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CIMA P1 > A. Cost Accounting for decision and control > Flashcards

A. Cost Accounting for decision and control Flashcards

1
Q

What is the definition of management accounting?

A

‘the application of the principles of accounting and financial management

  • to create, protect, preserve and increase value
  • for the stakeholders of for-profit enterprises in the public and private sectors’
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2
Q

What is the definition of cost accounting?

A
  • the gathering of cost information and its attachment to cost objects, the establishment of budgets, standard costs and actual costs of operations, processes, activities or products
  • analysis of variances, profitability or the social use of funds
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3
Q

Who makes operational decisions?

A

mainly low level managers who focus on day-to-day resource management

  • where to employ staff, how many to use, which machines to use
  • branch manager
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4
Q

Who makes tactical decisions?

A

middle-level managers who are more medium term in scope

-training and recruitment, changing suppliers, purchasing new machines etc

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5
Q

Who makes strategic decisions?

A

highest level of management

-new product launch, new markets, acquisitions

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6
Q

What type of data does cost accounting focus on?

A

mainly quantitative data

-e.g cost of material, how long staff should spend on service

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7
Q

What type of data does management accounting add to cost accounting?

A

use qualitative data such as satisfaction, motivation

-harder to measure

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8
Q

What is financial accounting?

A
  • classification and recording of the monetary transactions of an entity
  • established concepts, principles, accounting standards and legal requirements
  • presentation, by means of SOFP, SPL, CSF during and at the end of an accounting period
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9
Q

What are the differences between management and financial accounting?

A
  • financial has legal requirements, MA is for internal use
  • statutory requirement. management is at management’s discretion
  • FA concerned with production of accounts, MA concerned with provision of info to aid decisions
  • FA governed by many rules and regulations, MA has no format
  • FA deals with historic info, MA with both historical and future
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10
Q

What are the main elements of MA?

A

planning
control
decision making

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11
Q

What is the ‘planning’ element of MA?

A
  • establish objectives and goals for organisation
  • long term actions to improve position and achieve goals
  • create BUDGET to explain impacts of actions
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12
Q

What is the ‘control’ element of MA?

A
  • monitoring, measuring, evaluating and correcting actual results to ensure that the organisation’s plans are being achieved
  • gather information on results to conduct VARIANCE analysis between budgets and actuals
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13
Q

What is the ‘decision making’ element of MA?

A

considering information that has been provided and making informed decisions

  • usually a choice between 2 alternatives
  • need reliable information
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14
Q

Why must all cost be recorded in FA and MA?

A

FA: so profit can be calculated and true and fair financial position is presented in statements
MA:to carry out planning, control and decision making

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15
Q

What are the six suggested changes the cost transformation model recommend to maintain cost competitiveness?

A
  • creating a COST CONSCIOUS culture:cost leader so cost is lower than rivals, staff motivated to reduce costs
  • understanding COST DRIVERs: investigating variables, reduction
  • managing the RISKs that come from a cost conscious culture:eg reduction in quality or customer satisfaction, management should manage risks
  • ensuring products and services are PROFITABLE:important that every product/service makes a positive contribution to overall organisational profits
  • MAXIMISING VALUE from new products: potential probability predetermined, flexible production to adapt to needs
  • consider the environmental IMPACT of products-negative impacts can add costs, damage reputation and sales

RIPVCC

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16
Q

What is a ‘cost unit’?

A

unit of product or service in relation to which costs are ascertained
-anything measurable and useful for cost control purposes

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17
Q

What is a cost centre?

A

production or service location, a function, an activity or an item of equipment for which costs are accumulated

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18
Q

What is a cost object?

A

a product, service, centre, activity, customer or distribution channel in relation to which costs are ascertained

e.g cost units or cost centres

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19
Q

What are the 3 main ways of classifying costs?

A
  • by behaviour
  • by element
  • by nature
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20
Q

What are the 3 types of cost behaviours?

A

Fixed costs: don’t change with activity level
Variable costs: change in direct proportion to activity level
Semi-variable costs:have both fixed and variable elements

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21
Q

What is the meaning of a cost behaviour?

A

the way in which costs are affected by fluctuations in the level of activity

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22
Q

What is a fixed cost?

A

cost incurred for an accounting period that, within certain output or turnover limits, tends to be unaffected by fluctuations in the levels of activity

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23
Q

What is a stepped fixed cost?

A

cost is constant up until critical level of activity where cost increases by a step
-eg expansion of rented space used

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24
Q

What is a variable cost?

A

cost that varies with a measure of activity

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25
Q

What is a curvilinear variable cost?

A

aka economies of scale

  • non-linear variable costs
  • successive unit adds less to total variable cost than previous unit
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26
Q

What is diseconomies of scale?

A

each successive unit of activity adds more to the total variable cost than the previous unit

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27
Q

What is a semi-variable cost?

A

semi-fixed, hybrid or mixed cost

  • partially affected by activity level
    e. g gas, electricity
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28
Q

What are the different groups of classifying costs according to their elements?

