Ch 11 Summary.docx

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University of Waterloo
Accounting & Financial Management
AFM 481
Grant Russell

Chapter 11 Standard Costs and Variance Analysis Variance Analysis and the Strategic management Process Variance Analysis - Calculate variances and invest the causes - Use info for decision-making (need to know what caused the variance too!) - Diagnostic control system – mgmt. to monitor variances and determine if operations are going as planned; decide what to do to bring operations back under control (if needed) - Only use variable that are key to success Investigating Variances - Decide if the variance is large enough or consistent enough to justify investigation - Important if the variance is larger than the threshold (absolute amount of %) - Consistent trend in variances → investigate what the causes are so that they can be managed Conclusions and Actions - Use reasons for variances to draw conclusions and determine what action to take - Revise the budget or improve efficiency - Or error in accounting records – i.e. the variance is not actually a variance Separating Variances into Components - Identify categories to separate variances to produce more useful information - Revenue, cost variances - Motivate managers & employees by using variances as a basis for evaluation Standard Costs - The cost managers expect to incur to produces goods/services as planned - Key assumptions: volume, efficiency, price & quality - Std cost is the sum of std costs of resources used (DM, DL, fixed and var ohead) Standard Costing System and Variances - Inventory and COGS are recorded at std costs (not actual) – actual costs are recorded in cash disbursement, payroll, purchases, fixed assets and other components of accounting - Std cost variance = difference between std cost and actual cost - Std costing system usually motivates greater profitability Standard Cost Categories - Nature of goods/services - Cost accounting system used - Costs that managers consider important - Cost-benefit trade-off for monitoring individual costs Developing Standard Costs - Set the price of DM and the quantity needed to produce a unit - Use most recent year’s data, incorporate trends, etc Direct Cost Variances - Price variance: the diff between std and actual prices paid - Difference between actual price × actual quantity vs. std price × actual quantity - DM price variance = (actual $ - std $) × Q purchased - DL price variance = (actual $/hour – std $/hour) × # of hours - Efficiency variance: how economically direct resources were used - Difference between std price × actual quantity and std price × std quantity - DM efficiency variance = (AQ – SQ) × SP - DL efficiency variance = (AH – SH) × SP - Price variance + effiency variance = total variance Journal Entries for Direct Cost and Variances - Differences are recorded in variance accounts Analyzing Direct Cost Variance Information - Calculate the variances and reasons for variances - Break into: price and efficiency Identifying Reasons for Direct Cost Variances - Combined direct cost variance = DM price variance + DM efficiency variance - Reasons for price variances o Changes in prices paid for materials (quality, quantity – discounts, supplier) o Change in wages (union contract, training, minimum wage) o Error in acctg records - Reasons for efficiency variances o Spoilage or theft for materials o Employee turnover - Compare the variance with the expected amount of pay increase – determine if pa increase explains the unfavourable variance Recognizing Resource and Quality Trade-Offs - Trade-offs between price & efficiency - Need to consider trade-offs when analyzing variances Overhead Variances -
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