Chapter 9 and 10 Study Packet Notes

flexible budget

shows what revenues and costs should have been for the actual level of activity in the period

activity variance

the differences between the flexible budget and the planning budget

activity variance: favorable

flexible < planned

activity variance: unfavorable

flexible > planned

revenue and spending variances

differences between actual results and flexible budget

revenue variance: favorable

actual > flexible

revenue variance: unfavorable

actual < flexible

spending variance: favorable

actual < flexible

spending variance: unfavorable

actual > flexible

fixed cost

when a cost does not depend on the level of activity

flexible budget performance report

shows both activity variances and revenue & spending variances

The difference between the amount originally budgeted for that item and the actual cost of that item =

activity variance + spending variance

activity variance

how much of that difference is simply due to a change in the level of activity

spending variance

how well the cost was controlled

T/F: the planning budget is a static budget that is prepared for a single level of activity

True

T/F: Fixed costs are not controllable and therefore should be omitted from performance reports.

False

T/F: Actual costs should be directly compared to the planning budget to effectively control costs

False

T/F: if a cost item has a favorable activity variance, it means that spending was under control

False

T/F: An unfavorable activity variance for revenue can happen because prices were discounted more than expected

False

T/F: An unfavorable spending variance could be due to paying higher prices than should have been paid

True

T/F: A favorable revenue variance could be due to selling more units than expected; that is, it could be due to having more activity than expected

False

T/F: The activity variance for a fixed cost should be zero

True

standard

a benchmark or norm for evaluating performance

• set for both quantity and price of inputs

• ideal or practical

management by exception

only the significant variances are brought to the attention of management

ideal standards

can only be attained by the best employees working at top efficiency 100% of the time

• allow for no machine break downs, rest breaks or other lost time

practical standards

tight, but attainable

• allow for breakdowns and normal time lost

direct material standard price per unit

the amount that should be paid for the input

direct material quantity standard

reflect the amount of material that is required to make one unit of product

• including allowances for unavoidable waste and spoilage

direct labor rate per hour

includes wages, fringe benefits, and employment taxes

standard labor-hours per unit

includes allowances for rest breaks, personal needs of employees, clean-up, and machine down time

variable rate

the variable portion of the predetermined overhead rate

variable quantity

expressed in terms of whatever basis is used for applying variable overhead to product

standard cost card

has the summarized price and quantity standards for materials, labor, and overhead for a product

variance

a difference between standard and actual prices

standard quantity allowed for the output

the amount of an input that should’ve been used to complete the output for the period

materials quantity variance

• (AQ x SP)-(SQ x SP)

• (AQ - SQ) SP

materials price variance

• (AQ x AP)-(AQ x SP)

• (AP - SP) AQ

labor efficiency variance

• (AH x SR)-(SH x SR)

• (AH - SH) SR

labor rate variance

• (AH x AR)-(AH x SR)

• (AR - SR) AH

variable overhead efficiency

• (AH x SR)-(SH x SR)

• (AH - SH) SR

variable overhead rate

• (AH x SR)-(AH x SR)

• (AR - SR) AH

T/F: Practical standards are generally viewed as better than ideals standards for motivating employees

True

T/F: ideal standards allow for machine break-down time and other normal inefficiencies

False

T/F: Raw materials price variances should be computed and reported only when materials are placed into production

False

T/F: Waste on the production line will result in a materials price variance

False

T/F: If the actual price or quantity exceeds the standard price or quantity, the variance is unfavorable

True

T/F: Labor rate variances are generally out of the control of management

False

T/F: Managers should thoroughly investigate all differences (variances) between standard cost and actual cost

False

T/F: In a company with fixed labor, an undue focus on labor efficiency variances may result in the production of excess inventories

True