A

material: bought for manufacturing
labour: staff costs
expense: incurred in running business e.g rent, insurance

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29
Q

What are the different types of classifying costs according to their nature?

A

direct costs:can be traced to cost object (prime cost)
vs
indirect costs:can’t be directly traced to a single cost e.g overheads

product costs:costs only incurred if production takes place
vs
period costs:incurred due to passage of time

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30
Q

What type of costs are direct material, direct labour and absorbed production overheads?

A

product/direct costs

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31
Q

What is the aim of traditional absorption costing?

A

determine the full production cost per unit

-focus on production costs only

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32
Q

How is total cost calculated?

A

production costs + non-production costs

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33
Q

How is full production cost per unit calculated?

A

direct materials per unit + direct labour per unit + production overhead per unit

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34
Q

How is absorption rate calculated?

A

total budgeted overhead costs (allocated and apportioned) divided by budgeted production volume

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35
Q

How is over-or-under absorption calculated?

A

(budgeted overhead rate per unit x actual units) - actual overheads incurred

difference between premeditated and actual

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36
Q

What are the advantages of absorption costing?

A
  • take fixed production costs into account which are excluded from product costs usually
  • follows matching/ACCRUAL concept as inv items are matched against sales value when items are sold
  • fixed production overheads should be included in financial statements
  • analysis of over/under absorbed overheads may be useful in identifying inefficient utilisation of production resources
  • argument that in the longer term, all costs are variable and it is appropriate to try to identify overhead costs with the products or services that cause them
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37
Q

What are the disadvantages of absorption costing?

A
  • apportionment and absorption of overhead costs is arbitrary
  • profits vary with changes in production volume
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38
Q

What is marginal costing?

A

costing method which changes products or services with variable costs alone
-fixed costs are treated as period costs and are written off in total against contribution of the period

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39
Q

What is marginal cost?

A

extra cost arising as a result of producing one more unit or the cost saved as a result of producing one less unit
-good way to provide short term decision making activity

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40
Q

What does marginal cost comprise of?

A

direct material
direct labour
variable overheads

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41
Q

What are the advantages of marginal costing?

A
  • simpler costing system as costs don’t need to be apportioned and absorbed overhead
  • marginal costing reflects the behaviour of costs in relation to activity, useful in SR decision making
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42
Q

What are the disadvantages of marginal costing?

A
  • when FIXED costs are HIGH relative to variable costs and when overheads are high relative to direct costs, marginal cost of production and sales is only a small proportion of total costs. not useful for LT decision making
  • treatment of direct labour costs as a variable cost item is often UNREALISTIC
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43
Q

What is the difference between the two profits?

A

the (increase)/decrease in inventory x fixed overheads per unit

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44
Q

Profit differences in short term vs long term?

A

short term:depends on inv increase or reduction. Marginal and absorption systems give same profit when there is no change in inventories
long term: total reported profit will be the same whichever method is used

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45
Q

What are the 4 key factors of pricing decisions?

A

costs-ensure price is sufficient to cover the cost of producing the product or providing the service
competitors-monitor, set in line with goals
customers-value placed on product, price they are willing to pay
corporate objectives-link to strategic decisions

4Cs

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46
Q

What is cost-plus pricing?

A

adding a markup to the cost of the product or service in order to arrive at selling price

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47
Q

What factors can affect the mark-up pricing?

A
  • amount customers are willing to pay
  • level of competition i.e substitutes, competitors
  • organisation’s objectives
  • may be fixed mark up for company can make a specific return
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48
Q

What is full cost pricing?

A

selling price= full cost per unit x (1 + %)

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49
Q

Advantages of using full cost plus pricing?

A
  1. required profit will be made if budgeted sales volumes are achieved
  2. particularly useful method in CONTRACT COSTING industries such as building where a few large individual contracts can consume majority of the annual fixed costs and the fixed costs are low in relation to the variable costs
  3. Assuming the organisation knows its cost structures, full cost-plus is QUICK & CHEAP to employ, saving management time
  4. Full cost-plus pricing can be useful in JUSTIFYING selling prices to customers; if costs can be shown to have increase, this strengthens the case for an increase in the selling price
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50
Q

Problems with full cost plus pricing?

A
  1. Issues with SELECTION of ‘suitable’ basis on which to charge fixed costs to individual products or services
  2. Prices set on the basis of NORMAL VOLUME, and actual volume turns out to be considerable lower, overheads will not be fully recovered from sales and predicted profits may not be attainable
  3. Mark up can be very ARBITRARY and may not properly account for factors such as competition levels, how much customers are willing to pay etc
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51
Q

What is marginal cost-plus pricing?

A

selling price = marginal cost per unit x (1+mark up percentage)

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52
Q

Benefits of using marginal cost pricing?

A
  1. Just as accurate as total cost-plus pricing
  2. Knowledge of marginal cost gives management the option of pricing below total cost when times are bad, to fill total capacity
  3. Particularly useful in pricing specific one-off contracts because it only account for costs which are likely to change because of the new contract
  4. recognises the existence of scarce or limiting resources
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53
Q

Problems of marginal cost pricing?

