AFM481 - Advanced Cost Accounting Professor Grant Russell Final Exam Material Chapter 11 & 13. Chapter 11: Standard Costs and Variance Analysis

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1 AFM481 - Advanced Cost Accounting Professor Grant Russell Final Exam Material Chapter 11 & 13 Chapter 11: Standard Costs and Variance Analysis Variance Analysis: calculating variances and investigating their causes, reasons for the variances and improving future strategies or operating plans Organizations often establish a set of standards for expected costs. A standard cost is the cost managers expect to incur under operating plan assumptions, such as volume of production, efficiency of production, and prices and quality of inputs. Total Standard Cost per Unit of Output = 1) Standard Cost of DM + 2) Standard Cost of DL + 3) Standard Cost of VO + 4) Standard Cost of FO 1) Standard price per unit of input * Standard quantity per unit of output 2) Standard price per labour hour * Standard labour hours per unit of output 3) Standard variable overhead allocation rate * standard quantity of allocation base per unit of output 4) Standard fixed overhead allocation rate * Standard quantity of allocation base per unit of output Standard costing system: inventory and COGS are initially recorded at standard costs, rather than actual costs. Actual Costs are recorded through cash disbursements, payroll, purchases, fixed assets, and other components. The standard cost variances reconcile standard costs to actual costs. Standard cost variances must be closed to COGS and ending inventory. Standard Costs 1) Get a standard cost per unit of production for DM, DL, VO and FO 2) Using the expected production volume, make a Cost Budget (DM, DL and VO * production volume; same FO) Direct Cost Variances: DM and DL Price Variance: difference between standard and actual prices paid for resources purchased and used in the production of goods and services. Price variance is at AQ. Efficiency Variance: how economically direct resources such as materials and labour were used. Efficiency variance is at SP. *Note: AP or SP is $ per unit* Direct Materials Variances DM Price Variance = (AP-SP) * AQ = (Actual Price - Standard Price ) * Actual Quantity Purchased DM Efficiency Variance = (AQ-SQ) * SP = (Actual quantity for actual output - Standard quantity for actual output) * Actual DM purchased at actual price (AP * AQ) - Actual DM purchased at standard price (SP * AQ) = Favourable if actual price lower than standard Actual DMs used/produced at standard price (AQ * SP) - Standard DMs used at standard price (SQ * SP) = Favourable if actual quantity lower than standard

2 Standard price Actual DMs purchased at actual price-dm Price Variance-Actual DMs purchased at standard price Actual DMs used at standard price-dm Efficiency Variance-Standard DMs required at standard price Journal Entries for DM Price Variance DR Raw Materials Inventory (SP*AQ) DR DM Price Variance (U) CR A/P (AP*AQ) Direct Labour Variances DL Price Variance = (AP-SP) * AQ = (Actual labour price per hour - Standard labour price per hour) * Actual hours used DM Efficiency Variance = (AQ-SQ) * SP Journal Entries for DM Efficiency Variance DR Work-in-process Inventory (SP*SQ) CR DM Efficiency Variance (F) CR Raw Materials Inventory (SP*AQ) Actual DL hours used at actual price (AP * AQ) - Actual DL hours used at standard price (SP * AQ) = Favourable if actual labour price per hour lower than standard Actual DL hours used at standard price (SP * AQ) - Standard DL hours used at standard price (SP * SQ) = Favourable if actual hours less than standard Actual labour hours used at actual price-dl Price Variance-Actual labour hours used at standard price-dl Efficiency Variance-Standard labour hours required at standard price Total DL Variance = DL Price Variance + DL Efficiency Variance Journal Entries for DL Price and DL Efficiency Variance DR Work in Process Inventory (SP*SQ) DR DL Price Variance (U) CR DL Efficiency Variance (F) CR Wages Payable (AP*AQ) DM or DL Efficiency Variance broken into Mix Variance and Yield Variance Yield Variance = (Actual total units of input used - Budgeted total units of inputs used) * Budgeted input mix % * Budgeted price per input unit Material Yield Variance is the difference between actual and budgeted total quantity of inputs for actual output achieved, multiplied by budgeted prices (budgeted mix is held constant) Yield: What's the impact of changing efficiency while the mix is constant? Mix Variance = (Actual input mix % - Budgeted input mix %) * Actual total inputs used * Budgeted price per input unit E.g. Budgeted labour mix at budgeted prices for actual output achieved: 3,825 skilled hours at $16 per hour 1,275 unskilled hours at $12 per hour 5100 total hours Actual results: Material Mix Variance is the difference between actual and budgeted mix for the total quantity of inputs used, multiplied by budgeted prices (total quantity of inputs used is held constant) Mix: If I held my efficiency constant, what's the impact of changing the mix? Yield Variance = $1,500 F Skilled: (5,000-5,100) * (3,825/5,100) * $16 = 1200 F Unskilled: (5,000-5,100) * (1,275/5,100) * $12 = 300 F Mix Variance = $1,000 F Skilled: (4000/ /5100) * 5000 * $16= 4000F Unskilled: (1000/ /5100) * 5000 * $12= 3000

