D Theory (Variance Intepretation) Flashcards
(127 cards)
1
Q
When the materials may be used in different proportions to the standard?
A
Mix variance
2
Q
The standard may assume that there is some level of standard loss. The actual loss may be more or less than the standard loss?
A
Yield variance
3
Q
What is meant by a favourable mix variance?
A
Actual mix is cheaper than the standard mix
4
Q
Issue with a favourable mix variance?
A
While a cheaper mix saves money, it may imply poorer quality of the final product
5
Q
What is meant by a favourable yield variance?
A
Actual output exceeds the output expected for the given input units
6
Q
Advantages of yield variance?
A
Less spillage due to production methods or less waste due to quality of materials used as inputs
7
Q
Issue with material price variance? (manager)
A
May be outside the control of the production manager
8
Q
If a manager is able to obtain cheaper inputs from an alternative supplier but the materials are of lower quality?
A
Favourable price variance but unfavourable yield variance
9
Q
Why must the mix and yield variance be used together?
A
If the mix and yield variance added together give an overall favourable variance, that may be considered good from a financial perspective
10
Q
Issue with a favourable mix variance and sales volume variance?
A
Sales volume variance will be adverse and this will lead to a fall in sales
11
Q
Why managers move away from standard mix (materials)
A
The price of materials may change away from the standard, so one becomes relatively more or less expensive
12
Q
Why managers move away from standard mix (measurements)
A
Inaccurate measurement of inputs due to carelessness or mistake
13
Q
Why managers move away from standard mix (cheaper)
A
Intentionally using a cheaper mix to get a favourable mix variance
14
Q
What does sales mix variance compare?
A
The actual quantities of goods sold to the actual quantities sold at the standard mix
15
Q
What does sales quantity variance compare?
A
Compares the actual quantity (units) of goods sold in the standard mix with the budgeted quantity sold in the standard mix
16
Q
What is an adverse sales mix variance mean?
A
Implies substitution of one product for another, rather than a reduction in the overall quantity of products sold
17
Q
What does the sales quantity variance show?
A
The actual quantity of goods sold against the budget
18
Q
Cause of an adverse sales quantity variance (economic)
A
Poor economic conditions or a new competitor
19
Q
Effect of a fall in selling prices
A
Adverse price variance but due to increased demand, volume variance is favourable
20
Q
Consequence of customers switching to cheaper ranges or brands as these may be considered better value?
A
Lead to a favourable quantity variance if “better value” products attract customers from other products
21
Q
Budgeting and revisions (managers)?
A
Management should not revise budgets to hide inefficiencies and senior management should approve appropriate revisions
22
Q
What is meant by a planning variance?
A
Arises when an original budget is revised with the benefit of hindsight
23
Q
What is meant by an operational variance?
A
Arises when actual performance differs from a revised standard
24
Q
When should management consider revising standards for expected performance?
A
If the actual environment differs from what was anticipated when the original standard was set OR standard is generally unrealistic
25
Is it favourable or adverse if actual price is less than revised standard price?
Favourable
26
Is it favourable or adverse if the revised standard price is higher than the original standard price?
Adverse
27
Is it favourable or adverse if revised standard quantity is greater than the original standard quantity?
Adverse
28
Learning curve effect on variances?
Standard costs based on the cost of producing the first unit of a product may quickly become out of date
29
What is meant by a market size variance?
The size of the market was different from expected due to a change in the external environment (e.g. economic growth)
30
What is meant by a market share variance?
Arises because the share of that market was different from the budget
31
Advantages of planning and operational variances? (unavoidable)
Distinguishes between those variances caused by bad planning or unavoidable factors and those resulting from operating factors
32
Advantages of planning and operational variances? (adverse)
Adverse operating variances provide feedback control on processes which need correcting
33
Advantages of planning and operational variances? (conditions)
Planning variances can be used to update standards to current conditions
34
Advantages of planning and operational variances? (motivation)
Motivation may improve if managers know they will only be assessed on variances under their control
35
Disadvantages of planning and operational variances? (market)
Extra data requirements (e.g. market size)
36
Disadvantages of planning and operational variances? (time)
More time-consuming
37
Disadvantages of planning and operational variances? (external)
Managers may claim that all adverse variances have external causes and all favourable variances have internal causes
38
Disadvantages of planning and operational variances? (standard)
Operational managers may claim that all adverse variances are due to poor standard setting at the planning stage
39
What might managers do to mitigate effects of an adverse variance?
Revising their budgets and standards
40
Benefit of a challenging target for variance analysis?
A challenging target can motivate managers and staff to work harder, compared with having no target
41
Disadvantage of a challenging target for variance analysis? (insensitivity)
Managers use variance information insensitively, morale may suffer
42
Disadvantage of a challenging target for variance analysis? (preparation)
Accurate preparation of standards can be difficult
43
Labour quantity standards and efficiency variances assumption (output)
Output increases if workers speed up but this is likely due to improved machinary
44
A favourable materials price variance may cause?
An adverse materials usage variance may have been caused by cheaper materials
45
How should managers be judged on variances?
Only be judged on variances that are within their control
46
Who is responsibile for materials price variance?
The purchasing department
47
Who is responsibile for labour rate variance?
Who decides how much to pay particular workers
48
Who is responsibile for labour efficiency variance?
Responsibility of the person who supervises the workers
49
Who is responsibile for material usage variance?
Associated with a production manager. Can also be down to purchase manager buying a quality of material different from the standard
50
Who is responsibile for mix and yield variance?
Typically controlled by the production manager who supervises the production process
51
Who is responsibile for overhead variance?
Responsibility of the appropriate managers
52
Benefit of operational variances over traditional variances?