A
  1. Like any cost based pricing method, ignores EXTERNAL factors such as levels of competition, customer attitudes
  2. Mark-up becomes even MORE ARBITRARY than that used in full cost plus as now it must also include subjective element which allows for the selling price to cover fixed costs
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54
Q

How is profit mark-up calculated?

A

targeted return on investment in the product/budgeted level of production

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55
Q

How is the targeted return on investment calculated?

A

targeted return on investment in the product= total investment in the product x targeted rate of return

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56
Q

How is the selling price calculated using a profit margin?

A

selling price = total cost / (1-required margin)

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57
Q

What impact does modern production methods have on production costs?

A

Automation means:
-more indirect overheads (insurance, dep)
-less direct labour costs
-absoption rate is not volume based anymore (AC)
=> traditional methods of costing are less useful

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58
Q

Why are traditional methods of costing less useful?

A
  • indirect OH is largest cost of production in one figure that lacks detail and is not useful in management
  • management does not know what the components are of the largest production cost (indirect OHs) they cannot implement proper cost control
  • costs are often allocated between products on the basis of direct labour hours-despite the fact that direct labour becomes smaller proportion of costs and doesn’t fairly reflect the relationship between the products and the indirect overheads
  • because costs are inappropriately or inaccurately shared between products it means that the total production cost can be wrong which can lead to poor pricing and production decisions
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59
Q

Problems with traditional absorption costing?

A

cannot calculate a ‘true’ product cost that has any valid meaning

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60
Q

Problems with marginal costing?

A

VC small in relation to FC

FC might be fixed in relation to production volume but they might vary with other activities that are not volume-related

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61
Q

What is activity based costing?

A
  • alternative approach to product costing
  • rather than absorbing OHs on a production volume basis, it firstly allocates them to cost pools before absorbing them into units using cost drivers
  • originally developed for manufacturing companies
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62
Q

What is a cost pool?

A

an activity that consumes resources and for which overhead costs are identified and allocated.
-each cost pool has a cost driver

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63
Q

What is a cost driver?

A

unit of activity that consumes resources

-factor influencing level of cost

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64
Q

How many cost drivers must be allocated to an activity?

A

Must select one through ABC analysis

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65
Q

What are the 4 different transaction categories that help to identify activities that consume overhead resources?

A

LOGICAL transactions:moving materials or people, tracking
BALANCING transactions: ensuring necessary resources are available
QUALITY transactions:ensuring quality requirements are met e.g inspections, handling customer complaints
CHANGE transactions: activities required to respond to changes in customer demand, change in design, change in production method

LBQC

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66
Q

How to identify cost drivers?

A

must be:

  • relevant:connection between the cost driver and consumption of resources for the activity
  • easy to measure:measuring the units of cost driver and identifying the products or services to which they relate needs to be a fairly easy and straightforward process
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67
Q

What are the 3 types of cost drivers?

A

TRANSACTION drivers:cost of an activity is affected by the number of times a particular action is undertaken
DURATION driver:cost of activity is not much affected by the number of times the action is taken
INTENSITY driver: efforts would be directed at determining what resources were used in the making of a product/service

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68
Q

What type of drivers are set-ups, number of power drill operations?

A

Transaction

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69
Q

What type of drivers are set-up costs not related to number of set-ups as much as time?

A

Duration

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70
Q

What are the 5 steps to calculating an ABC?

A
  1. Group production OHs into activities, according to how they re driven
  2. Identify cost drivers for each activity i.e what causes these activity costs to be incurred
  3. Calculate a cost driver rate for each activity
  4. Absorb the activity costs into the product
  5. Calculate the full production cost and/or P&L
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71
Q

Which costing method is most expensive?

A

ABC, only use when apporpriate

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72
Q

When is ABC appropriate?

A
  • indirect costs are high relative to direct costs
  • products or services are complex
  • products or services are tailored to customer specifications
  • come products or services are sold in large numbers but others are sold in small numbers
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73
Q

What are the 4 different types of overhead cost activities?

A

UNIT-level activities-where consumption of resources is very strongly correlated with the number of units produced
BATCH-level activities-where the consumption of resources is very strongly correlated with the number of batches produced
PRODUCT-level activities- where consumption of resources may be related to the existence of particular products
FACILITY level activities-where the cost cannot be related in any way to the production of any particular product line

FPUB

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74
Q

What type of overhead cost would the grounds maintenance, plant security and property taxes be?

A

facility level activity

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75
Q

What type of overhead activity cost would direct material and labour be?

A

unit-level activity

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76
Q

What is the difference in ABC and traditional costing dependent on?

A

the proportion of overhead costs that falls into each of the four categories

  • if OH is primarily unit or facility level, cost will be similar
  • if OH cost falls into batch level or product level, difference would be significant
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77
Q

What is the CIMA definition of ABC?

A

‘an approach to the costing and monitoring of activities which involves
-tracing resource consumption and costing final outputs.
Resources are assigned to activities, and activities to cost objects based on consumption estimates.
The latter utilise cost drivers to attach activity costs to outputs’

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78
Q

What are the advantages of ABC?