3 4,000 skilled hours at $19 per hour 1,000 unskilled hours at $9 per hour 5,000 total hours 3000U Variance Overview Single Product Company: Total Variance = price + usage + sales volume Multi-Product Company: Total Variance = price + usage + sales quantity + sales mix Where Sales Quantity = industry volume + market share Multi-Input Company: Total Variance = price + mix + yield + sales volume Overhead Variances: VO Spending, VO Efficiency, FO Spending, FO Production Volume Standard VO Allocation Rate = Estimated VO Cost/Estimated Volume of Allocation Base Standard FO Allocation Rate = Estimated FO Cost/Estimated Volume of Allocation Base Variable Overhead Budget Variance: difference between allocated VO cost and actual VO cost Fixed Overhead Budget Variance: difference between allocated FO cost and actual FO cost Variable Overhead Budget Variances VO Spending Variance = Actual VO $ - (Actual Volume * Standard Rate) = (AR-SR) * AQ VO Efficiency Variance = (Actual volume of allocation base - Standard volume of allocation base for actual output) * Standard VO allocation rate Actual VO costs - Actual allocation base at standard rate = Favourable if actual VO costs less than expected, given the actual volume of output Flexible Budget for VO cost - Standard amount of VO for the actual volume = Favourable if actual volume less than expected, given actual production levels = (AQ-SQ) * SR Actual VO Costs-Spending Variance-Actual Allocation Base at Standard Rate-Efficiency Variance- Standard allocation base at Standard Rate VO Budget Variance = VO Spending Variance + VO Efficiency Variance Journal Entries for VO Costs and Variances: DR VO Cost Control (Actual VO Costs) CR A/P DR Work-in-process Inventory (Standard Volume at Standard Rate) CR VO Cost Control DR VO Cost Control CR VO Spending Variance (F) CR VO Efficiency Variance (F) Fixed Overhead Budget Variances FO Spending Variance = Actual FO costs - Estimated FO costs Favourable if actual less than estimated

4 Where Estimated FO costs = Estimated allocation base at standard rate FO Production Volume Variance = (Estimated Volume of Allocation Base - Standard Volume of Allocation Base for Actual Output) * Standard FO Allocation Rate where Standard FO Allocation Rate = Estimated FO / Estimated Volume Standard amount of FO cost allocated to products - Estimated FO costs If actual volumes of allocation base exceed normal/estimated volumes FO will be overapplied. -> Allocated to inventory and COGS FO Production Volume Variance Favourable If actual volumes of allocation base less than normal/estimated volumes FO will be underapplied -> expensed in COGS FO Production Volume Variance Unfavourable Actual FO Costs-Spending Variance-Estimated Allocation Base at Standard Rate-Production Volume Variance-Standard/Actual Allocation Base at Standard Rate FO Budget Variance = FO Spending Variance + FO Production Volume Variance Journal Entries for FO Costs and Variances DR FO Cost Control (Actual FO costs) CR A/P DR Work-in-process Inventory (Actual/Standard Allocation base at Standard Rate) CR FO Cost Control DR FO Spending Variance (U) DR Production Volume Variance (U) CR FO Cost Control Cost Variance Adjustments Favourable Variance: fewer resources were used than estimated. Decrease costs in inventory and COGS Unfavourable Variance: more resources were used than estimated. Increase costs in inventory and COGS If variance is material (combined variance amount >10% of total actual production costs including DM, DL, VO and FO), prorate among WIP, Finished Goods Inventory and COGS and decrease them. If not material (<10%), close the variances to COGS and decrease COGS by the total variance. Chapter 11A: Profit-Related Variances Revenue Variances Revenue Budget Variance = Actual Revenues - Standard Revenues = Sales Price Variance + Revenue Sales Quantity Variance Revenue variances are caused by changes in demand, sales price, discounting practices and changes in sales mix.

