be the flexible budget amounts at an activity level of 12,000 machine-hours if indirect materials is a variable cost and factory rent is a fixed cost?

Indirect Materials Factory RentA) $7,800 $14,400 B) $7,800 $18,000 C) $6,240 $14,400 D) $6,240 $18,000

3. Riggs Enterprise's flexible budget cost formula for indirect materials, a variable cost,

is $0.45 per unit of output. If the company's performance report for last month shows a $90 favorable variance for indirect materials and if 8,700 units of output were produced last month, then the actual costs incurred for indirect materials for the month must have been:

A) $4,005 B) $3,915 C) $3,825 D) $3,735

4. Teall Corporation has a standard cost system in which it applies manufacturing

overhead to products on the basis of standard machine-hours (MHs). The company has provided the following data for the most recent month:

Budgeted level of activity ................................................. 8,500 MHs Actual level of activity ...................................................... 8,600 MHs Cost formula for variable manufacturing overhead cost ... $5.70 per MH Budgeted fixed manufacturing overhead cost ................... $50,000 Actual total variable manufacturing overhead .................. $51,600 Actual total fixed manufacturing overhead ....................... $54,000


Cheng Nam Sang 2

What was the fixed overhead budget variance for the month? A) $4,000 unfavorable B) $4,000 favorable C) $570 favorable D) $570 unfavorable 5. Alapai Corporation has a standard cost system in which it applies manufacturing

overhead to products on the basis of standard machine-hours (MHs). The company has provided the following data for the most recent month:

Budgeted level of activity ................................................ 7,000 MHs Actual level of activity ..................................................... 7,200 MHs Cost formula for variable manufacturing overhead cost .. $9.40 per MH Budgeted fixed manufacturing overhead cost .................. $40,000 Actual total variable manufacturing overhead ................. $66,960 Actual total fixed manufacturing overhead ...................... $37,000

What was the total of the variable overhead spending and fixed overhead budget

variances for the month? A) $3,720 favorable B) $2,280 unfavorable C) $1,840 favorable D) $1,880 unfavorable

6. Ronda Manufacturing Company uses a standard cost system with machine-hours as

the activity base for overhead. Last year, Ronda incurred $840,000 of fixed manufacturing overhead and generated a $42,000 favorable fixed overhead budget variance. The following data relate to last year's operations:

Denominator activity level in machine-hours ................ 21,000 Standard machine-hours allowed for actual output ........ 20,000 Actual number of machine-hours incurred .................... 22,050

What amount of total fixed manufacturing overhead cost did Ronda apply to

production last year? A) $837,900 B) $840,000 C) $926,100 D) $972,405


Cheng Nam Sang 3

Use the following to answer questions 7-12: A manufacturing company has a standard costing system based on standard direct labor-hours (DLHs) as the measure of activity. Data from the company's flexible budget for manufacturing overhead are given below: Denominator level of activity ................................ 1,000 DLHs Overhead costs at the denominator activity level: Variable overhead cost ........................................ $3,800 Fixed overhead cost ............................................ $14,250 The following data pertain to operations for the most recent period: Actual hours ........................................................... 1,200 DLHs Standard hours allowed for the actual output ........ 885 DLHs Actual total variable overhead cost ........................ $4,380 Actual total fixed overhead cost ............................ $12,450 7. What is the predetermined overhead rate to the nearest cent? A) $14.03 B) $16.83 C) $15.04 D) $18.05 8. How much overhead was applied to products during the period to the nearest dollar? A) $18,050 B) $16,830 C) $15,974 D) $21,660 9. What was the variable overhead spending variance for the period to the nearest

dollar? A) $180 U B) $180 F C) $580 U D) $580 F 10. What was the variable overhead efficiency variance for the period to the nearest

dollar? A) $133 U B) $580 U C) $1,150 U D) $1,197 U


Cheng Nam Sang 4

11. What was the fixed overhead budget variance for the period to the nearest dollar? A) $1,800 F B) $3,268 F C) $161 U D) $4,650 U 12. What was the fixed overhead volume variance for the period to the nearest dollar? A) $4,489 U B) $1,618 U C) $2,850 F D) $1,639 U

13. Flick Company uses a standard cost system in which manufacturing overhead is

applied to units of product on the basis of standard direct labor-hours. The company's total budgeted variable and fixed manufacturing overhead costs at the denominator level of activity are $20,000 for variable overhead and $30,000 for fixed overhead. The predetermined overhead rate, including both fixed and variable components, is $2.50 per direct labor-hour. The standards call for two direct labor-hours per unit of output produced. Last year, the company produced 11,500 units of product and worked 22,000 direct labor-hours. Actual costs were $22,500 for variable overhead and $31,000 for fixed overhead.