A
  • more accuracy
  • better cost understanding
  • fairer allocation of costs
  • better cost control
  • can be used in complex situations
  • can be applied beyond production
  • can be used in service industries
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79
Q

What are the disadvantages of ABC?

A
  • not always relevant
  • still need arbitrary cost allocations
  • need to choose appropriate drivers and activities
  • complex
  • expensive to operate
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80
Q

What are the implications of switching to ABC?

A
  • pricing can be based on more realistic cost data:better pricing decisions
  • sales strategy can be more soundly based:better at targeting
  • improved decision making:research, production and sales effort can be directed to those offering the highest sales margin
  • performance management can be improved:enhanced due to focus and can be used as basis of budgeting and longer term forward planning of oh costs
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81
Q

What are the two main types of costing systmes?

A

specific order costing

continuous costing

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82
Q

What is specific order costing?

A
  • costs of distinct products or services are collected

e. g job costing, batch costing usually associated with absorption or ABC

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83
Q

What is continuous costing?

A
  • where a series of similar products or services are produced i.e costs are averaged over the number of products or services
    e. g joint product costing
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84
Q

What are the main types of cost units?

A

individual products-use job costing
groups of diff products - batch costing used
identical products from single production process-process costing used

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85
Q

What is a joint product?

A

products produced at same time in same process before being separated for sale or further use

  • main products
    e. g carbonated drinks using common start before syrup, sweetener and malt added
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86
Q

What is the split off point?

A

when joint products are seperated

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87
Q

What costs make up joint costs?

A

total of the raw material, labour and OH costs incurred up to the initial split-off point

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88
Q

What is the difference between a joint cost and common cost?

A

joint: cost of a process that results in more than one main product; before split off point
common: cost relating to more than one product or service; wider term that doesn’t relate to process e.g overheads

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89
Q

What is a by-product?

A

incidental to main product, low saleable value

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90
Q

What are the 3 methods used to apportion joint costs?

A
  • physical measurement
  • market value at point of separation
  • net realisable value
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91
Q

What is physical measurement of joint products?

A

costs apportioned to units of output of each product

92
Q

What is market value of joint products?

A

costs apportioned on the basis of the market value of each joint product at the point of separation

93
Q

What is the NRV of joint products?

A

further costs after separation are deducted from the market value before costs are apportioned

94
Q

How are by-products accounted for?

A
  • proceeds from sale of by-product may be treated as pure profit
  • proceeds from the sale, less any handling and selling expenses may be used to reduce the cost of the main products
95
Q

What is throughput accounting and what is it based on?

A

premise: managers should aim to increase throughout while simultaneously reducing inventory and operational expense
concepts: throughput, inventory and operating expenses

96
Q

How is the throughput contribution calculated?

A

throughput contribution=revenue - direct material costs

-variable costs=direct material costs

97
Q

What is the aim of throughput accounting?

A

maximise the measure of throughput contribution

98
Q

What is conversion costs?

A

non-material costs

-direct labour, rent, equipment depreciation

99
Q

What is throughput investment?

A

money business invests to buy the things that it intends to sell and money tied up in assets so that business can make the throughput
-PPE

100
Q

What are the operating expenses of throughput?

A

all the money a business spends to produce the throughput

i. e converting inventory into throughput
- not fixed costs, semi-variable

101
Q

Profit calculation for throughput?

A

throughput contribution - operating expenses = net profit

102
Q

What is super variable costing?

A

throughput accounting is sometimes called this as it has similarities to concept of contribution

  • seen as marginal costing alternative
  • not accurate description: concept of product cost is rejected
103
Q

What makes throughput costing different to traditional costing (absorption and marginal) and ABC?

A

no attempt to charge operating expenses to products

-contribution from whole product is calculated

104
Q

What is inventory valued at?

A

purchase cost of materials and bought-in parts

-should not include other costs e.g labour

105
Q

What is the aim of throughput accounting?

A

to maximise throughput contribution earned

-operating expenses are fixed annually

106
Q

What is a bottleneck?

A

a constraint on contribution

-machine limit, lack of resources

107
Q

What are the 5 steps to resolving the bottleneck problem?

A
  1. identify the bottleneck constraint
  2. calculate the throughout contribution per unit for each product
  3. calculate the throughput contribution per unit for each bottleneck resource for each product
  4. rank the products in order of the throughput contribution per unit of the bottleneck resource
  5. allocate resources using this ranking and answer the question
108
Q

How is return per factory hour calculated?

A

TP contribution/product’s time on the bottleneck resource

109
Q

How is cost per factory hour calculated?

A

total factory cost/total time on the bottleneck resource

110
Q

How is throughput accounting ratio calculated?

A

return per factory hour/cost per factory hour

111
Q

What does the return per factory hour ratio show?

A

the value added by the org

-managers are encouraged to maximise this

112
Q

What does the cost per factory show?

A

the cost of operating the factory in terms of OHs, labour costs etc

113
Q

What does the TPAR show?