5 Standard (Budgeted) Revenues = Standard (Budgeted) Selling Price * Standard (Budgeted) Sales Volume Sales Price Variance = (Actual Price - Standard Price ) * Actual Volume Sold = (AP-SP) * AQ Revenue Sales Quantity Variance = (Actual Volume Sold - Standard Volume Sold) * Standard Price = (AQ-SQ) * SP Difference between standard and actual selling prices for the volume of units actually sold = Favourable if actual selling price exceeds the standard price Difference between the standard and actual quantity of units sold at standard selling price = Favourable if actual sales quantities exceed standard quantities Contributed Margin-Related Variances [CM per unit = Sales per unit - VC per unit] Contribution Margin Variance Indicates the effects of changes in CMs, given the = (Actual CM - Standard CM) * Actual Volume actual level of sales Sold = Difference between standard and actual CMs = Favourable if the Total Actual CM is higher than the (Contribution Margin) Sales Volume Variance = (Actual Volume Sold - Standard Volume Sold) * Standard Contribution Margin total standard CM Indicates the effects of changes in units sold, given the standard contribution margins = Favourable if actual sales quantities exceed standard quantities Actual units sold at actual sales mix and actual CM-CM Variance-Actual units sold at actual sales mix and standard CM-CM Sales Volume Variance-Standard units sold at standard sales mix and standard CM CM Budget Variance = CM Variance + CM Sales Volume Variance Contribution Margin Sales Volume Variance broken into: Contribution Margin Sales Mix Variance and Contribution Margin Sales Quantity Variance (Contribution Margin) Sales Mix Variance Examines the effects of changes in the sales mix, = Actual units of all products sold * (Actual sales given the standard CM and actual quantity of units mix % - Budgeted sales mix %) * Budgeted CM sold per unit = Favourable when a shift occurs in sales mix toward -> Do this for each product. products having a higher standard CM Or (Actual volume - actual volume at budgeted mix) * Budgeted CM (Contribution Margin) Sales Quantity Variance = (Actual units of all products sold - Budgeted units of all products sold) * Budgeted sales mix % * Budgeted CM per unit -> Do this for each product. Examines the effects of changes in quantities sold, given the standard CM and standard sales mix = Variance favourable if total actual sales volume for the organization is greater than the standard Or = (Actual volume at budget mix - Budgeted Volume) * Budgeted CM Actual units at actual sales mix and standard CM-CM Sales Mix Variance-Actual units at standard sales mix and standard CM-CM Sales Quantity Variance-Standard units sold at standard sales mix and standard CM CM Sales Volume Variance = CM Sales Mix Variance + CM Sales Quantity Variance

6 Market-Share and Market-Size Variances Market-share Variance = Actual market size in units * (Actual market share % - Budgeted market share %) * Budgeted average CM per unit F if positive Market-size Variance = (Actual market size in units - Budgeted market size in units) * Budgeted market share % * Budgeted average CM per unit F if positive Key From Questions (11.22, 11.25, 11.31, 11.35, 11.36) FO Variances, Solve for Unknown Clinic charges patients at $40 per hour. The rate is based on the assumption of 6,000 patient hours monthly, assuming each patient requires 30 minutes. During September, 11,000 patients were seen, $248,000 FO costs allocated to patients and FO spending variance $24,000 Unfavourable. a) Actual Patient Hours = $248,000 / $40 = 6200 patient hours b) Budgeted Fixed Cost = 6,000 SQ * $40 SP = $240,000 c) Production Volume Variance = (Estimated Volume of Allocation Base - Standard Volume of Allocation Base for Actual Output) * Standard FO Allocation Rate = {6,000 patient hours - (0.5 hours * 11,000 actual patients)} * $40 = $20,000 U because actual volume is less than estimated volume. d) Actual FO Cost FO Spending Variance = Actual FO Cost - Estimated FO Cost 24,000 U = X - (6,000 standard patient hours * $40 standard rate) 24,000 U = X - $240,000 X = $264,000 Actual FO Cost Variable and Fixed Overhead Variances, Journal Entries Allocates overhead on the basis of DL hours. 2 DL hours are required for 1 unit of product. Planned production is 9,000 units. MO is estimated at $135,000 (20% Fixed, 80% Variable). 17,200 actual hours worked during the period resulted in the actual production of 8,500 units. Actual VO = $108,500; Actual FO = $28,000 Standard FO Cost = $135,000 * 20% = $27,000 Standard VO Cost = $135,000 * 80% = $108,000 Standard FO Allocation Rate = $27,000 / (9,000 units * 2 DL hours) = $1.50 per DL hour Standard VO Allocation Rate = $108,000 / (9,000 units * 2 DL hours) = $6.00 per DL hour A) VO Spending Variance: = (AR-SR) * AQ where AR = $108,500 / 17,200 hours = $ per hour = ( ) * 17,200 actual DL hours = $5,300 U because actual rate is higher than standard rate = higher costs