Required:

a. What is the denominator level of activity? b. What were the standard hours allowed for the output last year? c. What was the variable overhead spending variance? d. What was the variable overhead efficiency variance? e. What was the fixed overhead budget variance? f. What was the fixed overhead volume variance?


Cheng Nam Sang 5

Ans 1: D Ans 2: D Budgeted number of machine hours: 15,000

Cost Formula

(per machine-hour)

Activity (in machine-hours):

12,000 Variable costs:

Indirect materials ......... $0.52* $6,240 Fixed costs:

Factory rent .................. $18,000

*$7,800 15,000 MHs = $0.52 per MH Ans 3: C Variable overhead spending variance = AQ (AP SP) = 90 F

8,700 (AP 0.45) = -90 (8,700 AP) 3,915 = -90 (8,700 AP) = 3,825 AP = 3,825 8,700 = $0.4396

Actual indirect materials = 8,700 $0.4396 = $3,825 Ans 4: A Budget variance = Actual fixed overhead cost Budgeted fixed overhead cost = $54,000 $50,000 = $4,000 U Ans 5: A Actual rate =

Actual total variable manufacturing overhead Actual machine-hours = $66,960 7,200 = $9.30 Variable overhead spending variance = AH (AR SR) = 7,200 ($9.30 $9.40) = 7,200 ($0.10) = $720 F Fixed overhead budget variance = Actual fixed overhead costs Budgeted fixed overhead cost = $37,000 $40,000 = $3,000 F

Total overhead variance = $720 F + $3,000 F = $3,720 F Ans 6: B Predetermined overhead rate =

$882,000 21,000 denominator machine-hours = $42 per machine-hour Fixed overhead applied to production =

20,000 standard hours $42 per machine-hour = $840,000


Cheng Nam Sang 6

Ans 7: D Predetermined overhead rate = Total overhead Denominator level of activity = ($3,800 + $14,250) 1,000 DLHs = $18,050 1,000 DLHs = $18.05 per DLH Ans 8: C Predetermined overhead rate = Total overhead Denominator level of activity

= ($3,800 + $14,250) 1,000 DLHs = $18,050 1,000 DLHs = $18.05 per DLH Applied overhead = 885 DLHs $18.05 per DLH = $15,974

Ans 9: B Budgeted direct-labor hours: 1,100

Actual direct-labor hours: 1,200 Standard direct-labor hours allowed: 800

Cost Formula

(per DLH)

Actual Costs

Incurred 1,200 DLHs

Budget Based on

1,200 DLHs

Spending Variance

Variable overhead

costs ...................... $3.80 * $4,380 $4,560 $180 F

* $3,800 1,000 DLHs = $3.80 per DLH Ans 10: D Budgeted direct-labor hours: 1,000

Actual direct-labor hours: 1,200 Standard direct-labor hours allowed: 885

Cost Formula

(per DLH)

Budget Based on

1,200 DLHs

Budget Based on 885 DLHs

Efficiency Variance

Variable overhead

costs ...................... $3.80 * $4,560 $3,363 $1,197 U

*$3,800 1,000 = $3.80 Ans 11: A Fixed overhead budget variance = Actual fixed overhead cost Budgeted fixed overhead cost = $12,450 $14,250 = $1,800 F


Cheng Nam Sang 7

Ans 12: D Fixed portion of predetermined overhead rate

= $14,250 1,000 DLHs = $14.25 per DLH Volume variance = Fixed portion of predetermined overhead rate (Denominator hours Standard hours allowed) = $14.25 per DLH (1,000 DLHs 885 DLHs)

