Cost Accounting EXAM 3 Review

Flexible Budget

A budget that changes dependent on variance, volume, and other independent variables. It provides what revenue and cost levels should be based on various levels of output. Can be used to evaluate performance and control costs more effectively.

Flexible Budget Variance

The difference between actual results and the flexible budgeted resulted. Assists with analyzing performance based off what was predicted vs what was actually obtained.

How to calculate a flexible budget

Fixed Costs + (Variable cost per unit * Actual units produced)Purpose of Standard Costs

Purpose of Standard Costs

Represents estimated costs for materials, labor, and overhead that a company expects to incur under normal conditions. Used as benchmarks for measuring performance and controlling costs

Use of Standard Costs in Job Order Costing

• Application:

  • Standard costs are used to estimate the costs for custom, individual jobs or orders.

• Purpose:

  • Helps compare actual costs with standard costs for specific jobs, highlighting variances.

• Benefit:

  • Ensures accurate pricing and cost control for each job.

Use of Standard Costs in Process Costing

• Application:

  • Standard costs are used to estimate costs for homogeneous products produced in continuous processes.

• Purpose:

  • Tracks cost variances across departments or stages of production.

• Benefit:

  • Simplifies cost management in environments with high-volume production.

Purpose of a Standard Cost System

• Variance Analysis:

  • Facilitates the identification of cost variances between actual and standard costs to highlight inefficiencies.

• Improved Decision-Making:

  • Provides management with reliable cost benchmarks to make informed decisions about production, pricing, and cost-cutting measures.

• Enhanced Budgetary Control:

  • Links budgets to standard costs, improving financial planning and control.

• Streamlined Operations:

  • Promotes consistency in processes by establishing expected cost standards.

• Supports Financial Reporting:

  • Simplifies the preparation of financial statements by standardizing cost reporting.

Material Price Variance (MPV) - Definition and Formula

Measures the difference between the actual price paid for materials and the standard price, based on the actual quantity of materials purchased.

Formula: (Actual Price - Standard Price)xActual Quantity

Material Quantity Variance (MQV) - Definition and Formula

Measures the efficiency of material usage by comparing the actual quantity used vs the standard quantity allowed for actual production at the standard price.

Formula: (Actual Quantity−Standard Quantity)×Standard Price

Total Material Variance (TMV) - Definition and Formula

Combines price and quantity variances to measure the complete variance in cost

Formula: MPV + MQV or (Actual cost - Standard Cost)

Labor Rate Variance (LRV) - Definition and Formula

Measures difference between actual rate paid for labor and the standard rate based on the actual amount of hours worked

Formula: (Actual Rate−Standard Rate)×Actual Hours

Labor Efficiency Variance (LEV) - Definition and Formula

Measures efficiency of labor usage by comparing actual hours worked with the standard hours allocated for actual production at the standard rate

Formula: (Actual Hours−Standard Hours)×Standard Rate

Total Labor Variance (TLV) - Definition and Formula

Combines rate and efficiency variances to measure the complete variance in labor costs

Formula: LRV + LEV or (Actual Cost−Standard Cost)

Variable Overhead Efficiency Variance (VOEV)

Formula: (Actual Hours−Standard Hours)×Standard Overhead Rate per Hour

Measures how efficiently the base of variable overhead is used compared to the standard usage for actual production.

Joint Process

Production where multiple products are simultaneously produced from a common input or set of inputs. These products share costs up to a certain point, and after that point they become distinct and can be separately identified.,

Joint cost allocation

Process of distributing costs incurred in a joint production process among all of the joint products.

Purpose of Joint Cost Allocation

• Financial Reporting:

  • Required to comply with accounting standards for inventory valuation and cost of goods sold.

  • Ensures that joint product costs are appropriately reflected in financial statements.

• Profitability Analysis:

  • Helps determine the profitability of individual products by assigning a fair share of joint costs.

• Pricing Decisions:

  • Aids in setting selling prices for joint products by providing an accurate cost base.

• Decision-Making on Further Processing:

  • Helps decide whether to sell products at the split-off point or process them further for additional value.

• Cost Control and Efficiency:

  • Enables the monitoring and analysis of costs associated with joint processes to improve efficiency.

• Internal Performance Evaluation:

  • Provides a basis for evaluating the performance of different products or departments within the organization.

Joint Costs: Allocation to By-Products