7 B) VO Efficiency (Quantity) Variance = (Actual volume of allocation base - Standard volume of allocation base for actual output) * Standard VO allocation rate = (17,200 - (8,500 * 2)) * $6 per DL hour = $1,200 U because produced more than standard = higher costs C) FO Spending (Budget) Variance = Actual FO - Budgeted FO = $28,000 - $27,000 = $1,000 U because we spent more than budgeted. D) FO Production Volume Variance = (Estimated Volume of Allocation Base - Standard Volume of Allocation Base for Actual Output) * Standard FO Allocation Rate = [(9,000 standard *2) - (8,500 actual * 2)] * $1.50 = $1,500 U because we produced less than standard E) Journal Entries to Close the VO and FO Variances Actual VO Costs(Given 108,500)-Spending Variance(5300 U)-Actual Allocation Base at Standard Rate(17,200 * $6 = $103,200)-Efficiency Variance(1200 U)-Standard allocation base at Standard Rate(8,500 * 2 DL * $6 = 102,000) DR VO Cost Control (actual cost) $108,500 CR A/P $108,500 DR Work-In-Process Inventory (8,500 actual * 2 standard DL hours * $6 standard rate) $102,000 CR VO Cost Control $102,000 DR VO Spending Variance (U) $5,300 DR VO Efficiency Variance (U) $1,200 CR VO Cost Control $6,500 Actual FO Costs($28,000)-Spending Variance(1000 U)-Estimated Allocation Base at Standard Rate(135,000 estimated *20%=$27,000)-Production Volume Variance (1500 U)-Standard/Actual Allocation Base at Standard Rate (8,500 actual * 2 DL standard * $1.5 SR = $25,500) DR FO Cost Control $28,000 CR A/P $28,000 DR Work-in-Process Inventory $25,500 CR FO Cost Control $25,500 DR FO Spending Variance (U) $1,000 DR FO Production Volume Variance (U) $1,500 CR FO Cost Control $2,500 DR Ending WIP, Finished Goods, COGS (Prorated based on Ending Balances) $9,000 CR VO Spending Variance (U) $5,300 CR VO Efficiency Variance (U) $1,200 CR FO Spending Variance (U) $1,000

8 CR FO Production Volume (U) $1, Profit-Related Variances A) Revenue Budget Variance = Actual Revenues $53,200 - Standard Revenues $60,000 = $6,800 U B) Sales Price Variance = (Actual Price - Standard Price ) * Actual Volume Sold where AP = $53,200/3,800 units = $14 per unit and SP = $60,000/4,000 units = $15 per unit = ($14-$15)*3,800 = $3,800 U C) Revenues Sales Quantity Variance = (Actual Volume Sold - Standard Volume Sold) * Standard Price = (3,800-4,000) * $15 = $3,000 U D) Contribution Margin Sales Quantity Variance = (Actual Volume Sold - Standard Volume Sold) * Standard CM per unit where Standard CM = Sales $60,000 - Variable Manufacturing $16,000 - Variable S&A $8,000 = $36,000 where Standard CM per unit = $36,000 / 4,000 = $9 per unit = (3,800-4,000) * $9 = $1,800 U Chapter 13: Pricing Decisions Pricing methods must consider production costs, market factors and customer expectations. Cost-based Prices: A cost base is selected and a mark-up rate is calculated; ignored consumer demand 1) Variable Cost Approach Mark-up % = (Desired return on investment + FC) / (VC per unit * Annual Volume) Selling Price = VC * (1 + Mark-up %) 2) Absorption Cost Approach (both variable and fixed) Mark-up % = (Desired return on investment + Selling & Admin Costs) / (Absorption Cost per unit * Annual Volume) Selling Price = Absorption Costs * (1 + Mark-up %) 3) Total Cost Approach Mark-up % = Desired return on investment / (Total Cost per Unit * Annual Volume) Selling Price = Total Costs * (1+Mark-up %) Labour Rate = [(Labour Costs + S&A and Overhead Costs) / Labour Hours] + Profit Materials Loading Charge = (Purchasing, receiving, handling and storing parts costs / Invoice costs) + Profit Margin % Market-based Prices: takes consumer demand into consideration Price Elasticity: sensitivity of sales to price increases; When small increases in price result in large decreases in demand, the demand for the product is elastic. Elasticity = ln(1+%change in Q sold) / ln(1+% change in P) Profit-maximizing price = [Elasticity / (Elasticity + 1)] * VC

ACC406 Tip Sheet. Direct Labour (DL): labour that is directly attributable to the goods and service that are being produced by a firm.

ACC406 Tip Sheet. Direct Labour (DL): labour that is directly attributable to the goods and service that are being produced by a firm. ACC406 Tip Sheet Definitions Direct Cost: a cost that can be easily allocated to a certain object. Variable Cost (VC): a cost that changes in direct relation to output (output increases VC increases) Fixed