= $14.25 per DLH 115 DLHs = $1,639 U Ans 13:

a. Total overhead at the denominator level of activity ....... $50,000 Predetermined overhead rate ....................................... $2.50/DLH = Denominator level of activity ...................................... 20,000 DLHs

b. Actual output .............................. 11,500 units Standard DLH per unit ............ 2 DLH per unit = Standard DLHs allowed .......... 23,000 DLHs

c. Computation of variable overhead spending variance: Spending variance = (AH AR) (AH SR) = ($22,500) (22,000 $1.00*) = $500 U *$20,000 20,000 DLHs = $1.00

d. Computation of variable overhead efficiency variance: Spending variance = (AH SR) (SH SR) = (22,000 $1.00) (23,000* $1.00) = $1,000 F * 2 DLHs per unit 11,500 units = 23,000 DLHs e. Computation of the fixed overhead budget variance: Budget variance = Actual fixed overhead Budgeted Fixed overhead = $31,000 $30,000 = $1,000 U f. Computation of the fixed overhead volume variance: Volume variance = Fixed portion of predetermined overhead rate (Denominator hours Standard hours allowed) = $1.50* (20,000 23,000) = $4,500 F *$30,000 20,000 DLH = $1.50 per DLH

ACCT 102 Management Accounting Variance Analysis - Extra Exercises

Cheng Nam Sang 1

EQ1. Consider the following statements:

I. Behavioral scientists find that perfection standards often discourage employees and result in low worker morale.

II. Practical standards are also known as attainable standards. III. Practical standards incorporate a certain amount of inefficiency such as that caused

by an occasional machine breakdown. Which of the above statements is (are) true? A. I only. B. II only. C. III only. D. II and III. E. I, II, and III. EQ2. Which of the following would not be considered if a company desires to establish a series

of practical manufacturing standards? A. Production time lost during unusual machinery breakdowns. B. Normal worker fatigue. C. Freight charges on incoming raw materials. D. Production time lost during setup procedures for new manufacturing runs. E. The historical 2% defect rate associated with raw material inputs. EQ3. Most companies base the calculation of the materials price variance on the: A. number of units purchased. B. number of units spoiled. C. number of units that should have been used. D. number of units actually used. E. number of units to be purchased during the next accounting period. EQ4. Which of the following variances cannot occur together during the same accounting

period? A. Unfavorable labor rate variance and favorable labor efficiency variance. B. Unfavorable labor efficiency variance and favorable materials quantity variance. C. Favorable labor rate variance and unfavorable total labor variance. D. Favorable labor efficiency variance and favorable materials quantity variance. E. None of the above, as all of these variance combinations are possible. EQ5. Victoria, Inc., recently completed 52,000 units of a product that was expected to consume

five pounds of direct material per finished unit. The standard price of the direct material was $9 per pound. If the firm purchased and consumed 268,000 pounds in manufacturing (cost = $2,304,800), the direct-materials quantity variance would be figured as:

A. $72,000F. B. $72,000U. C. $107,200F. D. $107,200U. E. none of the above.


Cheng Nam Sang 2

Use the following to answer questions 6-10:

Cost standards for product no. C77: Direct material 3 pounds at $2.50 per pound $ 7.50 Direct labor 5 hours at $7.50 per hour 37.50

Actual results:

Units produced 7,800 units Direct material purchased 26,000 pounds at $2.70 $ 70,200 Direct material used 23,100 pounds at $2.70 62,370 Direct labor 40,100 hours at $7.30 292,730

EQ6. The direct-material quantity variance is: A. $750F. B. $750U. C. $6,500U. D. $7,250U. E. none of the above.

EQ7. The direct-material price variance is: A. $4,620F. B. $4,620U. C. $5,200F. D. $5,200U. E. none of the above.

EQ8. The direct-labor rate variance is: A. $7,800F. B. $7,950F. C. $8,020F. D. $8,000U. E. none of the above.

EQ9. The direct-labor efficiency variance is: A. $8,000F. B. $8,000U. C. $8,250F. D. $8,250U. E. none of the above.

