Objective: Standard Costing To understand Standard Costing and To understand Standard Costing and standard setting 1 Basic Costing Methods Manufacturing Costs Direct materials Direct labour Overhead Actual Costing Actual Actual Actual 2 g Normal Costing Actual Actual Budgeted Standard Costing Standard Standard Standard Budgets vs. Standards Are standards the A standard is a per 3 Are standards the same as budgets? A budget is set for total costs. p unit cost. Standards are often used when preparing budgets. Currently attainable standards are levels of General terms in standard costing Currently attainable standards are levels of performance that can be achieved by realistic levels of effort. Allowances are made for normal defectives, spoilage, waste, and non- productive time. 4 productive time. ACCT102 Managerial Accounting October 2011 Cheng Nam Sang 2 Standard Cost Expected and standard costs Expected and standard costs The building blocks of planning and control system The Master Budget Expected cost The cost most likely to be attained St d d t 5 Standard cost Determined cost per unit that should be attained (can be <, =, >expected cost) Standard Costs Predetermined. Standard Costs are Used for planning labour, material and overhead requirements. Benchmarks for measuringperformance. 6 measuring performance. Used to simplify the accounting system. General terms in standard costing Standard cost systems are accounting Standard cost systems are accounting systems that value products according to standard costs only. Perfection standards (ideal standards) are expressions of the most efficient f ibl d th b t 7 performance possible under the best conceivable conditions, using existing specifications and equipment. No provision is made for waste, spoilage, machine breakdowns, and the like. How do we normally set the budget Standard? Expectation and Standards Expectation and Standards engineering studies Perfect Standards / Attainable Standards analysis of historical data Attainable Standards continuous improvement goals 8 continuous improvement goals Continuous Improvement Standards Benchmarking Benchmark Standards ACCT102 Managerial Accounting October 2011 Cheng Nam Sang 3 Accountants, engineers, personnel Setting Standard Costs administrators, and production managers combine efforts to set standards based on experience and expectations. 9 Setting Standard Costs Should we use practical standards or ideal standards? 10 Engineer Managerial Accountant Setting Standard Costs Practical standards should be set at levels that are currently attainable with reasonable and efficient effort. 11 Production manager Setting Standard Costs I agree. Ideal standards, based on perfection, are unattainable and discourage most employees. 12 Human Resources Manager ACCT102 Managerial Accounting October 2011 Cheng Nam Sang 4 Note The argument that ideal standards are discouraging has been persuasive for many years. So normal defects and waste were built into the standards. In recent years, Six Sigma, Continuous Improvement and other initiatives have sought to eliminate all defects and waste 13 sought to eliminate all defects and waste. Ideal standards, that allow for no waste, have become more popular. The emphasis is on improvement over time, not attaining the ideal standards right now. Recap MCQ Extra Exercises (Variance Analysis extra exercises) EQ1 EQ2 14 Setting Direct Material Standards Price Standards Quantity Standards Standards Final, delivered cost of materials, net of discounts Standards Use product design specifications. 15 net of discounts. Setting Direct Labor Standards Rate Standards Time Standards Standards Use wage surveys and labor contracts. Standards Use time and motion studies for each labor operation 16 labor contracts. each labor operation. ACCT102 Managerial Accounting October 2011 Cheng Nam Sang 5 Setting Variable Overhead Standards Rate Standards Activity Standards Standards The rate is the variable portion of the predetermined overhead Standards The activity is the base used to calculate the predetermined 17 rate. p overhead. Standard Cost Card Variable Production Cost A standard cost card for one unit of d t i ht l k lik thi product might look like this: A A x B Standard Standard Standard Quantity Price Cost Inputs or Hours or Rate per Unit B 18 Inputs or Hours or Rate per Unit Di rect materi al s 3.0 l bs. 4.00 $ per l b. 12.00 $ Di rect l abor 2.5 hours 14.00 per hour 35.00 Vari abl e mfg. overhead 2.5 hours 3.00 per hour 7.50 Total standard uni t cost 54.50 $ Why do actual results normally differ from the master budget and sometimes standard as well? sales and other cost- sales and other cost driver activities were not the same as originally forecasted. i bl 19 revenue or variable costs per unit of activity and fixed costs per period were not as expected. Variances The variances of actual results from the master budget are called master (static) budget variances budget variances. The variances between the flexible budget and actual results are called flexible- budget variances due to pricing and cost control The differences betweenthe master 20 The differences between the master budget and the flexible budget are due to activity levels, not cost control, and are called activity-level variances. due to activity levels NOT cost control ACCT102 Managerial Accounting October 2011 Cheng Nam Sang 6 Standard Cost Variances A standard cost variance is the amount by which an actual cost differs from the standard cost. s t Standard Thi i i f bl 21 C o s This variance is unfavorable because the actual cost exceeds the standard cost. Standard Cost Variances I see that there First, they point to causes of problems and directions for improvement I see that there is an unfavorable variance. But why are variances important to me? for improvement. Second, they trigger investigations in departments having responsibility for incurring the costs. 22 Variance Analysis Managers focus on quantities and costs that differ from expectation, a practice known as management by exception Direct Material management by exception. A m o u n t Di t Standard 23 Material Type of Product Cost A Direct Labour Manufacturing Overhead Advantages of Standard Costs Management by Possible reductions exception in production costs Advantages 24 Improved cost control and performance evaluation Better Information for planning and decision making ACCT102 Managerial Accounting October 2011 Cheng Nam Sang 7 Emphasis on Favorable variances Disadvantages of Standard Costs Potential Problems p negative may impact morale. may be misinterpreted. Continuous improvement may be more important than Standard cost reports may 25 Emphasizing standards may exclude other important objectives. p meeting standards. p y not be timely. Incentives to build inventories. Static Budget Use of original budgeted figures to ith th t l lt compare with the actual results (Actual results Master budget results) Ignored changes in activity due to controllable and/or uncontrollable factors controllable and/or uncontrollable factors Not a good performance evaluation device 26 How do you solve the bl i problems on comparison between Master budget figures and Actual Results? 27 ACCT102 Managerial Accounting October 2011 Cheng Nam Sang 1 Objectives: Variance Analysis To understand flexed (or flexible) budget To understand how to calculate and interpret simple variances 1 To be able to prepare a simple variance- based performance report Why do actual results normally differ from the master budget and sometimes standard as well? sales and other cost- sales and other cost driver activities were not the same as originally forecasted. i bl 2 revenue or variable costs per unit of activity and fixed costs per period were not as expected. Variances The variances of actual results from the master budget are called master (static) budget variances budget variances. The variances between the flexible budget and actual results are called flexible- budget variances due to pricing and cost control The differences betweenthe master 3 The differences between the master budget and the flexible budget are due to activity levels, not cost control, and are called activity-level variances. due to activity levels NOT cost control Standard Cost Variances A standard cost variance is the amount by which an actual cost differs from the standard cost. s t Standard Thi i i f bl 4 C o s This variance is unfavorable because the actual cost exceeds the standard cost. ACCT102 Managerial Accounting October 2011 Cheng Nam Sang 2 Standard Cost Variances I see that there First, they point to causes of problems and directions for improvement I see that there is an unfavorable variance. But why are variances important to me? for improvement. Second, they trigger investigations in departments having responsibility for incurring the costs. 