ACC 459 - Analyzing Cost of Revenue

What is a bill of materials?

A list of raw materials, sub-assemblies, parts, and the quantities of each needed to manufacture a finished product - a recipe for production

What is included in a bill of materials

Raw materials, the specific components, the sub-assemblies, the quantity of each part, and the financial components

What is the purpose of a bill of material?

To identify what exactly needs to be ordered or grabbed from inventory to complete a finished product and to estimate the financial cost

What are the two direct material variances?

Material Usage Variance and Material Price Variance

What is Material Usage Variance

The dollar difference amount for how much raw material was actually used in the production process vs. what the expected amount was used

What is the calculation for material usage variance

Budgeted Purchase (Planned) Price x [Actual Quantity Used - Budgeted (planned) Quantity Used]

How do you interpret material usage variance

It’s unfavorable if the actual quantity used is more than the budgeted quantity used

What is material price variance

The dollar difference amount for what was actually paid for in raw materials/parts vs. what was expected to be paid

What is the calculation for Material price Variance

Actual Quantity x [Actual Price - Budgeted (planned) Price]

How do you interpret material price variance

It’s unfavorable if the actual price is more than the budgeted price

What are some of the potential causes for direct material variances

Operational issues like scrap, supply chain issues like material substitution, and planning issues like volume discounts not being realized

What is the calculation for direct material variance

[Actual Quantity *Actual Price] - [Planned Quantity *Planned Price]

What are the two direct labor variances

Labor Efficiency Variance and Labor Rate Variance

What is Labor Efficiency Variance

The dollar difference amount for how many labor hours were actually used in the production process vs. what the actual labor hours were

What is the calculation for labor efficiency variance

Planned (budgeted) Payroll Amount x [Actual Quantity Used - Planned Quantity Used]

What is Labor Rate Variance

THe dollar difference amount for what was actually paid for direct labor vs. what was expected to be paid

what is the calculation for labor rate variance

Actual Quantity Used x [Actual Payroll Amount - Planned Payroll amount]

What are the potential causes for direct labor variances

Machine issues, poor planning and scheduling, and demand exceeding expectations which requires overtime

What is overhead

The resources required that indirect support the processes that produce the products sold - do not generally vary with units of product/sale

What are overhead cost pools

A grouping of costs that provide a similar service in support of production with different operating characteristics than other cost pools

Calculation for Cost Driver

Total Budget / Total Budget Hours

Overhead Per Unit Budget Calculation

Amount of Hours the Cost Driver Required Produce x Cost Driver Value

What is Budgeted Overhead

The planned overhead expenses that are prepared annually for the yearW

What is the purpose behind budgeted overhead

To set expectations for expense control and develop rates and assignment of the overhead dollar amount per unit

What is Earned Overhead

The overhead that we should have spent based on what was actually finished

What is the purpose behind earned overhead

To set the costs that are used to process costed journal entries for overhead

What is Actual Overhead

The actual overhead expense for the period

What is the purpose behind actual overhead

To compare with the budget by line item to understand where and why variation exists

What is under-absorption of overhead

When your actual overhead bills are higher than the amount you assigned to your finished products

What are over-absorption of overhead

When your actual overhead bills are lower than the amount you assigned to your finished products

What is warranty

The costs that a company incurs in a current period for sales of products that it expects to repair in a future period

What is the purpose behind warranty

to set customer performance expectations, differentiate the brand from competitors, and build long-term trust

How are warranty costs determined

Past performance of models, product complexity, and variables in the estimation process

What are operating expenses

Costs that a company incurs to support its operating activities/running a business

What are selling expenses

the costs of selling and marketing a compnay’s products and services

What are general and admin expenses

all other departmental expenses that support the enterprise

what are amortization of intangibles expenses

periodic expenses of intangible assets

what are restructuring/special charges

expenses that are unusual in nature that management chooses to classify separately

Variable Costs

think of a 100% commissioned salesperson - dependent entirely on the output

Fixed Costs

think of a salesperson base pay only - costs that exist regardless of the output

Semi-Variable Costs

Think of a salesperson base pay + commission - Fixed and Variable Cost mixed

Step Costs

Think of a salesperson with added seasonal variation

What are committed costs

Costs that a business entity will be accountable for and highly unlikely to avoid under any circumstances

Discretionary Fixed Costs

a cost that is a required expenditure for a specified period of time but in practice could be reduced or eliminated in the short-term to improve profitability