EQ10. The standard hours allowed for the work performed are: A. 5. B. 5.14. C. 39,000. D. 40,100. E. none of the above.


Cheng Nam Sang 3

EQ11. Consider the following statements about variance investigation:

I. Variance investigation involves a look at only unfavorable variances. II. Variance investigation is typically based on a cost-benefit analysis. III. Variance investigation is often performed by establishing guidelines similar to the

following: Investigate variances that are greater than $X or greater than Y% of standard cost.

Which of the above statements is (are) true? A. I only. B. II only. C. III only. D. II and III. E. I, II, and III. EQ12. Justin Company recently purchased materials from a new supplier at a very attractive

price. The materials were found to be of poor quality, and the company's laborers struggled significantly as they shaped the materials into finished product. In a desperation move to make up for some of the time lost, the manufacturing supervisor brought in more-senior employees from another part of the plant. Which of the following variances would have a high probability of arising from this situation?

A. Material price variance, favorable. B. Material quantity variance, unfavorable. C. Labor rate variance, unfavorable. D. Labor efficiency variance, unfavorable. E. All of the above.

EQ13. Lucky Corporation's purchasing manager obtained a special price on an aluminum alloy

from a new supplier, resulting in a direct-material price variance of $9,500F. The alloy produced more waste than normal, as evidenced by a direct-material quantity variance of $2,000U, and was also difficult to use. This slowed worker efficiency, generating a $2,500U labor efficiency variance. To help remedy the situation, the production manager used senior line employees, which gave rise to a $900U labor rate variance. If overall product quality did not suffer, what variance amount is best used in judging the appropriateness of the purchasing manager's decision to acquire substandard material?

A. $4,100F. B. $5,000F. C. $7,000F. D. $7,500F. E. $9,500F.


Cheng Nam Sang 4

Use the following information for questions 14 and 15

Red Hot Chili Pepper produces the hottest chili sauce in the world for use in the making of spicy dishes. In making sure that the company is profitable, Red Hot Chili Peppers management always analyzes carefully the cost of its raw materials, green chili, which is sourced from India. Typically, to ensure that they can produce the hottest chili sauce, 1 kg of green pepper is squeezed into the making of 1 bottle of their chili sauce through a distillation process. In addition, to maintain the prices of their chili sauce, the company always manufactures 20,000 bottles monthly. In the month of October, the following information was available from company records:

Actual quantity of materials used 24,000 kgBudgeted quantity of materials purchased 26,000 kgActual price paid for materials $4 per kgBudgeted price for materials $5 per kg

The company computes its material price variance at the time of usage. EQ14. What was the materials price variance for the period?

A. $24,000 (F) B. $24,000 (U) C. $26,000 (F) D. $26,000 (U) E. None of the above

EQ15. What was the materials quantity variance for the period?

A. $8,000 (U) B. $10,000 (U) C. $16,000 (U) D. $20,000 (U) E. none of the above


Cheng Nam Sang 5

Use the following information for questions 16 to 19. JFH Company uses a standard cost system. Data for the month of May 20X5 for one of the companys products is as follows:

Total production of finished product for the month: 10,500 units Standard quantity of direct material allowed in finished product: 31,500 kg Standard cost of direct material: $10 per kg Material usage/quantity variance: $3,000 (U) Direct material purchased: 33,000kg costing $336,600 Total direct labour variance: $1,500 (F) Direct labour rate variance: $1,500 (U) Standard hour of direct labour time: 1 hour per unit Standard rate for direct labour: $15 per hour Overhead budget formula: $50,000 per month plus $25 per direct labour hour Actual overhead incurred: $300,000 Actual fixed overhead costs: $45,000 Normal volume: 10,000 units of finished product per month Material price variance is computed at the time of purchase

EQ16. Actual quantity of direct material used was:

A. 30,000 kg B. 30,300 kg C. 31,500 kg D. 31,800 kg E. 33,000 kg F. none of the above

EQ17. The actual direct labour hour worked was:

A. 9,800 hours B. 10,000 hours C. 10,250 hours D. 10,300 hours E. 10,500 hours F. none of the above

EQ18. The total variable overhead variance was:

A. $2,500(U) B. $2,500(F) C. $5,000(U) D. $5,000(F) E. $7,500(U) F. none of the above

EQ19. The fixed overhead volume variance was:

A. $0 B. $2,500(U) C. $2,500(F) D. $5,000(U) E. $5,000(F) F. none of the above


Cheng Nam Sang 6

EQ20. Richie Ventura operates a commercial painting business in Sacramento, which has a very

tight labor market. Much of his work focuses on newly constructed apartments and townhouses.