5 Variance Analysis Managers focus on quantities and costs that differ from expectation, a practice known as management by exception Direct Material management by exception. A m o u n t Di t Standard 6 Material Type of Product Cost A Direct Labour Manufacturing Overhead Advantages of Standard Costs Management by Possible reductions exception in production costs Advantages 7 Improved cost control and performance evaluation Better Information for planning and decision making Emphasis on Favorable variances Disadvantages of Standard Costs Potential Problems p negative may impact morale. may be misinterpreted. Continuous improvement may be more important than Standard cost reports may 8 Emphasizing standards may exclude other important objectives. p meeting standards. p y not be timely. Incentives to build inventories. ACCT102 Managerial Accounting October 2011 Cheng Nam Sang 3 Static Budget Use of original budgeted figures to ith th t l lt compare with the actual results Ignored changes in activity due to controllable and/or uncontrollable factors Not a good performance evaluation device 9 Flexible Budget (variable budget) Purpose: Purpose: to isolate unexpected effects on actual results 10 that can be corrected if adverse or enhanced if beneficial. Flexible Budget (variable budget) a budget that adjusts for changes in sales volume and other cost-driver activities. identical to the master budget in format, but managers may prepare it for any level of activity. based on the same assumptions of ( 11 revenue and cost behavior (within the relevant range) as is the master budget incorporating effects on each cost and revenue caused by changes in activity A simplified chocolate example Milk Cocoa Standard 1000kg 500kg 500kg Actual 900kg 480kg 420kg 12 ACCT102 Managerial Accounting October 2011 Cheng Nam Sang 4 A simplified chocolate example Milk Cocoa Standard 1000kg 500kg 500kg Actual 900kg 480kg 420kg Standard 900kg 450kg 450kg 13 Standard (for the actual production) 900kg 450kg 450kg Variance 30 kg (U) 30kg (F) Standard Cost Variances Standard Cost Variances Price Variance The difference between Quantity Variance The difference between 14 The difference between the actual price and the standard price The difference between the actual quantity and the standard quantity A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity y y y
Actual Price Standard Price Standard Price Price Variance Quantity Variance 15 Standard price is the amount that should have been paid for the resources acquired. Actual Quantity Actual Quantity Standard Quantity A General Model for Variance Analysis Price Variance Quantity Variance y y y
Actual Price Standard Price Standard Price Standard quantity is the quantity allowed for 16 Standard quantity is the quantity allowed for the actual output. Standard input per unit of output times amount of good output. ACCT102 Managerial Accounting October 2011 Cheng Nam Sang 5 A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity AQ(AP - SP) Price Variance Quantity Variance y y y
Actual Price Standard Price Standard Price 17 AQ(AP SP) AQ x AP AQ x SP AQ x AP AQ x SP AQ = Actual Quantity AP = Actual Price SP = Standard Price A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity SP(AQ SQ) Price Variance Quantity Variance y y y
Actual Price Standard Price Standard Price 18 SP(AQ SQ) AQ = Actual Quantity AP = Actual Price SP = Standard Price SP x AQ SP x SQ SP x AQ SP x SQ Sales Variances AQ x AP Q Price Variance AQ x SP Volume Variance SQ x SP 19 SQ x SP ______________ Total Flexed Variance A =Actual; S =Standard; Q =Quantity; P =Price; R =Rate; H =Hr Comprehensive Class Example FaFa Pte Ltd (Variance Analysis Example.pdf) See Fa Fa Pte Ltd for details of calculations of sales, material, labour, variable overhead and fixed overhead variances 20 ACCT102 Managerial Accounting October 2011 Cheng Nam Sang 6 Sales Variances Price Variance (possible examples) Unplanned change in selling price e.g. Due to unexpected change in costs Management decision on pricing, volume and profit trade off 21 profit trade-off Response to actions of competitors Sales Variances Volume Variance (possible examples) Reduction/Increase in demand e.g. Increase/reduce in selling price Production or logistics problems creating stock-out situations 22 Recession or competitors price cutting Advances/Problems of competitors products Over-/under-estimated budget Cost Variances Material variances Price; usage Labour variances Rate of pay; idle time; efficiency Variable overhead variances Rate; efficiency 23 Rate; efficiency Fixed overhead variances Spending; Volume Material Variances AQ x AP Price Variance AQ x SP Usage Variance SQ x SP _____________ 24 (Std Quantity for the Total Flexed Variance Actual production/output) i.e. Applied Standard (Aoutput x Std required for the Quantity) x SP ACCT102 Managerial Accounting October 2011 Cheng Nam Sang 7 Class Exercises CQ.1 to3 Pl d lli Please do your polling 25 Material Variances Price Variance (possible causes) Cheaper substitutes / shortage of supplies Bulk purchase discounts Different suppliers General market factors e g oil crisis; 26 General market factors e.g. oil crisis; adverse weather Standard setting issues weighted average? last purchase prices? Usage Variance Sub-standard materials Material Variances Sub standard materials Mechanical breakdown leading to spoilage Unrealistic standards Measurement errors e.g. unrecorded materials leading to o erstating act al 27 materials leading to overstating actual usage in the current period but understating usage in the following period Operating inefficiencies Labour Variances AHp x AR p Rate (Spending) variance AHp x SR Idle time variance AHwx SR Efficiencyvariance 28 Efficiency variance SH x SR ________________ (SH for actual production) Total flexed variance i.e. AppliedStandard (Aoutput x Std hour required) x SR ACCT102 Managerial Accounting October 2011 Cheng Nam Sang 8 Class Exercises file CQ.4 Please do your polling 29 Labour Variances Rate of Pay Variance (possible causes) Unexpected overtime rush orders? U t d dj t t Unexpected pay adjustments Using different grades of labour Idle Time Variance (possible causes) Machinery problems 30 Machinery problems Strikes Illness and absenteeism Failure to allocate all productive time accurately Labour Variances Efficiency Variance (possible causes) Quality of raw material resulting less or more labour efforts Learning curve problem General morale or personal problems or other human problems 31 p p Wrong standards / unattainable standards Recap MCQ CQ 5 CQ 6 CQ 7 32 CQ 8 Please do your polling ACCT102 Managerial Accounting October 2011 Cheng Nam Sang 9 Another Attempt (See Class Exercises CQ.9) 1 MPV = $74 400 U 1. MPV = $74,400 U MUV = $128,000 U 2. LRV = $14,500 U LEV = $90,000 U 33 Variable Overhead Variances AHw x AR Rate (spending) var. AHw x SR Efficiency var. SH x SR _______________ 34 (SH for actual production) Total flexed variance i.e. Applied Standard (Aoutput x Std hour required) x SR Variable Overhead Variances Rate (Spending) and Efficiency Variances Difficult for interpretation due to the overhead rate per unit/hour being likely to be amalgamation of many different cost elements Choice of activity base/cost driver 35 y Careful analysis of actual costs Breakdown of the standard cost into its constituent parts e.g. material, labour Fixed Overhead Variances Actual Spending variance Budget (Boutput x SH) x POR Denominator Hr x POR Applied SH x SR (S f Volume variance 36 (Std Hr for the actual output _______________ @ std rate) (Aoutput x SH) x POR Total Variance (over-/under-applied fixed overhead) ACCT102 Managerial Accounting October 2011 Cheng Nam Sang 10 Fixed Overhead Variances (Normal Textbooks approach) Garrison et al Asian ed. also shows this method of calculatingvolume variance (see p.600) calculating volume variance (see p.600) Identify pre-determined overhead rate which covers both variable and fixed overheads Separate variable and fixed overheads as only fixed overhead component is relevant for the fixed overhead variance analysis Defined: Denominator Activity and Denominator Hour (see p.598, 600) Volume variance = Fixed component of the predetermined overhead rate x (Denominator hours Standard hours allowed) 37 Fixed Overhead Variances Spending variance (also refers as budget variance) shows the budgeting errors on fixed overhead. Volume variance reflects the capacity and effectiveness (not efficiency) of utilizing the facility, such as production facility (planned volume vs actual volume). This can be affected by management decision to change the utilization of facility due to change of market condition, but can also be caused by uncontrollable events such as machine breakdown. 38 Total fixed overhead variance (effectively is the over- /under-applied fixed overhead) Flexible Budget Performance Report
Direct materials Cost Labour Cost Variable production overhead Fixed production overhead
39 Net Income
Variance Analysis Cycle Identify ti Receive l ti Take corrective Analyze variances questions explanations actions Conduct next periods operations 40 Prepare standard cost performance report Begin operations ACCT102 Managerial Accounting October 2011 Cheng Nam Sang 11 Potential Problems in Variance Analysis and Standard Costing Dysfunctional behaviour (budget gaming) Dysfunctional behaviour (budget gaming) Interactions among variances Aggregated nature of variances Lack of timeliness of variances Outdated/irrelevant standards 41 Outdated/irrelevant standards Your Chance to do another Comprehensive Exercise Meng Meng Pte Ltd (Dont forget there may be unannounced quiz!) q ) 42 Objectives achieved? Do you understand Standard Costing and t d d tti ? standard setting? What is a flexible (or flexed) budget? Do you understand the basic principles in calculating and interpreting variances Can you compute simple variances? 43 Can you compute simple variances? Can perform simple variance interpretation/analysis? What is a performance report? ACCT 102 Managerial Accounting
Variance Analysis Cheng Nam Sang 1 Variance Analysis: Example
FaFa Pte Ltd produces soap in bulk.
