ch 10, 11, 12 notes.docx

6 Pages
Unlock Document

University of Toronto St. George
Rotman Commerce
Michael Khan

CHAPTER 10: Standard Costs and Overhead Analysis Management by Exception – A system in which standards are set for operating activities which are periodically compared to actual results. Standard Cost Card – A detailed listing of the standard amounts of materials, labour, and overhead that should go into a unit of product, multiplied by the standard price for each. Setting Standard Costs: Ideal Standards – those that can be attained only under the Best circumstances. Few firms use these, because large variances can be normal and it discourages workers. Practical Standards – tight but attainable, which allow for machine downtime and employee rest. It can also be used to forecast cash flows and plan inventory.  Standard Price per Unit – the price for a single unit of materials that includes allowances for quality, quantitiy, shipping, and net of any other discounts.  Standard Qty per unit – the amount of material going into each unit of finished product, accounting for unavoidable waste, spoilage, an dohter inefficiencies.  For example, 3 kg per unit x $4/unit = $12 per unit of finished goods  Same for standard rate per hour and labour hours – includes everything! Variable Manufacturing Overhead The major distinction between standards and budgets is that standard is a unit amount, while a budget is a total amount. VARIANCE ANALYSIS The reason for separating standards into price and qty is that different managers are responsible for buying and using inputs. E.g. purchasing and production manager. A variance is the difference between standard prices and quantities and actual prices and quantities. Materials Price Variance = (AQ x AP) – (AQ x SP) = AQ(AP – SP) Materials Qty Variance = SP(AQ – SQ) Variable Overhead Spending Variance = AH(AR – SR) in terms of rates Useful when the cost driver is the number of labour or machine hours. Variable Overhead Efficiency Variance = SR(AH-SH) in terms of hours Overhead Rates and Fixed OH Analysis Predetermined OH rate = OH from the flexible budget at the denominator level of activity/denominator level of activity. Budget Variance – the difference between actual fixed OH costs and budgeted fixed OH costs in the flexible budget. Volume Variance – a measure of utilization of plant facilities. Fixed portion of predetermined OH rate x (denominator hours – standard hours allowed) Advantages of Standard Costs  Key element in management by exception; managers are alerted whenever costs fall significantly outside standards, and helps them focus on important issues  Standards that are viewed as reasonable by employees can promote economy and efficiency, as well as benchmarks  It can simplify bookkeeping because they don’t have to record actual costs  It fits naturally with an integrated system of responsibility accounting. It establishes what costs should be, who is responsible, and whether actual costs are under control Problems with Standard Costs  Since standard cost variance reports are released days or weeks after the end of the month, the information may be outdated  If managers use variance reports to lay blame, morale might suffer. Workers may cover up unfavourable variances by rushing work and omitting quality  Output in many companies is not labour-paced, and direct labour may not be variable. Since these assumptions are made in the labour qty and efficiency variances, there can be inaccuracies  IN some cases, favourable variances, such as less material used, is worse than unfavourable. For example at Harvey’s, less meat may mean a dissatisfied customer  There can be a tendency to emphasize meeting the standards instead of improving quality and satisfaction. This can be reduced by using performance measures that focus on other objectives CHAPTER 11: Reporting for Control Decentralized Organization – decision making is spread throughout the org, rather than being confined to a few top executives. It requires segment reporting to permit an alysis and evaluation of segment managers’ decisions. Responsibility Centre – part of an org whose manager has control over and is accountable for cost, profit, or investments. Cost Centre – a segment whose manager has control over costs, but not revenue or investment. Accounting and finance depts. Are cost centres, as well as manufacturing facilities. Profit Centre – manager has control over both cost and revenue, for example, a manager of a resort. He is evaluated by comparing actual profits to budgeted profit. Investment Centre – manager has control over cost, revenue, and investments, such as the CEO of GM or the president of an operations division. Transfer Pricing This is the price charged when one division or segment provides goods or services to another segment. Although one department stands to gain over another, the overall profit of the company stays the same. Three common approaches to set transfer prices are: 1. Allow the managers involved in the transfer to negotiate 2. Set transfer prices at cost using either variable or full absorption cost 3. Set transfer prices at the market price The FUNDAMENTAL OBJECTIVE in setting transfer prices is to motivate managers to act in the best interests of the OVERALL COMPANY. Suboptimization occurs when they do not. 1. Negotiated Transfer Prices – advantageous because it preserves the autonomy of the divisions and consistent with decentralization. The managers of divisions are likely to have much better info about the potential costs and benefits of the transfer. It will fall in the range of acceptable transfer prices set by the lowest they will sell and highest they will pay. Both divisions must be profitable. Transfer Price = Variable Cost per Unit + Total CM on lost sales/number of units transferred 2. Transfers to the Selling Division at Cost – Although it’s easy to apply, there are disadvantages. It can lead to suboptimization because there could be cheaper suppliers elsewhere if the full cost was charged. Also, the selling division would never profit for any internal transfer. They do not provide incentives to control costs, if the costs of one division is simply passed on to the next. 3. Transfers at Market Price – This approach is designed for situations in which there is an intermediate market for the transferred product or service. If this is set, the manager would not lose anything on the transfer, because there is no greater opportunity cost of selling it elsewhere. Difficulties arise when there is idle capacity. When the purchaser buys the ingredient at a higher market price, it can lead to inc orrect pricing decisions. Divisional Autonomy and Suboptimization – basically top management should decentralize and permit more decision making power to sub-managers, since they know more details anyway. However, some managers might suboptimize and act in their departments best interests in
More Less

Related notes for RSM222H1

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.