A

return from product against cost of running factory

  • aim for more than one
  • however can’t focus on return of one product vs cost of factory as a whole
114
Q

What are the criticisms of TP accounting?

A
  • concentrates on short term:resources and operating expenses are fixed here
  • more difficult to apply TPA to longer term where costs are variable
  • more suitable for profit and performance in short term
  • ABC more appropriate for measuring and controlling performance from a longer-term perspective
115
Q

What is a digital product?

A

product that is stored, delivered and consumed in an electronic format

  • games, apps, music
  • could be made of a bundle of features, which need to be costed separately
116
Q

Why are digital products difficult to cost?

A
  • 0 marginal costs and most costs are likely fixed:expensive to make but cheap to reproduce
  • no standard time or cost attributed to product
  • difficult to determine OH divers
  • timing of costs hard to pinpoint, can span over many acc periods
  • lifespan of products can vary:hard to determine cost over lifespan
  • features/functions might be shared amongst a number of products
117
Q

What is the cost structure of digital media?

A
  • high fixed, upfront (sunk)

- low marginal, cheap to reproduce

118
Q

What are some typical costs and cost patterns of digital products?

A
  • staff costs:project, product specific, upfront
  • infrastructure, platform & payment types:where app is hosted and cost of that and cost of collecting payment
  • functionality:reusable, shared
  • deign & development:shareable design elements
  • marketing:fixed market budget, pre-launch
  • IT support services & testing:for infrastructure, updates to API and fix bugs, post launch costs
  • royalty and license costs:hard to budget as sales dependent, license fees are fixed
  • inventory costs:no inv, avoids need for holding and valuation of inv
  • administrative services:good dashboard to effectively administer app, expensive to implement
119
Q

Are sunk and marginal costs considered when deciding on selling price?

A

sunk: ignored
marginal: considered

120
Q

Why is the CBA for launching new products complicated?

A
  • timing and FREQUENCY of costs will be difficult to estimate:some upfront, some ongoing and some one-off
  • some costs for SHARED functions e.g payments, digital images
  • determining BENEFITS will be complicated due to unknown lifespan of the product
121
Q

What is digital costing?

A

systems that use product designs and specifications alongside web connections to markets and suppliers to provide real time cost information on components and product parts

  • used for products with large amount of parts
  • more details on marginal, total and average product costs
122
Q

Features of digital costing systems?

A
  • gather info in real time from suppliers and marketplaces
  • built in analytics and intelligence capabilities
  • more advanced systems can make suggestions on buying behaviour
  • cope with hundreds of purchasing decisions at one time
  • more detailed breakdown of OHs and personalised cost drivers
  • can make granular decisions
123
Q

Benefits of digital costing systems?

A
  • automatic, quick and cheap comparisons lead to cost savings
  • quicker lead times and low operational costs
  • no human labour to calculate
  • better understanding of flexibility and nature of costs
  • use suggestions to achieve improves, cheaper and more efficient operations
  • easy to used and quickly understood by users
  • better knowledge of drivers and absorption of costs
  • detailed breakdowns help cost control and pricing decisions
  • better customer profitability evaluation
124
Q

What is target costing?

A

a system that is used when the selling price is less controllable so profit is dependent on meeting a TARGET COST rather than changing selling price
-work backwards from desired profit to find desired cost

125
Q

What is standard costing?

A

compare predetermined costs of products/services to actual costs incurred

126
Q

What is a standard cost?

A

the predetermined cost of a product/service

-based on either absorption costing or marginal costing

127
Q

What is a variance?

A

the difference between the standard cost and actual cost

128
Q

What is a standard?

A

‘benchmark measurement of resource usage or revenue or profit generation, set in defined conditions’

129
Q

What is a standard price?

A

expected price for selling the standard product or service

130
Q

How is standard profit per unit calculated?

A

s.p - cost in absorption costing

131
Q

What is standard contribution per unit?

A

s.p - variable costs (marginal costing)

132
Q

What are the 4 main types of standard?

A

ideal: 100% perfect condition 100% of the time, no waste
basic: long term standards, unchanged over years, shows trends
current: based on current working conditions, useful when anomalies arise
attainable: based on efficient but not perfect operating conditions, includes allowances, most popular

133
Q

Which standards motivate workers and which do not?

A

ideal: demotivate, standards may seem too perfect
basic: demotivate if they become too easy to achieve, boring
current: demotivate, not challenging as based on current
attainable: motivate as it provides realistic target

134
Q

What is variance analysis?

A

‘evaluation of performance by means of variances, whose timely reporting should maximise the opportunity for managerial action’
-process by which the total difference between actual cost and standard is broken down into its different elements

135
Q

What is a favourable variance?

A

when actuals are better than expected

136
Q

What is an adverse variance?

A

when actuals are worse than expected

137
Q

How is budgetary control different from standard costing and variance analysis?

A

Budget control

  • controlling total costs across an area of responsibility
  • more flexible and can be used across variety of activities
  • does not provide basis for measuring efficiency
  • operates outside accounting systems

SC and VA

  • unit costs
  • standardised expectations
  • provides basis for measuring efficiency
  • integrated with actual accounting systems
138
Q

What are the 3 groups of variances?