The standard cost per drum is made up as follows:
Raw Materials 100 kg costing $2 per kg Labour 12 hours costing $3 per hour Variable production overheads 12 hours costing $2.5 per hour
Fixed production costs per month are budgeted at $90,000. For April, budgeted production was 7,500 drums.
The company budgeted to sell all 7,500 units at $450 per unit.
The actual costs incurred in the period were:
Raw materials (900,000 kg purchased) $1,755,000 Labour (110,000 hours paid, 102,000 hours worked) $341,000 Variable production overheads $280,000 Fixed production costs $86,000
During April 7,800 drums of soap were actually produced. There were no raw materials inventories at the start or end of the period.
The actual sales for the period were 7,200 drums at price of $480 each.
Assumptions:
1. We are operating a total absorption costing system, so that all production costs are absorbed into units produced; and 2. The basis for absorbing fixed overheads is labour hours. Despite the advent of ABC, this is the most commonly used absorption basis in practice. ACCT 102 Managerial Accounting
Variance Analysis Cheng Nam Sang 2 Standard Cost Card for soap $ Raw materials (100 kg x $2) 200 Labour (12 hours x $3) 36 Variable production overheads (12 hours x $2.5) 30 Fixed production overheads (12 hours x $1) NB1 12 278
NB 1 Fixed overhead absorption (or applied) rate: Produce 7,500 drums, each taking 12 hours to produce. Total budgeted hours =7,500 x 12 =90,000 Fixed overhead budgeted =$90,000 Fixed overhead absorption rate per hour =$90,000 / 90,000 =$1 per hr
Actual vs Master Budget (Static Variances)
Budgeted production =7,500 drums Budgeted Actual Variance Actual production =7,800 drums $ $ $ Revenue 3,375,000 3,456,000 81,000 F Direct materials Cost 1,500,000 1,755,000 255,000 U Labour Cost 270,000 341,000 71,000 U Variable production overhead 225,000 280,000 55,000 U Fixed production overhead 90,000 86,000 4,000 F 2,085,000 2,462,000 377,000 U
Flexible Budget vs Master Budget (Activity Variances)
Flexed Budget: Sales =7,200 drums Master Flexed Variance Prodn =7,800 drums $ $ $ Revenue 3,375,000 3,240,000 135,000 U All Costs @ Standard Costs: Direct materials Cost 1,500,000 1,560,000 60,000 U Labour Cost 270,000 280,800 10,800 U Variable production overhead 225,000 234,000 9,000 U Fixed production overhead 90,000 90,000 0 2,085,000 2,164,800 79,800 U
ACCT 102 Managerial Accounting
Variance Analysis
Cheng Nam Sang 3
FaFa Pte Ltd Flexible Budget Performance Report For the month of April
Master Budget Activity Variances Flexed Budget Revenue & Spending variances Actual Results $ $ $ $ $ Revenue 3,375,000 135,000 U 3,240,000 216,000 F 3,456,000
Direct materials Cost 1,500,000 60,000 U 1,560,000 195,000 U 1,755,000 Labour Cost 270,000 10,800 U 280,800 60,200 U 341,000 Variable production overhead 225,000 9,000 U 234,000 46,000 U 280,000 Fixed production overhead 90,000 0 U 90,000 4,000 F 86,000 2,085,000 79,800 U 2,164,800 297,200 U 2,462,000
ACCT 102
Variance Analysis
Cheng Nam Sang Flexible Budget Variances (Detailed breakdown)
Sales Variances $ $ Variances AQ x AP =7,200 x $480 = 3,456,000 (Actual Sales) 216,000 F Price AQ x SP =7,200 x $450 = 3,240,000 (135,000) U Volume SQ x SP =7,500 x $450 = 3,375,000
81,000 F Total Flexed
COSTS
Raw Material Variances $ $ Variances AQ x AP =900,000 x $1.95 1,755,000 (Actual Cost) (45,000) F Price AQ x SP =900,000 x $2 1,800,000 240,000 U Usage SQ NB2 x SP =(7800 x 100) x $2 1,560,000 195,000 U Total Flexed (Actual output x std RM quantity)
x SP 60,000 U Activity BQ x SP =(7500 x 100) x $2 1,500,000 (Budgeted Cost) =(Budgeted output x std RM quantity) x SP
NB2 SQ =Standard Quantity for actual output =7,800 drums x 100 kg =780,000 kg
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ACCT 102
Variance Analysis
Cheng Nam Sang Labour Variances $ $ Variances AHp x AR =110,000 x $3.1= 341,000 (Actual Cost) 11,000 U Rate AHp x SR =900,000 x $3 = 330,000 24,000 U Idle Time AHw x SR =102,000 x $3 = 306,000 25,200 U Efficiency SHw NB3 x SR =(7800 x 12) x $3 = 280,800 60,200 U Total Flexed (Actual output x std Labour Hr)
x SR 10,800 U Activity BH x SR =(7500 x 12) x $3 = 270,000 (Budgeted Cost) =(Budgeted output x std Labour Hr) x SR
NB3 SHw =Standard Hours worked for actual output =7,800 drums x 12 hours =93,600 hours
Variable Overhead Variances $ $ Variances AHw x AR = 280,000 (Actual Cost) 25,000 U Rate AHw x SR =102,000 x $2.5 = 255,000 21,000 U Efficiency SHw NB3 x SR =(7,800 x 12) x $2.5 = 234,000 46,000 U Total Flexed (Actual output x std Labour Hr)
x SR 9,000 U Activity BH x SR =(7,500 x 12) x $2.5 = 225,000 (Budgeted Cost) =(Budgeted output x std Labour Hr) x SR
Fixed Overhead Variances (Different from the rest)
$ $ Variances Actual Cost = 86,000 (4,000) F Spending Budgeted Cost =(7500 x 12) x $1 NB1 90,000 (Budgeted output x Std labour Hr) x SR Denominator Hr x POR (3,600) F Volume SHw NB3 x SR = (7800 x 12) x $1 93,600 (7,600) F Total Flexed (Actual output x std Labour Hr)
x SR
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ACCT 102 Managerial Accounting
Variance Analysis
Cheng Nam Sang 6
Further reference
1 In this example, we assumed no Raw Material Inventory.
If purchased quantity is more than used quantity then there is inventory at the end of the period. The proforma should be:
AQ (purchased) x AP Price variance AQ (purchased) x SP Inventory @ standard cost AQ (used) x SP Usage variance SQ (for actual production) x SP
2 If you need to analyse sales or material mix and yield variances
Sales Variances
AQ x AM x AP Price variance AQ x AM x SP Mix variance AQ x SM x SP Quantity variance SQ x SM x SP
Material Variances
AQ x AM x AP Price variance AQ x AM x SP Mix variance AQ x SM x SP Yield variance SQ x SM x SP (Standard Quantity at standard price in standard mix for actual production)
ACCT 102 Management Accounting Class Exercise
Cheng Nam Sang 1 Far West Ltd produces high-quality leather wallets. The company uses a standard cost system and has set the following standards for materials and labour:
Leather (6 strips @ $8) $48 Direct Labour (1.5 hours @ $12) 18 Total Prime Cost $66
During the year, Far West produced 10,000 leather wallets. Actual leather purchased was 61,000 strips at $7.96 per strip. There were no beginning and ending inventories of leather. Actual direct labour was 15,600 hours at $12.50 per hour.
Required
CQ1. Compute the costs of leather and direct labour that should have been incurred (i.e. flexible budget) for the production of 10,000 leather wallets.