The following data relate to crew no. 5 for a recently concluded period when 85

apartment units were painted: Three new employees were assigned to crew no. 5. Wages averaged $18.80 per hour

for each employee; the crew took 2,550 hours to complete the work. Based on his knowledge of the operation, articles in trade journals, and conversations

with other painters, Ventura established the following standards: Typical hourly wage rate of crew personnel: $15 Anticipated crew time for each unit: 34 hours

The paint quantity variance was $6,070F. The operation did not go as smoothly as planned, with customer complaints and

problems being much higher than expected. Required:

A. Compute Ventura's direct-labor variances. B. Is the direct-labor rate variance consistent with what you might expect in a tight labor

market? Explain. C. Analyze the information given and that you calculated, and determine what likely

happened that would give rise to customer complaints? EQ21. A manufacturing company is expected to complete a task in 45 minutes. During a recent

accounting period, 3,200 completed units were produced, resulting in the following labor variances:

Labor rate variance: $520 favorable Labor efficiency variance: $2,800 unfavorable

The standard labor rate is $14 per hour. Required: Calculate (1) the standard hours allowed for the work performed, (2) the actual hours

worked, and (3) the actual wage rate.

EQ22. A Balanced Scorecard is:

A. a performance measurement system that emphasizes profit growth. B. an evaluation process that focuses on improving sales and productivity. C. a series of checks and balances based primarily on the information derived from the

financial statements of the organization. D. a performance measure that evaluates multiple categories of an organizations critical

success factors related to organizational goals. E. a performance measurement system that focuses exclusively on critical issues

relating to meeting customers expectations such as anticipating customers needs, after-sale services, and delivery efficiency.

F. none of the above.


Cheng Nam Sang 7

EQ23. Bob's Burgers and Such, a national fast-food chain, has experienced a number of problems in the past few years, and management is considering the adoption of a balanced scorecard as part of a turnaround effort.

Required: A. Briefly explain the concept of a balanced scorecard. What general factors are

included in a typical balanced scorecard? B. Independent of your answer in requirement "A," assume that Bob's is very concerned

about customer satisfaction. List four different (and specific) customer-satisfaction measures that may be appropriate for the firm (and for other fast-food providers).

C. Independent of requirement "A," assume that Bob's wants to return to former levels of profitability. List several financial measures that would allow management to assess success or failure with respect to the following goals: (1) pay creditors on a timely basis, (2) keep shareholders happy, and (3) improve profitability over time at stores that have been open at least one year.

EQ24. provide expected revenues and costs for several levels of activity. a. Continuous budgets b. Flexible budgets c. Master budgets d. Static budgets EQ25. are budgets for a single activity level. a. Flexible budgets b. Master budgets c. Static budgets d. Both b and c are correct. EQ26. The Zachary Fitness Company has the following budgeted costs for the production of its

only product, exercise machines: Variable manufacturing costs $30.00 per unit Shipping expenses (selling) $ 1.00 per unit Administrative $ 0.50 per unit Fixed manufacturing costs $50,000 per month Fixed selling and admin. costs $35,000 per month What are Zachary's expected costs for 1,000 units of product to be produced and sold in

March? a. $30,000 b. $31,000 c. $85,000 d. $116,500. EQ27. The flexible budget is based on the same assumptions of revenue and cost behavior (within

the relevant range) as is the: a. master budget b. static budget c. both a and b d. neither a nor b


Cheng Nam Sang 8

EQ28. Which of the following is descriptive of an activity-based flexible budget:

a. based on budgeted costs for each activity center and related cost driver b. based on actual costs for each activity center and related cost driver c. is limited to no more than ten activity centers d. a and c