A 
sales
variable cost:
-material
-labour
-variable overhead
fixed overhead
139
Q

What is a sales variance?

A

difference between:

  • actual and standard sales prices
  • budgeted and actual sales volumes (measured in profit/contribution/revenue)
140
Q

What is a sales price variance?

A

effect on profit of a ‘change in revenue caused by the actual selling prices differing from the budgeted’

141
Q

How is sales price variance calcualted?

A

standard selling price x actual number of units sold
actual selling price x actual number of units sold
=>(actual - standard) x actual units sold
-favourable if above 0

142
Q

What is the sales volume variance?

A

measured the effect on contribution/profit of not achieving the budgeted volume of sales
-difference between actual and budgeted sales volume valued at either standard profit (ABD) or standard contribution (marginal)

143
Q

How is sales volume variance calculated?

A

actual sales volume - budgeted sales volume

-favourable is positive

144
Q

What are the 3 ways in which the variance in units can be valued?

A

standard profit per unit (absorption costing)
standard contribution per unit ( marginal costing)
standard revenue per unit (rarely used)

145
Q

How is sales volume variance contribution calculated?

A

(actual sales volume - budgeted sales volume) x standard contribution p.u
-favourable is positive

146
Q

How is sales volume variance profit calculated?

A

(actual sales volume - budgeted sales volume) x standard profit p.u
-favourable is positive

147
Q

How is sales volume variance revenue calculated?

A

(actual sales volume - budgeted sales volume) x selling price
-favourable is positive

148
Q

What are the potential causes of sales price variances?

A

1) larger discounts offered to persuade bulk buying
2) lower discounts due to strength of demand
3) effect of low-price offers due to marketing campaign
4) market conditions forcing industry wide price change

149
Q

What are the potential causes of sales volume variances?

A

1) successful/unsuccessful direct selling efforts
2) successful/unsuccessful marketing efforts
3) unexpected changed in customer needs/buying habits
4) failure to satisfy demand due to production difficulties
5) Higher demand due to a cut in selling prices, or lower demand due to an increase in sales prices

150
Q

What are the 3 types of direct material cost variances?

A

DM total variance split into:
DM price variance: paying more/less for materials
DM material usage variance:using more of less for actual output

151
Q

What is direct material total variance?

A

difference between

  • standard DM cost of the actual production
  • actual direct material cost
152
Q

How is direct material total variance calculated?

A

actual production output x (actual - standard cost)
F if negative

  • sum of DMPV and DMUV
153
Q

What is direct material price variance?

A

difference between

  • actual price of purchased material
  • their standard cost
154
Q

What is direct material usage variance?

A

measures efficiency in the use of material, by comparing standard material usage for actual production with actual material used, the difference is values at standard cost

155
Q

How is direct material price variance calculated?

A

difference between:
(standard purchase price per kg or per time (per litre for liquids)
-actual purchase price)
x actual quantity used

156
Q

How should DMPV be calculated if inv is valued at :

a) standard cost
b) actual cost

A

a) using quantity of materials purchased (eliminated variances)
b) using quantity used (variance eliminated as item is used and remaining inv is closing)

157
Q

How is direct material usage variance calculated?

A

(standard quantity for actual production
- actual quantity used)
x standard purchase price

158
Q

What are the potential causes of material price variances?

A

1) using a different supplier who is cheaper/more expensive
2) bulk buying or buying smaller quantity, losing discount
3) unexpected increase in prices charged by supplier
4) efficient/inefficient buying procedures
5) unexpected buying costs, such as high delivery charged
6) a change in material quality, resulting in either higher or lower purchase prices

159
Q

What are the potential causes of material usage variances?

A

1) a higher than/lower than expected rate of scrap or waste
2) using a difference quality or material affecting wastage
3) defective materials
4) better quality control
5) more efficient work procedures, resulting in better material usage rates
6) changing the labour mix which impacts on wastage of different types of labour make more/less errors
7) changing the materials mix to obtain a more expensive/less expensive mix than the standard

160
Q

What are the 4 types of direct labour cost variances?

A

DL total variance split into

  • DL labour rate variance
  • DL efficiency variance

Idle time variance

161
Q

What is direct labour total variance?

A

difference between:
standard DL cost of actual production
actual cost of DL

162
Q

How is direct labour total variance calculated?

A

actual quantity of output x (standard - actual cost)

=> F if positive

163
Q

What is direct labour rate variance?

A

paying more or less than expected per hr

164
Q

What is direct labour efficiency variance?

A

using less or more hours p.u than expected

165
Q

How is direct labour rate variance calculated?

A

actual hours paid for x (standard - actual rate p.hr)

=> F if positive

166
Q

How is direct labour efficiency variance calculated?

A

standard hourly rate x (standard hours for actual prod - actual hrs worked)
=> F if positive

167
Q

Possible causes of labour rate variances?

A

1) an unexpected increase in basic rates of pay
2) payments of bonuses, where these are recorded as direct labour costs
3) using labour that is more or less experienced (and so more or less expensive) than the ‘standard’
4) a change in the composition of the work force, and so a change in average rates of pay

168
Q

Possible causes of labour efficiency variances?