Material Labour a) $796,000 $125,000 b) $480,000 $180,000 c) $800,000 $120,000 d) $477,600 $187,500 e) $485.560 $195,000
CQ2. Compute the total static (budgeted) variances for material and labour.
Material Labour a) $5,560 F $15,000 F b) $5,560 U $15,000 U c) $2,440 F $7,800 U d) $2,440 U $7,800 F e) None of the above
CQ3. Break down the total variance for materials into a price variance and usage variance
Price Variance Usage Variance a) $2,440 F $8,000 U b) $2,440 U $8,000 F c) $5,560 F $2,440 F d) $5,560 F $2,440 U e) None of the above
CQ4. Break down the total variance for labour into a rate variance and an efficiency variance
Rate Variance Efficiency Variance a) $15,000 F $7,800 U b) $15,000 U $7,800 F c) $7,800 F $7,200 F d) $7,800 U $7,200 U e) None of the above
CQ5. The Standard quantity of materials allowed is computed by the equation
a) Unit quantity standard x Standard output b) Unit quantity standard x Actual output c) Unit quantity standard x Practical output d) Unit quantity standard x Normal output e) None of the above
ACCT 102 Management Accounting Class Exercise
Cheng Nam Sang 2
CQ6. The standard direct labour hours allowed is given by the question
a) Unit labour standard x Normal output b) Unit labour standard x Practical output c) Unit labour standard x Standard output d) Unit labour standard x Actual output e) Unit labour standard x Theoretical output
CQ7. The total (flexible budget) variance is given by the equation
a) (AP x AQ) (SP x SQ) b) (SP x AQ) (AP x SQ) c) (SP x AQ) (SP x SQ) d) (AP x SP) (AQ x SQ) e) None of the above
CQ8. Investigating variances from standard is
a) always done b) done if the variance is outside an acceptable range c) not done if the variance is expected to recur d) done if the variance is less than 10 percent of standard cost e) none of the above
CQ9. At the beginning of the year, Paul & Mary Ltd had the following stand cost sheet for one of its chemical products: Direct materials (5 kg @$3.20) $16 Direct labour (2 hrs @$9.00) 18 Standard prime cost per unit 34 The actual results for the year are as follows: i) Unites produced: 140,000. ii) Materials purchased: 744,000 kg @$3.30 iii) Materials used: 740,000 kg iv) Direct labour: 290,000 hours @9.05.
Required a. Compute price and usage variances for materials b. Compute the labour rate and labour efficiency variances
ACCT 102 Managerial Accounting
Cheng Nam Sang 1 Flexible Budget & Variance Analysis
1. provide expected revenues and costs for several levels of activity.
a. Continuous budgets b. Flexible budgets c. Master budgets d. Static budgets
2. are budgets for a single activity level.
a. Flexible budgets b. Master budgets c. Static budgets d. Both b and c are correct.
3. The Zachary Fitness Company has the following budgeted costs for the production of its only product, exercise machines:
Variable manufacturing costs $30.00 per unit Shipping expenses (selling) $ 1.00 per unit Administrative $ 0.50 per unit Fixed manufacturing costs $50,000 per month Fixed selling and admin. costs $35,000 per month
What are Zachary's expected costs for 1,000 units of product to be produced and sold in March?
a. $30,000 b. $31,000 c. $85,000 d. $116,500.
4. The flexible budget is based on the same assumptions of revenue and cost behavior (within the relevant range) as is the:
a. master budget b. static budget c. both a and b d. neither a nor b
5. Which of the following is descriptive of an activity-based flexible budget:
a. based on budgeted costs for each activity center and related cost driver b. based on actual costs for each activity center and related cost driver c. is limited to no more than ten activity centers d. a and c
6. The key differences between the traditional flexible budget and the activity-based flexible budget is:
a. the traditional should be used when a significant portion of the costs vary with cost drivers other than units of production b. some manufacturing costs that are fixed with respect to units are variable with respect to cost drivers, other than units, used for an activity-based flexible budget c. traditional flexible budgeting is dramatically increasing in popularity d. the larger the company, the more likely the activity-based flexible budget will not be used
ACCT 102 Managerial Accounting
Cheng Nam Sang 2 7. Flexible budgets allow for financial performance evaluation because actual results can be compared with
a. the expected prices and variable costs per unit and fixed cost for the period. b. the continuous budget for the period. c. the static budget for the period. d. the master budget for the period.
8. The flexible budget is prepared using the:
a. estimated levels of activity of the closest competitor b. historical levels of activity c. actual levels of activity d. most conservative levels of activity
9. measure how effective managers have been in meeting the planned level of sales.
a. Continuous-budget variances b. Flexible-budget variances c. Master-budget variances d. Sales-activity variances
10. measure the efficiency of operations at the actual level of activity.
a. Zero-based budget variances b. Flexible-budget variances c. Master-budget variances d. Sales-activity variances
Use the following information for questions 11 through 14.
The Blake Company has developed the following standards for one of their products.
Direct materials: 30 pounds x $3 per pound Direct labor: 10 hours x $8 per hour Variable overhead: 10 hours x $2 per hour
The following activity occurred during the month of November:
Materials purchased: 500,000 pounds at $3.20 per pound Material used: 460,000 pounds Units Produced: 15,000 units Direct labor: 145,000 hours at $7.90 per hour Actual variable OH: $295,000
The company records the materials price variance at the time of purchase.
11. The materials price variance is
a. $0. b. $92,000 unfavorable. c. $100,000 favorable. d. $100,000 unfavorable.
12. The labor usage variance is
a. $39,500 favorable. b. $39,500 unfavorable. c. $40,000 unfavorable. d. $40,000 favorable. ACCT 102 Managerial Accounting
Cheng Nam Sang 3 13. The variable overhead spending variance is
a. $5,000 favorable. b. $5,000 unfavorable. c. $10,000 favorable. d. $10,000 unfavorable.
14. The variable overhead efficiency variance is
a. $10,000 unfavorable b. $ 0 c. $10,000 favorable d. cannot be determined ACCT 102 Managerial Accounting
Cheng Nam Sang 4 Flexible Budget & Variance Analysis
1. [b] 2. [d]
3. [d] From the information provided, Zachary's flexible-budget cost formula is $85,000 + $31.50 X, where X is the number of units produced. Inserting 1,000 for X gives $85,000 + ($31.50 x 1,000) which equals $116,500.
4. [c] 5. [a] 6. [b] 7. [a] 8. [c] 9 [d]
10. [b]
11. [d] As stated, the company determines the price variance based on the material purchased. Therefore, the price variance is ($3.20 - $3.00) x 500,000 pounds which is $100,000. The variance is unfavorable since the actual price paid ($3.20) exceeds the standard price ($3.00).
12. [d] The labor usage variance is found by multiplying the standard labor rate ($8) by the difference between the actual hours worked (145,000) and the number of hours that should have been taken to produce 15,000 units (150,000 = 15,000 x 10 hrs./unit). The resulting variance is $40,000, which is favorable because fewer hours were worked than should have been for the production level achieved.
13. [b] Spending variance = (AH x AR) (AH x SR) = AH x (AR SR) = 295,000 (145,000 x 2) = 295,000 290,000 = 5,000 Unfavourable
14. [c] The efficiency variance is the difference between the actual quantity of the cost-driver activity and the standard quantity allowed, which is then multiplied by the standard rate. The actual quantity of 145,000 hours is less than the standard allowed of 150,000 hours. The 5,000 hour difference is multiplied by the standard rate of $2 to arrive at a $10,000 favorable variance.
Efficiency variance =AH x SR SH x SR =(145,000 x 2) [(15,000 x 10) x 2] =290,000 300,000 =10,000 Favourable ACT 102 Management Accounting: Variance Analysis
Cheng Nam Sang 1 1 The activity base that is used for a flexible budget for an overhead cost should be: A) direct labor-hours. B) units of output. C) expressed in dollars, if possible. D) the cause of the overhead cost.
2. The following costs appear in Malgorzata Company's flexible budget at an activity level of 15,000 machine-hours:
Total Cost Indirect materials ............... $7,800 Factory rent ....................... $18,000
What would be the flexible budget amounts at an activity level of 12,000 machine- hours if indirect materials is a variable cost and factory rent is a fixed cost?