EQ29. The key differences between the traditional flexible budget and the activity-based flexible

budget is:

a. the traditional should be used when a significant portion of the costs vary with cost drivers other than units of production

b. some manufacturing costs that are fixed with respect to units are variable with respect to cost drivers, other than units, used for an activity-based flexible budget

c. traditional flexible budgeting is dramatically increasing in popularity d. the larger the company, the more likely the activity-based flexible budget will not be

used EQ30. Flexible budgets allow for financial performance evaluation because actual results can be

compared with a. the expected prices and variable costs per unit and fixed cost for the period. b. the continuous budget for the period. c. the static budget for the period. d. the master budget for the period. EQ31. The flexible budget is prepared using the:

a. estimated levels of activity of the closest competitor b. historical levels of activity c. actual levels of activity d. most conservative levels of activity

EQ32. measure how effective managers have been in meeting the planned level of

sales. a. Continuous-budget variances b. Flexible-budget variances c. Master-budget variances d. Sales-activity variances EQ33. measure the efficiency of operations at the actual level of activity. a. Zero-based budget variances b. Flexible-budget variances c. Master-budget variances d. Sales-activity variances


Cheng Nam Sang 9

Use the following information for questions 34 through 37. The Blake Company has developed the following standards for one of their products. Direct materials: 30 pounds x $3 per pound Direct labor: 10 hours x $8 per hour Variable overhead: 10 hours x $2 per hour The following activity occurred during the month of November: Materials purchased: 500,000 pounds at $3.20 per pound Material used: 460,000 pounds Units Produced: 15,000 units Direct labor: 145,000 hours at $7.90 per hour Actual variable OH: $295,000 The company records the materials price variance at the time of purchase. EQ34. The materials price variance is a. $0. b. $92,000 unfavorable. c. $100,000 favorable. d. $100,000 unfavorable. EQ35. The labor usage variance is a. $39,500 favorable. b. $39,500 unfavorable. c. $40,000 unfavorable. d. $40,000 favorable. EQ36. The variable overhead spending variance is a. $5,000 favorable. b. $5,000 unfavorable. c. $10,000 favorable. d. $10,000 unfavorable. EQ37. The variable overhead efficiency variance is

a. $10,000 unfavorable b. $ 0 c. $10,000 favorable d. cannot be determined


Cheng Nam Sang 10

Suggested Answers EQ1 E EQ2 A EQ3 A EQ4 E EQ5 B EQ6 A EQ7 D EQ8 C EQ9 D EQ10 C EQ11 D EQ12 E EQ13 A EQ14 A EQ15 D EQ16 D

Material Quantity

AQ used SP

SQ used of actual production SP

?=318,000/10=31,800 10

?=315,000+3,000=318,000

31,500 10

315,000 Usage 3,000(U)

OR

AQ x AP AQ x SP AQ x 10 = 315,000 + 3000 = 318,000 3,000 U [Usage] SQ x SP 31,500 x 10 = 315,000

AQ = 318,000 / 10 = 31,800


Cheng Nam Sang 11

EQ17 D

Direct Labour

AH AR

AH SR

SH of actual production SR

10,300

?=154,500+1,500=156,000

?=10,300 15

?=157,500-3,000=154,500

1*10,500=10,500 15

157,500 Rate 1,500(U) Efficiency ?=Rate + Eff=1,500(F) Efficiency = 3,000(F)

Total 1,500(F) OR AH x AR AH x AR = 154,500 + 1,500 1,500 U [Rate] AH x SR AH x 15 = (157,500 3,000) 3,000 F [Efficiency] SH x SR (10,500 x 1) x 15 = 157,500 Total 1,500 F [Total] AH x 15 = 154,500 AH = 10,300 AR = ? = (154,500 +1,500) / AH = 156,000 / 10,300 = 15.15 EQ18 F

VOH

AH AR

AH SR

SH of actual production SR

255,000 1*10,500=10,500 25

262,500 7,500 (F)

OR AH x AR AH x AR = 255,000 AH x SR SH x SR (10,500 x 1) x 25 = 262,500 Total 7,500 F


