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Standard Cost Card

A detailed document listing the standard costs of direct materials, direct labor, and manufacturing overhead necessary to produce a unit of a product or service.

Ideal Standards

Represent the perfect level of efficiency with no waste or downtime.

Normal Standards

Reflect efficient operating conditions allowing for normal levels of waste and inefficiencies.

Master Budgets

Comprehensive plans encompassing various budgets like sales, production, cash, and capital budgets, designed for a specific level of activity.

Flexible Budgets

Budgets that adjust for changes in activity levels, providing a more accurate representation of costs and revenues at different activity levels.

Volume Variance

The difference between actual fixed overhead costs and budgeted fixed overhead costs based on standard hours for the actual level of activity.

Spending Variance

The difference between actual costs incurred for direct materials, direct labor, or variable overhead, and the standard costs allowed for the actual level of activity.

Direct Materials Price Variance

Responsibility typically falls on the purchasing department for the price paid for materials.

Direct Materials Quantity Variance

Responsibility often attributed to the production department for efficient use of materials during production.

Favorable Variances

Variances that occur when actual costs are lower than standard costs or when actual revenues exceed budgeted revenues.

• Interpretation: May result from cost savings or higher-than-expected revenues.

• Common Causes: Efficient use of resources, cost-saving measures, or higher-than-anticipated demand.

Unfavorable Variances

Variances that occur when actual costs are higher than standard costs or when actual revenues fall short of budgeted revenues.

• Interpretation: May indicate inefficiencies or lower-than-expected revenues.

• Common Causes: Waste, inefficiencies in production, higher-than-anticipated costs.

Independent Projects

Projects whose cash flows are not affected by the acceptance or rejection of other projects.

Mutually Exclusive Projects

Projects where the acceptance of one project precludes the acceptance of another due to resource constraints or similar project objectives.

Net Income Methods

Evaluate projects based on their impact on accounting profits.

Cash Flow Methods

Evaluate projects based on their actual cash flows.

Discounted Cash Flow Methods

Consider the time value of money by discounting future cash flows.

Non-discounting Methods

Do not consider the time value of money.

Accounting Rate of Return (ARR)

Calculates the average accounting profit divided by the initial investment.

• Limitations: Ignores the time value of money, based on accounting profits rather than cash flows.

Payback Period

Calculates the time taken for a project to recoup its initial investment.

• Limitations: Ignores cash flows beyond the payback period and the time value of money.

Internal Rate of Return (IRR)

The discount rate that makes the net present value of a project's cash flows zero.

• Comparison: If IRR is greater than the required rate of return, NPV is positive; if less, NPV is negative; if equal, NPV is zero.

Time Value of Money

The concept that a dollar today is worth more than a dollar in the future due to its potential earning capacity.

Annuity

A series of equal payments made at regular intervals over a specified period.

Different types of Time Value of Money problems.

Present value of a single amount, future value of a single amount, present value of an annuity, future value of an annuity

Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI)

Capital Budgeting Methods to Prioritize Independent Capital Investment Projects.