Indirect Materials Factory Rent A) $7,800 $14,400 B) $7,800 $18,000 C) $6,240 $14,400 D) $6,240 $18,000
3. Riggs Enterprise's flexible budget cost formula for indirect materials, a variable cost, is $0.45 per unit of output. If the company's performance report for last month shows a $90 favorable variance for indirect materials and if 8,700 units of output were produced last month, then the actual costs incurred for indirect materials for the month must have been: A) $4,005 B) $3,915 C) $3,825 D) $3,735
4. Teall Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company has provided the following data for the most recent month:
Budgeted level of activity ................................................. 8,500 MHs Actual level of activity ...................................................... 8,600 MHs Cost formula for variable manufacturing overhead cost ... $5.70 per MH Budgeted fixed manufacturing overhead cost ................... $50,000 Actual total variable manufacturing overhead .................. $51,600 Actual total fixed manufacturing overhead ....................... $54,000
ACT 102 Management Accounting: Variance Analysis
Cheng Nam Sang 2 What was the fixed overhead budget variance for the month? A) $4,000 unfavorable B) $4,000 favorable C) $570 favorable D) $570 unfavorable
5. Alapai Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company has provided the following data for the most recent month:
Budgeted level of activity ................................................ 7,000 MHs Actual level of activity ..................................................... 7,200 MHs Cost formula for variable manufacturing overhead cost .. $9.40 per MH Budgeted fixed manufacturing overhead cost .................. $40,000 Actual total variable manufacturing overhead ................. $66,960 Actual total fixed manufacturing overhead ...................... $37,000
What was the total of the variable overhead spending and fixed overhead budget variances for the month? A) $3,720 favorable B) $2,280 unfavorable C) $1,840 favorable D) $1,880 unfavorable
6. Ronda Manufacturing Company uses a standard cost system with machine-hours as the activity base for overhead. Last year, Ronda incurred $840,000 of fixed manufacturing overhead and generated a $42,000 favorable fixed overhead budget variance. The following data relate to last year's operations:
Denominator activity level in machine-hours ................ 21,000 Standard machine-hours allowed for actual output ........ 20,000 Actual number of machine-hours incurred .................... 22,050
What amount of total fixed manufacturing overhead cost did Ronda apply to production last year? A) $837,900 B) $840,000 C) $926,100 D) $972,405
ACT 102 Management Accounting: Variance Analysis
Cheng Nam Sang 3 Use the following to answer questions 7-12:
A manufacturing company has a standard costing system based on standard direct labor-hours (DLHs) as the measure of activity. Data from the company's flexible budget for manufacturing overhead are given below:
Denominator level of activity ................................ 1,000 DLHs Overhead costs at the denominator activity level: Variable overhead cost ........................................ $3,800 Fixed overhead cost ............................................ $14,250
The following data pertain to operations for the most recent period:
Actual hours ........................................................... 1,200 DLHs Standard hours allowed for the actual output ........ 885 DLHs Actual total variable overhead cost ........................ $4,380 Actual total fixed overhead cost ............................ $12,450
7. What is the predetermined overhead rate to the nearest cent? A) $14.03 B) $16.83 C) $15.04 D) $18.05
8. How much overhead was applied to products during the period to the nearest dollar? A) $18,050 B) $16,830 C) $15,974 D) $21,660
9. What was the variable overhead spending variance for the period to the nearest dollar? A) $180 U B) $180 F C) $580 U D) $580 F
10. What was the variable overhead efficiency variance for the period to the nearest dollar? A) $133 U B) $580 U C) $1,150 U D) $1,197 U
ACT 102 Management Accounting: Variance Analysis
Cheng Nam Sang 4 11. What was the fixed overhead budget variance for the period to the nearest dollar? A) $1,800 F B) $3,268 F C) $161 U D) $4,650 U
12. What was the fixed overhead volume variance for the period to the nearest dollar? A) $4,489 U B) $1,618 U C) $2,850 F D) $1,639 U
13. Flick Company uses a standard cost system in which manufacturing overhead is applied to units of product on the basis of standard direct labor-hours. The company's total budgeted variable and fixed manufacturing overhead costs at the denominator level of activity are $20,000 for variable overhead and $30,000 for fixed overhead. The predetermined overhead rate, including both fixed and variable components, is $2.50 per direct labor-hour. The standards call for two direct labor-hours per unit of output produced. Last year, the company produced 11,500 units of product and worked 22,000 direct labor-hours. Actual costs were $22,500 for variable overhead and $31,000 for fixed overhead.
Required:
a. What is the denominator level of activity? b. What were the standard hours allowed for the output last year? c. What was the variable overhead spending variance? d. What was the variable overhead efficiency variance? e. What was the fixed overhead budget variance? f. What was the fixed overhead volume variance?
Ans 3: C Variable overhead spending variance = AQ (AP SP) = 90 F 8,700 (AP 0.45) = -90 (8,700 AP) 3,915 = -90 (8,700 AP) = 3,825 AP = 3,825 8,700 = $0.4396 Actual indirect materials = 8,700 $0.4396 = $3,825
Ans 4: A Budget variance = Actual fixed overhead cost Budgeted fixed overhead cost = $54,000 $50,000 = $4,000 U
Ans 5: A Actual rate = Actual total variable manufacturing overhead Actual machine-hours = $66,960 7,200 = $9.30 Variable overhead spending variance = AH (AR SR) = 7,200 ($9.30 $9.40) = 7,200 ($0.10) = $720 F
Fixed overhead budget variance = Actual fixed overhead costs Budgeted fixed overhead cost = $37,000 $40,000 = $3,000 F
Total overhead variance = $720 F + $3,000 F = $3,720 F
Ans 6: B Predetermined overhead rate = $882,000 21,000 denominator machine-hours = $42 per machine-hour Fixed overhead applied to production = 20,000 standard hours $42 per machine-hour = $840,000 ACT 102 Management Accounting: Variance Analysis
Cheng Nam Sang 6 Ans 7: D Predetermined overhead rate = Total overhead Denominator level of activity = ($3,800 + $14,250) 1,000 DLHs = $18,050 1,000 DLHs = $18.05 per DLH
Ans 8: C Predetermined overhead rate = Total overhead Denominator level of activity = ($3,800 + $14,250) 1,000 DLHs = $18,050 1,000 DLHs = $18.05 per DLH Applied overhead = 885 DLHs $18.05 per DLH = $15,974
Ans 9: B Budgeted direct-labor hours: 1,100 Actual direct-labor hours: 1,200 Standard direct-labor hours allowed: 800
Cost Formula (per DLH) Actual Costs Incurred 1,200 DLHs Budget Based on 1,200 DLHs Spending Variance
Variable overhead costs ...................... $3.80 * $4,380 $4,560 $180 F
* $3,800 1,000 DLHs = $3.80 per DLH
Ans 10: D Budgeted direct-labor hours: 1,000 Actual direct-labor hours: 1,200 Standard direct-labor hours allowed: 885
Cost Formula (per DLH) Budget Based on 1,200 DLHs Budget Based on 885 DLHs Efficiency Variance
Variable overhead costs ...................... $3.80 * $4,560 $3,363 $1,197 U
*$3,800 1,000 = $3.80
Ans 11: A Fixed overhead budget variance = Actual fixed overhead cost Budgeted fixed overhead cost = $12,450 $14,250 = $1,800 F
ACT 102 Management Accounting: Variance Analysis
Cheng Nam Sang 7 Ans 12: D Fixed portion of predetermined overhead rate = $14,250 1,000 DLHs = $14.25 per DLH Volume variance = Fixed portion of predetermined overhead rate (Denominator hours Standard hours allowed) = $14.25 per DLH (1,000 DLHs 885 DLHs) = $14.25 per DLH 115 DLHs = $1,639 U
Ans 13: a. Total overhead at the denominator level of activity ....... $50,000 Predetermined overhead rate ....................................... $2.50/DLH = Denominator level of activity ...................................... 20,000 DLHs
b. Actual output .............................. 11,500 units Standard DLH per unit ............ 2 DLH per unit = Standard DLHs allowed .......... 23,000 DLHs
c. Computation of variable overhead spending variance: Spending variance = (AH AR) (AH SR) = ($22,500) (22,000 $1.00*) = $500 U *$20,000 20,000 DLHs = $1.00
d. Computation of variable overhead efficiency variance: Spending variance = (AH SR) (SH SR) = (22,000 $1.00) (23,000* $1.00) = $1,000 F * 2 DLHs per unit 11,500 units = 23,000 DLHs
e. Computation of the fixed overhead budget variance: Budget variance = Actual fixed overhead Budgeted Fixed overhead = $31,000 $30,000 = $1,000 U
f. Computation of the fixed overhead volume variance: Volume variance = Fixed portion of predetermined overhead rate (Denominator hours Standard hours allowed) = $1.50* (20,000 23,000) = $4,500 F *$30,000 20,000 DLH = $1.50 per DLH
ACCT 102 Management Accounting Variance Analysis - Extra Exercises
Cheng Nam Sang 1 EQ1. Consider the following statements:
I. Behavioral scientists find that perfection standards often discourage employees and result in low worker morale. II. Practical standards are also known as attainable standards. III. Practical standards incorporate a certain amount of inefficiency such as that caused by an occasional machine breakdown.