Cheng Nam Sang 12

EQ19 C FOH

Actual Budget Applied 50,000 50,000*10,500/10,000=52,500

Volume 2,500F OR Actual 45,000 Budget 50,000 2,500 F [Volume] SH x SR Applied

(10,500 * 1) * ($50,000/10,000) = $52,500

Total EQ20

A. Actual Labor Cost Standard Labor Cost

Actual Hours x

Actual Rate

Actual Hours x

Standard Rate

Standard Hours X

Standard Rate

2,550 x $18.80 2,550 x $15.00 2,890* x $15.00 $47,940 $38,250 $43,350 $9,690U $5,100F

Direct-labor rate variance Direct-labor

efficiency variance

*85 units x 34 hours OR

AH x AR 2,550 x 18.80 = 47,940 9,690 U [Rate] AH x SR 2,550 x 15.00 = 38,250 5,100 F [Efficiency] SH x SR (Applied)

(85 x 34) x 15.00 = 43,350

Total 4,590 U [Total] B. Yes. A tight labor market often means that premium wages are needed to attract

qualified employees. These wages would give rise to an unfavorable rate variance. C. Ventura has two favorable variances: labor efficiency and material (paint) quantity.

The favorable efficiency variance indicates that the crew is spending less time than budgeted, perhaps rushing the jobs and being a bit sloppy. It is also possible that employees are being somewhat skimpy in their use of paint, using less than expected (e.g., applying one coat rather than two in certain applications).


Cheng Nam Sang 13

EQ21

Actual Labor Cost Standard Labor Cost Actual Hours x

Actual Rate

Actual Hours x

Standard Rate

Standard Hours x

Standard Rate

2,600 x $13.80 2,600 x $14.00 2,400* x $14.00 $35,850 $36,400 $33,600 $520F $2,800U

Direct-labor rate variance Direct-labor

efficiency variance

*3,200 units x 0.75 hours 1. Standard hours allowed: 2,400 2. Actual hours worked: 2,600 3. Actual wage rate: $13.80

OR AH x AR AH x AR = (36,400 520) = 35,880 520 F [Rate] AH x SR AH x 14 = (33,600 + 2,800) = 36,400 2,800 U [Efficiency] SH x SR (Applied)

[3,200 x (45/60)] x 14 = 2,400 x 14 = 33,600

Total 2,280 U [Total]

AH = 36,400 / 14 = 2,600

AR = 35,880 / AH = 35,880 / 2,600 = 13.80

EQ22 D

A. a performance measurement system that emphasizes profit growth. Not just profit growth

B. an evaluation process that focuses on improving sales and productivity. There are other factors as well

C. a series of checks and balances based primarily on the information derived from the financial statements of the organization. Use other information such as customers complaint

D. a performance measure that evaluates multiple categories of an organizations critical success factors related to organizational goals.

E. a performance measurement system that focuses exclusively on critical issues relating to meeting customers expectations such as anticipating customers needs, after-sale services, and delivery efficiency. The word exclusively is incorrect.

F. none of the above.

EQ23 A. A balanced scorecard is a tool that incorporates a variety of different measures, both

financial and non-financial, in the performance-evaluation process. The measures are critical to a firm's success and are tied to organizational strategy. The goal of a balanced scorecard is to allow improvement in a number of broad-reaching areas rather than permit a manager to improve only a small facet of the business at the expense of others. Typical factors are often divided into four categories: financial, customer, learning and growth, and internal operations.


Cheng Nam Sang 14

B. Answers will vary but often include market share, queue time, results of a customer quality survey, number of customer complaints, number of order errors, and number of repeat customers.

C. Pay creditors on a timely basis: stipulated end-of-period cash balance and current ratio Shareholder satisfaction: growth in earnings per share, increases in per-share market

price of Bob's stock, price-earnings ratio Profitability improvement: gross margin growth rates, earnings growth rates

EQ24. [b] EQ25. [d] EQ 26. [d] From the information provided, Zachary's flexible-budget cost formula is

$85,000 + $31.50 X, where X is the number of units produced. Inserting 1,000 for X gives $85,000 + ($31.50 x 1,000) which equals $116,500.