A

1) taking more or less time than expected to complete work, due to inefficient or efficient working
2) using labour that is more or less experienced than the ‘standard’
3) a change in the composition or mix of the work force, and so a change in the level of efficiency
4) improved working methods
5) industrial action by the work force : ‘working to rule’
6) poor supervision
7) improvements in efficiency due to an unexpected ‘learning effect’ amongst the work force
8) unexpected lost time due to production bottlenecks and resource shortages

169
Q

What measure is used to calculate variable production overheads?

A

labour hours is used as VP OHs normally vary with them

170
Q

How is variable production overhead total variance calculated?

A

(standard -actual cost) x actual quantity of output

=>positive means F

171
Q

How can variable production overhead total variance be split?

A

variable production overhead expenditure variance: paying more or less per hour for V OH
variable production overhead efficiency variance:using more or less variable overheads per unit than expected

172
Q

What is the variable production overhead total variance defined?

A

measures the difference between the variable overhead that should be used for actual output and variable production overhead actually used

173
Q

How is variable production overhead expenditure variance calculated?

A

(standard cost - actual cost) x number of hours worked

174
Q

How is variable production overhead efficiency variance calculated?

A

[(standard hours - actual hours) x actual output produced]

x standard variable OH rate

175
Q

Does idle time affect variable production overhead expenditure variance?

A

yes, as it is assumed that variable production OH is incurred during active hours only

176
Q

What is fixed production overhead total variance?

A

difference between standard fixed production oH cost absorbed by actual production and actual fixed production overhead incurred

177
Q

How is fixed production overhead total variance calculated?

A

overheads absorbed as actual output

less actual fixed overhead incurred

178
Q

Are under/over absorptions favourable or adverse?

A

under-adverse

over-favourable

179
Q

What is under/over absorption?

A

difference between the overheads incurred and the overheads absorbed

180
Q

Why does under/over absorption occur?

A

the OAR is based upon two predictions - budgeted fixed overhead and the budgeted level of activity
-if either is wrong, there will be over/under absorption and a fixed overhead total variance

181
Q

How is is fixed production overhead expenditure variance calculated?

A

budgeted fixed OH - actual fixed production overhead incurred

182
Q

How is fixed production overhead volume variance calculated?

A

(actual - budgeted output) x standard fixed overhead rate per unit

183
Q

Under what costing system does fixed overhead volume variance not exist?

A

marginal costing

184
Q

What is the fixed overhead absorption based on in absorption costing systems?

A

hours

185
Q

What does the fixed overhead capacity variance measure?

A

whether more or fewer hours than budgeted are worked:

actual hours x FOAR per hour - budgeted expenditure

186
Q

What does the fixed overhead efficiency variance measure?

A

whether more or less time than standard was used to produce output:
standard hours for actual production x FOAR per hour
less actual hours x FOAR per hour

187
Q

Why is there no fixed production overhead volume variance in marginal costing?

A

in marginal costing fixed production overheads are not absorbed into the cost of production

188
Q

What is the only fixed production overhead variance in marginal costing?

A

expenditure variance

-difference between actual and budgeted fixed production overhead expenditure

189
Q

What are some potential causes of fixed overhead variances?

A

1) fixed overhead expenditure adverse variances are caused by SPENDING in excess of the budget
2) fixed overhead volume variance (therefore capacity and efficiency variance) is caused by changes in PRODUCTION VOLUME (which might be caused by changed in sales volumes or change in productivity)

190
Q

What are some potential causes of variable overhead variances?

A

3) variable production overhead expenditure variance are often caused by changes in MACHINE RUNNING COSTS
4) variable production overhead efficiency variances affected by similar issued to those for DIRECT LABOUR EFFICIENCY VARIANCES

191
Q

How can variances be inter-related?

A

if explanation for one variance also explains another

-might need to look at several variances together

192
Q

What are some examples of interdependence between variables?

A
  • cheaper materials > favourable material price variance but might increase wastage and decrease labour productivity
  • more experienced labour might decrease labour rate variance but improve labour rate efficiency
  • changing composition of team might result in cheaper labour mix but worse productivity
  • workers trying to improve productivity to win bonus might use materials wastefully to save time
  • cutting sales prices might result in higher sales demand from customers
193
Q

What is an operating statement?

A

top level variance report, reconciling budgeted to actual profit
-starts with expected figure and ends with actual

194
Q

How often are variances reported?

A

as soon as possible at end of each control period

  • top level reconciliation for senior management
  • variance reports for managers
195
Q

Which type of variances are ABC more likely to impact?

A

overhead variances

-assumed that overheads are essentially variable

196
Q

What is the aim of sales mix and quantity variances?

A

when an organisation wants to determine impact of multiple related products on profits
-split of sales volume variance

197
Q

What are the 3 steps involved in calculating the sales mix and quantity variances?

A

Step 1. the standard mix
Step 2. valuation
Step 3. sales quantity variance

198
Q

What is the standard mix?