Which of the above statements is (are) true? A. I only. B. II only. C. III only. D. II and III. E. I, II, and III.
EQ2. Which of the following would not be considered if a company desires to establish a series of practical manufacturing standards? A. Production time lost during unusual machinery breakdowns. B. Normal worker fatigue. C. Freight charges on incoming raw materials. D. Production time lost during setup procedures for new manufacturing runs. E. The historical 2% defect rate associated with raw material inputs.
EQ3. Most companies base the calculation of the materials price variance on the: A. number of units purchased. B. number of units spoiled. C. number of units that should have been used. D. number of units actually used. E. number of units to be purchased during the next accounting period.
EQ4. Which of the following variances cannot occur together during the same accounting period? A. Unfavorable labor rate variance and favorable labor efficiency variance. B. Unfavorable labor efficiency variance and favorable materials quantity variance. C. Favorable labor rate variance and unfavorable total labor variance. D. Favorable labor efficiency variance and favorable materials quantity variance. E. None of the above, as all of these variance combinations are possible.
EQ5. Victoria, Inc., recently completed 52,000 units of a product that was expected to consume five pounds of direct material per finished unit. The standard price of the direct material was $9 per pound. If the firm purchased and consumed 268,000 pounds in manufacturing (cost =$2,304,800), the direct-materials quantity variance would be figured as: A. $72,000F. B. $72,000U. C. $107,200F. D. $107,200U. E. none of the above.
ACCT 102 Management Accounting Variance Analysis - Extra Exercises
Cheng Nam Sang 2 Use the following to answer questions 6-10:
Cost standards for product no. C77: Direct material 3 pounds at $2.50 per pound $ 7.50 Direct labor 5 hours at $7.50 per hour 37.50
Actual results: Units produced 7,800 units Direct material purchased 26,000 pounds at $2.70 $ 70,200 Direct material used 23,100 pounds at $2.70 62,370 Direct labor 40,100 hours at $7.30 292,730
EQ6. The direct-material quantity variance is: A. $750F. B. $750U. C. $6,500U. D. $7,250U. E. none of the above.
EQ7. The direct-material price variance is: A. $4,620F. B. $4,620U. C. $5,200F. D. $5,200U. E. none of the above.
EQ8. The direct-labor rate variance is: A. $7,800F. B. $7,950F. C. $8,020F. D. $8,000U. E. none of the above.
EQ9. The direct-labor efficiency variance is: A. $8,000F. B. $8,000U. C. $8,250F. D. $8,250U. E. none of the above.
EQ10. The standard hours allowed for the work performed are: A. 5. B. 5.14. C. 39,000. D. 40,100. E. none of the above.
ACCT 102 Management Accounting Variance Analysis - Extra Exercises
Cheng Nam Sang 3 EQ11. Consider the following statements about variance investigation:
I. Variance investigation involves a look at only unfavorable variances. II. Variance investigation is typically based on a cost-benefit analysis. III. Variance investigation is often performed by establishing guidelines similar to the following: Investigate variances that are greater than $X or greater than Y% of standard cost.
Which of the above statements is (are) true? A. I only. B. II only. C. III only. D. II and III. E. I, II, and III.
EQ12. J ustin Company recently purchased materials from a new supplier at a very attractive price. The materials were found to be of poor quality, and the company's laborers struggled significantly as they shaped the materials into finished product. In a desperation move to make up for some of the time lost, the manufacturing supervisor brought in more-senior employees from another part of the plant. Which of the following variances would have a high probability of arising from this situation? A. Material price variance, favorable. B. Material quantity variance, unfavorable. C. Labor rate variance, unfavorable. D. Labor efficiency variance, unfavorable. E. All of the above.
EQ13. Lucky Corporation's purchasing manager obtained a special price on an aluminum alloy from a new supplier, resulting in a direct-material price variance of $9,500F. The alloy produced more waste than normal, as evidenced by a direct-material quantity variance of $2,000U, and was also difficult to use. This slowed worker efficiency, generating a $2,500U labor efficiency variance. To help remedy the situation, the production manager used senior line employees, which gave rise to a $900U labor rate variance. If overall product quality did not suffer, what variance amount is best used in judging the appropriateness of the purchasing manager's decision to acquire substandard material? A. $4,100F. B. $5,000F. C. $7,000F. D. $7,500F. E. $9,500F.
ACCT 102 Management Accounting Variance Analysis - Extra Exercises
Cheng Nam Sang 4 Use the following information for questions 14 and 15
Red Hot Chili Pepper produces the hottest chili sauce in the world for use in the making of spicy dishes. In making sure that the company is profitable, Red Hot Chili Peppers management always analyzes carefully the cost of its raw materials, green chili, which is sourced from India.
Typically, to ensure that they can produce the hottest chili sauce, 1 kg of green pepper is squeezed into the making of 1 bottle of their chili sauce through a distillation process. In addition, to maintain the prices of their chili sauce, the company always manufactures 20,000 bottles monthly.
In the month of October, the following information was available from company records: Actual quantity of materials used 24,000 kg Budgeted quantity of materials purchased 26,000 kg Actual price paid for materials $4 per kg Budgeted price for materials $5 per kg
The company computes its material price variance at the time of usage.
EQ14. What was the materials price variance for the period?
A. $24,000 (F) B. $24,000 (U) C. $26,000 (F) D. $26,000 (U) E. None of the above
EQ15. What was the materials quantity variance for the period?
A. $8,000 (U) B. $10,000 (U) C. $16,000 (U) D. $20,000 (U) E. none of the above
ACCT 102 Management Accounting Variance Analysis - Extra Exercises
Cheng Nam Sang 5 Use the following information for questions 16 to 19.
J FH Company uses a standard cost system. Data for the month of May 20X5 for one of the companys products is as follows: Total production of finished product for the month: 10,500 units Standard quantity of direct material allowed in finished product: 31,500 kg Standard cost of direct material: $10 per kg Material usage/quantity variance: $3,000 (U) Direct material purchased: 33,000kg costing $336,600 Total direct labour variance: $1,500 (F) Direct labour rate variance: $1,500 (U) Standard hour of direct labour time: 1 hour per unit Standard rate for direct labour: $15 per hour Overhead budget formula: $50,000 per month plus $25 per direct labour hour Actual overhead incurred: $300,000 Actual fixed overhead costs: $45,000 Normal volume: 10,000 units of finished product per month Material price variance is computed at the time of purchase
EQ16. Actual quantity of direct material used was: A. 30,000 kg B. 30,300 kg C. 31,500 kg D. 31,800 kg E. 33,000 kg F. none of the above
EQ17. The actual direct labour hour worked was: A. 9,800 hours B. 10,000 hours C. 10,250 hours D. 10,300 hours E. 10,500 hours F. none of the above
EQ18. The total variable overhead variance was: A. $2,500(U) B. $2,500(F) C. $5,000(U) D. $5,000(F) E. $7,500(U) F. none of the above
EQ19. The fixed overhead volume variance was: A. $0 B. $2,500(U) C. $2,500(F) D. $5,000(U) E. $5,000(F) F. none of the above
ACCT 102 Management Accounting Variance Analysis - Extra Exercises
Cheng Nam Sang 6
EQ20. Richie Ventura operates a commercial painting business in Sacramento, which has a very tight labor market. Much of his work focuses on newly constructed apartments and townhouses.