EQ27. [c] EQ28. [a] EQ29. [b] EQ30. [a] EQ31. [c] EQ32[d] EQ33 [b] EQ34. [d] As stated, the company determines the price variance based on the material

purchased. Therefore, the price variance is ($3.20 - $3.00) x 500,000 pounds which is $100,000. The variance is unfavorable since the actual price paid ($3.20) exceeds the standard price ($3.00).

EQ35. [d] The labor usage variance is found by multiplying the standard labor rate ($8)

by the difference between the actual hours worked (145,000) and the number of hours that should have been taken to produce 15,000 units (150,000 = 15,000 x 10 hrs./unit). The resulting variance is $40,000, which is favorable because fewer hours were worked than should have been for the production level achieved.

EQ36. [b] Spending variance = (AH x AR) (AH x SR) = AH x (AR SR)

= 295,000 (145,000 x 2) = 295,000 290,000 = 5,000 Unfavourable

EQ37. [c] The efficiency variance is the difference between the actual quantity of the

cost-driver activity and the standard quantity allowed, which is then multiplied by the standard rate. The actual quantity of 145,000 hours is less than the standard allowed of 150,000 hours. The 5,000 hour difference is multiplied by the standard rate of $2 to arrive at a $10,000 favorable variance.

Efficiency variance = AH x SR SH x SR

= (145,000 x 2) [(15,000 x 10) x 2] = 290,000 300,000 = 10,000 Favourable

ACCT102 Management Accounting Variance Analysis Exercise

Cheng Nam Sang 1

Ming Ming Pte Ltd manufacturers power drills that are sold throughout Singapore. The company uses standard costs for its budgeting process and compares actual results to budgeted amounts on a monthly basis. Each month, Ming Mings accounting department prepares a variance analysis and distributes the report to all responsible parties. Richard Tan, production manager, is upset about the results for June. Richard, who is responsible for the cost of goods manufactured, has implemented several cost-cutting measures in the manufacturing area and is discouraged by the unfavourable variances in variable costs.

Ming Ming Pte Ltd Operating Results

For the Month of June Master

Budget Actual Variance

Unit sold .. 5,000 4,800 200 U $000 $000 $000 Revenue ...... 1,200 1,152 48 U Variable cost ... 760 790 30 U

Contribution margin . 440 362 78 U Fixed production overhead ........ 180 180 Fixed general administrative cost ... 120 115 5 F Operating income . 140 67 73

When the master budget was prepared, Ming Mings cost accountant, Ian Yeo, supplied the following unit costs: direct material (2kg @$30/kg) ....... $60 direct labour (4hr @$11/hr) ..... $44 variable overhead (4DLH @$9/hr) $36 variable selling per unit ... $12 The total actual variable costs of $790,000 for June include $310,008 for direct material, $232,320 for direct labour, $184,500 for variable overhead, and $63,172 for variable selling expenses. Ian believes that Ming Mings monthly reports would be more meaningful to everyone if the company adopted flexible budgeting and prepared more detailed analyses. REQUIRED: 1. Prepare a flexible budget for Ming Ming Pte Ltd for the month of June. 2. Calculate all possible variances based on information provided so far. 3. In order to convince everyone about the use flexible budget, Ian has collected further

details from Richard as follows: Actual material usage and price per unit: 1.9kg @34 per kg Actual labour hours paid : 21,120 hours @$11 per hour Actual labour hours work: 19,680 hours (due to non-delivery of materials for 2 days) Expand the flexible budget variances into more meaningful details and offer possible explanations for variances that exceed $10,000.

4. Discuss how the revised flexible budget and variance data are likely to impact the behaviour of Richard Tan, the production manager.

Standard costing - colour.pdfVariance Analysis - colour.pdfVariance Analysis Class Example - Fa Fa.pdfClass Exercises Week 10 - no answer.pdfVariance Analysis MCQ.pdfExtra Exercises 1.pdfExtra Exercises 2.pdfvariance exercise - Meng Meng - ACCT102 - no answer.pdf

Handout 9 - Standard Costing and Variance Analysis

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