Chapters 9 + 10 Acct 2

Variance Analysis Cycle

Used by companies to evaluate and improve performance. Includes analyzing variances, raising questions, identifying root causes, taking actions, and conducting next period’s operations.

Management By Exception

Management system that compares actual results to a budget so significant deviations can be flagged and investigated

Flexible Budget

Shows what costs should be for the actual level of activity

Activity Variances

The difference between the amount of revenue or expense in the flexible budget and the planning budget. It is solely caused by the difference between the planned and actual levels of activity.

Purpose of comparing actual results to flexible budget

Helps to answer how well revenues, costs, and profit were controlled.

Cost Center

A department that generates costs but does not directly sell to outsiders; e.g. manufacturing

Standard

Benchmark for measuring performance

Quantity Standards

Specify how much of an input should be used to make a product or provide a service

Price Standard

Determines how much should be paid for each input of an input

Standard hours per unit

Amount of direct labor hours that should be used to produce one unit of finished goods

Price Variance

Difference between actual amount paid for an input and the standard amount that should have been paid, multiplied by the actual amount of input purchased

Quantity Variance

The difference between the standard quantity allowed and actual quantity multiplied by the standard price

Standard Quantity Per Unit

Defines the amount of direct materials that should be used for each unit of finished product

Materials Quantity Variance

Measures difference between actual quantity of materials used in production and standard quantity of materials used for the actual output, multiplied by standard price per unit of materials

Standard Rate Per Hour

Company’s expected direct labor wage rate per hour, including employment taxes and fringe benefits

Labor Rate Variance

Difference between actual hourly rate and standard hourly rate, multiplied by the actual number of hours worked in the period

Labor Efficiency Variance

Measures the difference between actual labor hours and standard hours allowed for actual output, multiplied by standard hourly rate.

Variable Overhead Rate Variance

Measures the difference between actual variable overhead cost incurred and standard cost that would have been incurred based on the actual activity

Variable Overhead Efficiency Variance

Measures the difference between the actual level of activity and the standard activity allowed for the actual output

Advantages of standard cost systems

1.They are a key element of management by exception. If costs conform to standards, managers can focus on other issues.

2.Standards provide benchmarks that employees can use to evaluate and improve their own performance

3.Standard costs can greatly simplify bookkeeping. Instead of recording actual costs for each job, the standard costs for direct materials, direct labor, and overhead can be charged to jobs

4.Standard costs fit naturally into an integrated system of “responsibility accounting”, which establish what costs should be and whether actual costs are under control

Potential problems with standard costs

1.Standard cost variance reports are usually prepared on a monthly basis and are often released ages after the end of the month. Consequently, the information in the reports may be outdated and useless

2.If managers use variances only to assign blame and punish subordinates, morale may suffer. Furthermore, subordinates may be tempted to cover up unfavorable variances/take actions not in the best interests of the company to make sure the variances are favorable

3.Labor-hour standards and efficiency variances make two important assumptions, including that the production process is labor-paced and that labor is a variable cost.

IN a standard costing system, variable and fixed overhead are applied to production using the standard hours allowed for actual production.

True

WHy do companies compute materials price using the quantity of materials purchased

It allows for timely variance reports and simplifies bookkeeping.

In a standard cost system…

Every unit of output is charged with the same amount of overhead cost. Overhead is applied using the standard hours allowed for the actual production.

Budget Variance

The difference between actual fixed manufacturing overhead and the budgeted fixed manufacturing overhead for the period

Volume Variance

Budgeted fixed overhead - fixed overhead applied to work in process

Graphic analysis of fixed overhead offers insight into

Both budget and volume variances

The over or under applied overhead equals the sum of the overhead variances when using a ____ cost system

standard

Standard cost variance accounts begin and end each accounting period

empty

Favorable variances ___ retained earnings

increase