The following data relate to crew no. 5 for a recently concluded period when 85 apartment units were painted: Three new employees were assigned to crew no. 5. Wages averaged $18.80 per hour for each employee; the crew took 2,550 hours to complete the work. Based on his knowledge of the operation, articles in trade journals, and conversations with other painters, Ventura established the following standards: Typical hourly wage rate of crew personnel: $15 Anticipated crew time for each unit: 34 hours The paint quantity variance was $6,070F. The operation did not go as smoothly as planned, with customer complaints and problems being much higher than expected.
Required: A. Compute Ventura's direct-labor variances. B. Is the direct-labor rate variance consistent with what you might expect in a tight labor market? Explain. C. Analyze the information given and that you calculated, and determine what likely happened that would give rise to customer complaints?
EQ21. A manufacturing company is expected to complete a task in 45 minutes. During a recent accounting period, 3,200 completed units were produced, resulting in the following labor variances:
Required: Calculate (1) the standard hours allowed for the work performed, (2) the actual hours worked, and (3) the actual wage rate.
EQ22. A Balanced Scorecard is: A. a performance measurement system that emphasizes profit growth. B. an evaluation process that focuses on improving sales and productivity. C. a series of checks and balances based primarily on the information derived from the financial statements of the organization. D. a performance measure that evaluates multiple categories of an organizations critical success factors related to organizational goals. E. a performance measurement system that focuses exclusively on critical issues relating to meeting customers expectations such as anticipating customers needs, after-sale services, and delivery efficiency. F. none of the above.
ACCT 102 Management Accounting Variance Analysis - Extra Exercises
Cheng Nam Sang 7 EQ23. Bob's Burgers and Such, a national fast-food chain, has experienced a number of problems in the past few years, and management is considering the adoption of a balanced scorecard as part of a turnaround effort.
Required: A. Briefly explain the concept of a balanced scorecard. What general factors are included in a typical balanced scorecard? B. Independent of your answer in requirement "A," assume that Bob's is very concerned about customer satisfaction. List four different (and specific) customer-satisfaction measures that may be appropriate for the firm (and for other fast-food providers). C. Independent of requirement "A," assume that Bob's wants to return to former levels of profitability. List several financial measures that would allow management to assess success or failure with respect to the following goals: (1) pay creditors on a timely basis, (2) keep shareholders happy, and (3) improve profitability over time at stores that have been open at least one year.
EQ24. provide expected revenues and costs for several levels of activity.
a. Continuous budgets b. Flexible budgets c. Master budgets d. Static budgets
EQ25. are budgets for a single activity level.
a. Flexible budgets b. Master budgets c. Static budgets d. Both b and c are correct.
EQ26. The Zachary Fitness Company has the following budgeted costs for the production of its only product, exercise machines:
Variable manufacturing costs $30.00 per unit Shipping expenses (selling) $ 1.00 per unit Administrative $ 0.50 per unit Fixed manufacturing costs $50,000 per month Fixed selling and admin. costs $35,000 per month
What are Zachary's expected costs for 1,000 units of product to be produced and sold in March?
a. $30,000 b. $31,000 c. $85,000 d. $116,500.
EQ27. The flexible budget is based on the same assumptions of revenue and cost behavior (within the relevant range) as is the: a. master budget b. static budget c. both a and b d. neither a nor b ACCT 102 Management Accounting Variance Analysis - Extra Exercises
Cheng Nam Sang 8
EQ28. Which of the following is descriptive of an activity-based flexible budget:
a. based on budgeted costs for each activity center and related cost driver b. based on actual costs for each activity center and related cost driver c. is limited to no more than ten activity centers d. a and c
EQ29. The key differences between the traditional flexible budget and the activity-based flexible budget is:
a. the traditional should be used when a significant portion of the costs vary with cost drivers other than units of production b. some manufacturing costs that are fixed with respect to units are variable with respect to cost drivers, other than units, used for an activity-based flexible budget c. traditional flexible budgeting is dramatically increasing in popularity d. the larger the company, the more likely the activity-based flexible budget will not be used
EQ30. Flexible budgets allow for financial performance evaluation because actual results can be compared with
a. the expected prices and variable costs per unit and fixed cost for the period. b. the continuous budget for the period. c. the static budget for the period. d. the master budget for the period.
EQ31. The flexible budget is prepared using the:
a. estimated levels of activity of the closest competitor b. historical levels of activity c. actual levels of activity d. most conservative levels of activity
EQ32. measure how effective managers have been in meeting the planned level of sales.
a. Continuous-budget variances b. Flexible-budget variances c. Master-budget variances d. Sales-activity variances
EQ33. measure the efficiency of operations at the actual level of activity.
a. Zero-based budget variances b. Flexible-budget variances c. Master-budget variances d. Sales-activity variances
ACCT 102 Management Accounting Variance Analysis - Extra Exercises
Cheng Nam Sang 9 Use the following information for questions 34 through 37.
The Blake Company has developed the following standards for one of their products.
Direct materials: 30 pounds x $3 per pound Direct labor: 10 hours x $8 per hour Variable overhead: 10 hours x $2 per hour
The following activity occurred during the month of November:
Materials purchased: 500,000 pounds at $3.20 per pound Material used: 460,000 pounds Units Produced: 15,000 units Direct labor: 145,000 hours at $7.90 per hour Actual variable OH: $295,000
The company records the materials price variance at the time of purchase.
EQ34. The materials price variance is
a. $0. b. $92,000 unfavorable. c. $100,000 favorable. d. $100,000 unfavorable.
EQ35. The labor usage variance is
a. $39,500 favorable. b. $39,500 unfavorable. c. $40,000 unfavorable. d. $40,000 favorable.
EQ36. The variable overhead spending variance is
a. $5,000 favorable. b. $5,000 unfavorable. c. $10,000 favorable. d. $10,000 unfavorable.
EQ37. The variable overhead efficiency variance is
a. $10,000 unfavorable b. $ 0 c. $10,000 favorable d. cannot be determined ACCT 102 Management Accounting Variance Analysis - Extra Exercises
Cheng Nam Sang 10 Suggested Answers
EQ1 E
EQ2 A
EQ3 A
EQ4 E
EQ5 B
EQ6 A
EQ7 D
EQ8 C
EQ9 D
EQ10 C
EQ11 D
EQ12 E
EQ13 A
EQ14 A
EQ15 D
EQ16 D
Material Quantity
AQ used SP SQ used of actual production SP ?=318,000/10=31,800 10 ?=315,000+3,000=318,000 31,500 10 315,000 Usage 3,000(U)
OR AQ x AP
AQ x SP AQ x 10 =315,000 +3000 =318,000 3,000 U [Usage] SQ x SP 31,500 x 10 =315,000
AQ =318,000 / 10 =31,800
ACCT 102 Management Accounting Variance Analysis - Extra Exercises
Cheng Nam Sang 11
EQ17 D
Direct Labour AH AR AH SR SH of actual production SR 10,300
?=154,500+1,500=156,000 ?=10,300 15 ?=157,500-3,000=154,500 1*10,500=10,500 15 157,500 Rate 1,500(U) Efficiency ?=Rate +Eff=1,500(F) Efficiency =3,000(F) Total 1,500(F) OR
AH x AR AH x AR =154,500 +1,500 1,500 U [Rate] AH x SR AH x 15 =(157,500 3,000) 3,000 F [Efficiency] SH x SR (10,500 x 1) x 15 =157,500 Total 1,500 F [Total]
AH x 15 =154,500 AH =10,300
AR =? =(154,500 +1,500) / AH =156,000 / 10,300 =15.15
EQ18 F
VOH AH AR AH SR SH of actual production SR 255,000 1*10,500=10,500 25 262,500 7,500 (F)
OR
AH x AR AH x AR =255,000
AH x SR
SH x SR (10,500 x 1) x 25 =262,500 Total 7,500 F
ACCT 102 Management Accounting Variance Analysis - Extra Exercises
Cheng Nam Sang 12 EQ19 C
FOH Actual Budget Applied 50,000 50,000*10,500/10,000=52,500 Volume 2,500F OR
Actual 45,000
Budget 50,000 2,500 F [Volume] SH x SR Applied (10,500 * 1) * ($50,000/10,000) =$52,500 Total
EQ20 A. Actual Labor Cost Standard Labor Cost Actual Hours x Actual Rate
Actual Hours x Standard Rate
Standard Hours X Standard Rate 2,550 x $18.80 2,550 x $15.00 2,890* x $15.00 $47,940 $38,250 $43,350 $9,690U $5,100F
Direct-labor rate variance
Direct-labor efficiency variance
*85 units x 34 hours
OR
AH x AR 2,550 x 18.80 =47,940 9,690 U [Rate] AH x SR 2,550 x 15.00 =38,250 5,100 F [Efficiency] SH x SR (Applied) (85 x 34) x 15.00 =43,350 Total 4,590 U [Total]
B. Yes. A tight labor market often means that premium wages are needed to attract qualified employees. These wages would give rise to an unfavorable rate variance.
