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Final

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Accounting & Financial Management

AFM 481

Grant Russell

Fall

Description

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 DM purchased at actual price (AP * AQ)
= (Actual Price - Standard Price ) * Actual - Actual DM purchased at standard price (SP * AQ)
Quantity Purchased = Favourable if actual price lower than standard
DM Efficiency Variance = (AQ-SQ) * SP Actual DMs used/produced at standard price (AQ * SP)
= (Actual quantity for actual output - - Standard DMs used at standard price (SQ * SP)
Standard quantity for actual output) * = Favourable if actual quantity lower than standard Standard price
Actual DMs purchased at actual price-DM Actual DMs used at standard price-DM Efficiency
Price Variance-Actual DMs purchased at Variance-Standard DMs required at standard price
standard price
Journal Entries for DM Price Variance Journal Entries for DM Efficiency Variance
DR Raw Materials Inventory (SP*AQ) DR Work-in-process Inventory (SP*SQ)
DR DM Price Variance (U) CR DM Efficiency Variance (F)
CR A/P (AP*AQ) CR Raw Materials Inventory (SP*AQ)
Direct Labour Variances
DL Price Variance = (AP-SP) * AQ Actual DL hours used at actual price (AP * AQ)
= (Actual labour price per hour - Standard - Actual DL hours used at standard price (SP * AQ)
labour price per hour) * Actual hours used = Favourable if actual labour price per hour lower than
standard
DM Efficiency Variance = (AQ-SQ) * SP 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 Material Yield Variance is the difference between
= (Actual total units of input used - actual and budgeted total quantity of inputs for actual
Budgeted total units of inputs used) * output achieved, multiplied by budgeted prices
Budgeted input mix % * Budgeted price per (budgeted mix is held constant)
input unit
Yield: What's the impact of changing efficiency while
the mix is constant?
Mix Variance Material Mix Variance is the difference between
= (Actual input mix % - Budgeted input actual and budgeted mix for the total quantity of inputs
mix %) * Actual total inputs used * Budgeted used, multiplied by budgeted prices (total quantity of
price per input unit inputs used is held constant)
Mix: If I held my efficiency constant, what's the impact
of changing the mix?
E.g. Budgeted labour mix at budgeted Yield Variance = $1,500 F
prices for actual output achieved: Skilled: (5,000-5,100) * (3,825/5,100) * $16 = 1200 F
3,825 skilled hours at $16 per hour Unskilled: (5,000-5,100) * (1,275/5,100) * $12 = 300 F
1,275 unskilled hours at $12 per hour
5100 total hours Mix Variance = $1,000 F
Skilled: (4000/5000 - 3825/5100) * 5000 * $16= 4000F
Actual results: Unskilled: (1000/5000-1275/5100) * 5000 * $12= 3000 4,000 skilled hours at $19 per hour 3000U
1,000 unskilled hours at $9 per hour
5,000 total hours
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 costs
= Actual VO $ - (Actual Volume * Standard - Actual allocation base at standard rate
Rate) = Favourable if actual VO costs less than expected,
= (AR-SR) * AQ given the actual volume of output
VO Efficiency Variance Flexible Budget for VO cost
= (Actual volume of allocation base - Standard - Standard amount of VO for the actual volume
volume of allocation base for actual output) *= Favourable if actual volume less than expected,
Standard VO allocation rate 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 Favourable if actual less than estimated
= Actual FO costs - Estimated FO costs Where Estimated FO costs = Estimated
allocation base at standard rate
FO Production Volume Variance Standard amount of FO cost allocated to products
= (Estimated Volume of Allocation Base - - Estimated FO costs
Standard Volume of Allocation Base for Actual
Output) * Standard FO Allocation Rate If actual volumes of allocation base exceed
where Standard FO Allocation Rate = normal/estimated volumes
Estimated FO / Estimated Volume 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 the

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