A

what actual sales for each product would have been if the sales proportions remained unchanged
-compare to actual mix

199
Q

What are the 2 ways of valuation of the change in mix?

A

int individual units method

the weighted average contribution method

200
Q

What is the individual units method?

A

each product’s variance x standard margin(standard contribution per unit/standard profit per unit)

201
Q

What does the individual units method show regarding profits?

A

impact of changes on profit, by product

  • shows how customers switch from one to another
  • if favourable, can replicate change
  • if adverse, can look to counteract or switch
202
Q

What is the weighted average contribution method?

A
  • calculate weighted average contribution (total contribution/total budgeted units)
  • deduct weighted average contribution from contribution per unit in each product
203
Q

Which valuation of the standard mix is seen as more superior and why?

A

weighted average method:

  • easier to see impact of each individual product when measured against average price
  • better variances for control purposes
204
Q

What does the sales quantity variance consider and ignore?

A

ignore: change in mix
considers: impact of profit from selling more or less units than was bidgeted

205
Q

What is the weighted average method of calculating sales quantity variance?

A

in total using the weighted average contribution:

  • calculate weighted average contribution
  • multiply by (actual - budgeted sales)
206
Q

What is the sales quantity variance of individual units contribution values by?

A

by product

-each variance (between standard mix units and budgeted units ) multiplied by contribution

207
Q

Which valuations of the sales quantity variance is seen as more superior and why?

A

by product using the individual units contribution
-shows impact on profits for the change in volume of each type of product (assuming mix between products had remained unchanged)

208
Q

Benefits of mix and quantity variance?

A
  • sales mix variance can allow identification of trends in sales of individual elements of its total product sales
  • sales quantity variance can be used to show changes in the size of the market/change in the market share for an organisation
  • sales mix variance may indicate future directions for sales strategies-organisation would aim to repeat F variances by identifying their causes
  • sales mix variance can be used to gauge the success or failure of new sales campaigns
  • when sales volume is split between mix and quantity, can see who is responsible for different elements. Sales quantity variance indicates whether the sales team has performed well and mix variance will provide information on success of those responsible for applying the mix of sales
209
Q

Issues of mix and quantity variances?

A
  • like any variance, must consider controllability of the variance before making performance review decisions based on the output. Also need to consider effects of any changes in strategy e.g targeting
  • variance should be considered as a whole rather than individual basis due to interdependence e,g effect of production on sales volume variances
  • sales mix variance only relevant if products have some sort of relationship between them e.g complementary, different versions, substitutes
  • can be hard to apply these techniques in organisation with broad product ranges. Hard to determine which products are complementary, substitutes etc and often computer based techniques are needed to perform the detailed calculations
210
Q

What is a planning variance?

A

part of the total variance caused by an inappropriate original (ex-ante) standard
-errors in setting original standard

211
Q

What is a operational variance?

A

part of the variance attributable to decisions taken within the business that has caused a change between the revised (ex-ante) standard and the actual results
-operating performance

212
Q

What is ex-ante?

A

before event

-what forecasts are usually based on

213
Q

What is ex post?

A

after the event

-setting standards in hindsight

214
Q

Are planning and operational variances controllable?

A

planning: uncontrollable
operational: controllable

215
Q

What are the causes of operational variances?

A

operational factors: materials price/usage variances, labour rate and efficiency variances, variable OH expenditure and efficiency variances, fixed OH expenditure variances and sales variances

216
Q

How is the operational variance calculated?

A

revised budget vs actuals

217
Q

How is the planning variance calculated?

A

budget vs revised budget

218
Q

Why would managers like to separate total variance?

A

to see what is operational and what is planning related (uncontrollable) thereby giving a measure of operational efficiency

219
Q

What are some causes of planning variances?

A

faulty standard-setting

-responsibility for this lies with senior rather than operational management

220
Q

What are some good reasons for a change in the standard?

A
  • change in one of the main materials used to make a product/service
  • unexpected increase in the price of materials due to a rapid increase in world market prices e.g oil price
  • a change in working methods and procedures that alters the expected direct labour time or a product/service
  • an unexpected change in the rate of pay to the work force
221
Q

What happens if there is a difference between the standards in 2+ items?

A
  • operational variance are calculated against most up-to-date revision
  • total planning variance will be the difference between the original standard or budget and the most up-to-date revision. can be further divided between each individual planning error
222
Q

Benefits of planning variances?

A
  • more useful
  • up-to-date
  • better for motivation
  • assesses planning
223
Q

problems of planning variances?

A
  • subjective
  • time consuming
  • can be manipulated
  • can cause conflict
224
Q

how do you work backwards to calculate operating variances?

A

rearrange standard cost data and variances

-pull together standard cost per unit

225
Q

What is the prime cost?

A

total of all direct costs

226
Q

When is marginal costing and throughput costing equal?

A

When direct labour is a fixed cost, not variable

227
Q

Are idle time variances always adverse?

A

yes unless there is an allowance

e.g managers allow for seasonal variance in demand

CIMA P1 (4 decks)

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