C. Ventura has two favorable variances: labor efficiency and material (paint) quantity. The favorable efficiency variance indicates that the crew is spending less time than budgeted, perhaps rushing the jobs and being a bit sloppy. It is also possible that employees are being somewhat skimpy in their use of paint, using less than expected (e.g., applying one coat rather than two in certain applications).
ACCT 102 Management Accounting Variance Analysis - Extra Exercises
Cheng Nam Sang 13 EQ21
Actual Labor Cost Standard Labor Cost Actual Hours x Actual Rate
Actual Hours x Standard Rate
Standard Hours x Standard Rate 2,600 x $13.80 2,600 x $14.00 2,400* x $14.00 $35,850 $36,400 $33,600 $520F $2,800U
Direct-labor rate variance
Direct-labor efficiency variance
*3,200 units x 0.75 hours
1. Standard hours allowed: 2,400 2. Actual hours worked: 2,600 3. Actual wage rate: $13.80 OR
AH x AR AH x AR =(36,400 520) =35,880 520 F [Rate] AH x SR AH x 14 =(33,600 +2,800) =36,400 2,800 U [Efficiency] SH x SR (Applied) [3,200 x (45/60)] x 14 =2,400 x 14 =33,600 Total 2,280 U [Total]
AH =36,400 / 14 =2,600
AR =35,880 / AH =35,880 / 2,600 =13.80
EQ22 D A. a performance measurement system that emphasizes profit growth. Not just profit growth B. an evaluation process that focuses on improving sales and productivity. There are other factors as well C. a series of checks and balances based primarily on the information derived from the financial statements of the organization. Use other information such as customers complaint D. a performance measure that evaluates multiple categories of an organizations critical success factors related to organizational goals. E. a performance measurement system that focuses exclusively on critical issues relating to meeting customers expectations such as anticipating customers needs, after-sale services, and delivery efficiency. The word exclusively is incorrect. F. none of the above.
EQ23 A. A balanced scorecard is a tool that incorporates a variety of different measures, both financial and non-financial, in the performance-evaluation process. The measures are critical to a firm's success and are tied to organizational strategy. The goal of a balanced scorecard is to allow improvement in a number of broad-reaching areas rather than permit a manager to improve only a small facet of the business at the expense of others. Typical factors are often divided into four categories: financial, customer, learning and growth, and internal operations.
ACCT 102 Management Accounting Variance Analysis - Extra Exercises
Cheng Nam Sang 14 B. Answers will vary but often include market share, queue time, results of a customer quality survey, number of customer complaints, number of order errors, and number of repeat customers.
C. Pay creditors on a timely basis: stipulated end-of-period cash balance and current ratio Shareholder satisfaction: growth in earnings per share, increases in per-share market price of Bob's stock, price-earnings ratio Profitability improvement: gross margin growth rates, earnings growth rates
EQ24. [b] EQ25. [d]
EQ 26. [d] From the information provided, Zachary's flexible-budget cost formula is $85,000 + $31.50 X, where X is the number of units produced. Inserting 1,000 for X gives $85,000 + ($31.50 x 1,000) which equals $116,500.
EQ27. [c] EQ28. [a] EQ29. [b] EQ30. [a]
EQ31. [c] EQ32[d] EQ33 [b]
EQ34. [d] As stated, the company determines the price variance based on the material purchased. Therefore, the price variance is ($3.20 - $3.00) x 500,000 pounds which is $100,000. The variance is unfavorable since the actual price paid ($3.20) exceeds the standard price ($3.00).
EQ35. [d] The labor usage variance is found by multiplying the standard labor rate ($8) by the difference between the actual hours worked (145,000) and the number of hours that should have been taken to produce 15,000 units (150,000 = 15,000 x 10 hrs./unit). The resulting variance is $40,000, which is favorable because fewer hours were worked than should have been for the production level achieved.
EQ36. [b] Spending variance = (AH x AR) (AH x SR) = AH x (AR SR) = 295,000 (145,000 x 2) = 295,000 290,000 = 5,000 Unfavourable
EQ37. [c] The efficiency variance is the difference between the actual quantity of the cost-driver activity and the standard quantity allowed, which is then multiplied by the standard rate. The actual quantity of 145,000 hours is less than the standard allowed of 150,000 hours. The 5,000 hour difference is multiplied by the standard rate of $2 to arrive at a $10,000 favorable variance.
Efficiency variance =AH x SR SH x SR =(145,000 x 2) [(15,000 x 10) x 2] =290,000 300,000 =10,000 Favourable
Cheng Nam Sang 1 Ming Ming Pte Ltd manufacturers power drills that are sold throughout Singapore. The company uses standard costs for its budgeting process and compares actual results to budgeted amounts on a monthly basis. Each month, Ming Mings accounting department prepares a variance analysis and distributes the report to all responsible parties. Richard Tan, production manager, is upset about the results for J une. Richard, who is responsible for the cost of goods manufactured, has implemented several cost-cutting measures in the manufacturing area and is discouraged by the unfavourable variances in variable costs.
Ming Ming Pte Ltd Operating Results For the Month of June Master Budget Actual Variance
Unit sold .. 5,000 4,800 200 U
$000 $000 $000 Revenue ...... 1,200 1,152 48 U Variable cost ... 760 790 30 U Contribution margin . 440 362 78 U Fixed production overhead ........ 180 180 Fixed general administrative cost ... 120 115 5 F Operating income . 140 67 73
When the master budget was prepared, Ming Mings cost accountant, Ian Yeo, supplied the following unit costs:
direct material (2kg @$30/kg) ....... $60 direct labour (4hr @$11/hr) ..... $44 variable overhead (4DLH @$9/hr) $36 variable selling per unit ... $12 <DLH =direct labour hour>
The total actual variable costs of $790,000 for J une include $310,008 for direct material, $232,320 for direct labour, $184,500 for variable overhead, and $63,172 for variable selling expenses. Ian believes that Ming Mings monthly reports would be more meaningful to everyone if the company adopted flexible budgeting and prepared more detailed analyses.
REQUIRED:
1. Prepare a flexible budget for Ming Ming Pte Ltd for the month of J une. 2. Calculate all possible variances based on information provided so far. 3. In order to convince everyone about the use flexible budget, Ian has collected further details from Richard as follows: Actual material usage and price per unit: 1.9kg @34 per kg Actual labour hours paid : 21,120 hours @$11 per hour Actual labour hours work: 19,680 hours (due to non-delivery of materials for 2 days) Expand the flexible budget variances into more meaningful details and offer possible explanations for variances that exceed $10,000. 4. Discuss how the revised flexible budget and variance data are likely to impact the behaviour of Richard Tan, the production manager.