COMM 294 - Final Exam

Standard Costs

Predetermined unit costs managers set at the beginning of a period

Standard Cost Process

1. Set standard cost

2. Identify accumulated actual amount

3. Calculate variance between standard and actual

Ideal Standards

Standards at peak performance (100% efficiency)

• Not realistic

• May demotivate

• Useful for setting improvement objectives, but not decision making

Normal Standards

Allow for downtime and periods of inefficiency

• Tight but attainable

• More realistic for decision making

Management by Exception (MBE)

Encourage managers to step in only when variances are very large

• Small deviation between standards and actual costs are normal

Favourable Variances

Actual Cost < Standard Cost

Unfavourable Variances

Actual Cost > Standard Cost (not necessarily bad)

Direct Material Price Standard

Cost per unit of DM that should be incurred

• Acquisition Cost: purchase price, transport fees, duties, taxes, etc.

Direct Material Quantity Standards

Material needed to 1 unit of product

• Allows for unavoidable waste and/or spoliage

Direct Labour Price Standards

Based on current wage rates

• Accounts for inflation adjustment, benefits, and taxes

Direct Labour Quantity Standard

DL time required to make 1 unit of product

• Allows for rest, clean up, machine set up, etc.

Manufacturing Overhead Standards

Amount of overhead per 1 unit of product using the POHR

• POHR = Budgetted Overhead/Expected Cost Driver Use

Standard Cost Card

Table showing the total standard cost for each product including DM, DL and MOH

Variances

Total Actual Costs - Total Standard Costs

General Variance Model

1. Actual Spent: AQ x AP

2. Standard Expectation: SQ x SP

3. AQ x SP

4. Price Variance: Step 1 - Step 3

5. Quantity Variance: Step 3 - Step 2

Standard Quantity

Standard Allowed Per Unit x Actual Units Produced

Causes of MPV

Purchasing Department (Main Cause)

• Delivery method of raw materials

• Quality of raw materials

Production Managers

• Rush orders

No One at Fault

• Inflation

• Bad weather

Causes of MQV

Production Department (Main Cause)

• Inexperienced workers

• Faulty machinery

Purchasing Department

• Low quality materials

Causes of LPV

Wage Setting Managers

• Paying workers different wages than expected

Production Department

• Misallocation of workers

Causes of LQV

Production Department

• Poor training

• Worker fatigue

• Faulty machinery

Purchasing Department

• Inferior materials

Variance Reports

Table showing standards and actual costs for different variance types to report variance amount for each product

• Includes an explanation for the variance

Variance Income Statement

• Sales, COGS, and gross profit reported at standard

• Section for variances (all types and total)

• Actual gross profit

• Selling and admin expense

• Net Income

Balanced Score Cards

Evaluates company performance based on four objectives:

1. Financial — ROI, NI, share price

2. Customer — retention, brand recognition,

3. Internal Process — waste reduction, planning accuracy

4. Learning/Growth — ethics violations, incidents

Product Costs

Any cost necessary to bring a product to complete

• Incurred: Dr. Inventory, Cr. Cash/AP

• Sold: Dr. COGS, Cr. Finished Goods Inventory

• Capitalized: We recognize as an asset on the balance sheet

Period Costs

Any additional cost necessary for operations

• Incurred: Dr. Expense, Cr. Cash/AP

Prime Costs

Direct material + direct labour

Absorption Costing (Full Costing)

Treats FMOH as a product cost

• FMOH is allocated to all units of production

• Production cannot take place without these costs

Variable Costing (Direct/Marginal Costing)

Treats FMOH as a period cost

• These costs do not vary for additional production

COGS Formula

Beginning Inventory + COGM - FG Inventory

Absorption Costing Income Statement

Regular income statement with sales, gross profit, and other expenses

Variable Costing Income Statement

Contribution Margin income statement with sales, variable costs, contribution margin, and additional costs

FMOH Deferred to Inventory

The difference between absorption and variable costing net income

Production > Sales

Absorption Costing Income > Variable Costing Income (Inventory increases)

Production < Sales

Absorption Costing Income < Variable Costing Income (Inventory decreases)

Production = Sales

No change in net income, not change in inventory

What Affects NI Under Absorption Costing

Change in sales and change in production

What Affects NI Under Variable Costing

Just change in unit sales

Overproduction

Occurs when firms manipulate NI by overproducing under absorption costing (but this evens out over multiple periods)

Decentralization

Decision making is spread throughout the organization

• Lower level has more details info (can make better decisions)

• More autonomy might mean lack of coordination

Segment

A subset of an organization about which we seek cost, revenue, or profit data

• Division

• Manufacturing plant

• Sales channel

• Individual store

• Etc.T

Segmented Income Statement

Uses contribution margin method to report net income

• Separates common and traceable fixed costs

Traceable FC (Direct)

FC that arise because of one particular segment, and are allocated only to that segment

• May become common if company is divided into smaller segments

Common FC (Indirect)

FC that support operation of multiple segments, and are allocated amoung them

The Segment Margin (Division Margin)

Contribution Margin - Traceable FC of Segment

• Represents segment’s contribution to overall profit

Issues with Segment Reporting

• Omitting Costs: Under absorption costing, cost of product may look smaller

• Assignment of FC to Arbitrary Segments: Segments may seem less profitable

Responsibility Centres

Any part of an organization whose manager has control over one of the 4 types

1. Cost

2. Revenye

3. Profit

4. Investment

Cost Responsibility Centre

Manager has control over incurrence of costs

Revenue Responsibility Centre

Manager has responsibility over revenue of a unit

Profit Responsibility Centre

Manager has control over both costs and revenue

Investment Responsibility Centre

Manager has control over profits and invested capital

Responsibility Accounting

Identifying and reporting costs based on the manager who has authority over them

Controllable Costs

Incurred directly by a level of responsibility

Uncontrollable Costs

Incurred indirectly and allocated to a level of responsibility (Not the manager’s fault or decision)

Controllable Margin

Contribution Margin - Controllable FC

• Considered best measure of a managers performance