Generally a more reliable indicator of performance
53
How can variances be improved (non-financial)
Including non-financial factors as well as variances in managers’ appraisal systems
54
issue of using a standard costing system?
Lead to an overemphasis on quantitative elements of performance. It is important that qualitative performance is not neglected (e.g. customer satisfaction)
55
What does JIT aim to provide?
Flexible manufacturing systems aim to provide more tailored production to meet customers’ needs
56
Main issue with traditional standard setting?
Based on a company’s own costs and procedures. May be too inward-looking
57
Issue with variance analysis in rapidly changing environments (standards)
Merely meeting standards may be insufficient to ensure a company’s survival in a competitive environment
58
Issue with variance analysis in rapidly changing environments (internal)
Standards provide an internal focus to management
59
What is the sales mix contribution variance?
Measures the effect on profit of changing the mix of actual sales from the standard mix
60
What is the sales quantity contribution variance?
Measures the effect on profit of selling a different total quantity from the budgeted total quantity
61
What if standard costs have been calculated without taking into account the learning effect?
Labour usage variances will be favourable because the standard labour hours that they are based on will be too high
62
What does the material usage variance demonstrate?
If more or less material is used than expected
63
What happens when there is more than one input material in material usage variance?
Can be split into material mix and yield variances
64
What is meant by a favourable usage variance?
The change in the mix had a favourable impact overall
65
Who is generally responsible for mix of input materials used?
Production manager
66
Why can it be tempting for production managers to change the product mix?
Since these savings may lead to greater bonuses for them at the end of the day
67
Issue with submitting lower quality or cheaper input materials?
The yield may not be of the same quality even if the yield volume is the same as higher quality materials
68
Does it take a long time for sales variances to be affected by a mix change?
Yes
69
Why can poorer quality materials lead to an adverse labour efficiency variance?
As the workforce takes longer than expected to complete the work
70
Example of a favourable price variance?
Actual price was less than expected
71
What is meant by a favourable mix variance?
Actual mix would have used less of the expensive ingredient. But may sacrifice quality
72
What is meant by an adverse yield variance?
A greater proportion of inputs is wasted
73
WOuld a production manager be motivated to improve the quality of output?
Not likely
74
Why does the yield variance arise?
There is a difference between what the input should have been for the output achieved and the actual output
75
What happens if all products have the same budgeted margin?
There is no measurable sales mix variance
76
What does an ideal standard assume?
Perfect operating conditions
77
What are basic standards?
Long run underlying averages
78
Ideal standards and variance analysis?
Likely produce adverse results
79
What is the effect on profit of operating at a different level of activity to the one budgeted?
Difference between the flexed budget profit and the originally budgeted profit
80
Are ideal standards more useful for short-term or long-term?
For setting long-term targets as efforts are made to reduce inefficiencies in processes over time
81
What is sales mix variance based on?
The difference in sales volume (i.e. units) as a result of changes in the proportions of each product sold, not sales revenue
82
Characteristics of a basic standard?
A standard which is kept unchanged over a period of time
83
Should a standard be revised to hide poor operational performance?
No
84
Should a standard be revised for something outside of company's control?
Yes
85
What is the main focus on variance analysis?
Cost reduction
86
Advantage of ideal standards?
Constant reminder to strive for economy, efficiency and effectiveness
87
Disadvantages of ideal standard?
Managers know they can't achieve them and standard could be unrealistic (hard for variance analysis)
88
Disadvantages of basic standard?
Out of date
Likely to be too easy to achieve in the future
89
What is a current standard?
Established for use over a short period, reflecting current conditions
90
Disadvantage of a current standard?
Time consuming and costly to implement
91
What is an attainable standard?
Challenging but should be attainable under existing operating conditions
92
Why are attainable standards more likely to be used than ideal standards?
Achievable so managers will be motivated
93
What is meant by controllability principle?
Managers of responsibility centres should only be held accountable for costs over which they have some influence
94
Why is controllability principle significant?
Very demoralising for managers to have performance judged on what they don't have control over
Information on costs is reported to manager who is able to take action to control them
95
How can controllability principle be implemented?
Producing reports which calculate and distinguish between controllable and uncontrollable items
96
When can a learning curve apply (labour)
The activity is labour intensive
97
When can a learning curve apply (identical)
The units are identical (i.e. a repetitive task).
98
When can a learning curve apply (labour)
Low labour turnover
99
When can a learning curve apply (production)
No prolonged breaks in production
100
What is standard setting in learning curve theory?
The labour standard should be set/revised based on the expected learning effect
101
What is budgeting in learning curve theory?
Variable costs per unit are expected to fall with an increase in production − which is particularly important to cash budgeting.
102
What is pricing decision in learning curve theory?
An accurate labour cost may be predicted
103
What is work scheduling in learning curve theory?
Workforce planning
104
Problems with learning curve (production)
If there is a break in production, workers may "forget" the skill and the learning curve will not be so predictable
105
Problems with learning curve (identical)
The mass production of identical items, on which the learning effect is based, is not always appropriate
106
What is meant by a steady state?
With more repetitions, the improvements get smaller until, eventually, the learning process stops and reaches a “steady state”. There are no further improvements to be made.
107
What does the learning curve enable?
Users to predict how long it will take to complete a future task
108
What decimal place should learning curve calculations be rounded to?
Three decimal places
109
What happens to time per unit when production increases in learning curve theory?
Time per unit decreases
110
What do automated factories cause for the learning curve?
Less scope for learning, so lead to slower learning rates
111
What is the standard cost?
It is the planned cost of a product under current and/or anticipated operating conditions.
112
Why categorise standards into price or quantity?
Because different managers are usually responsible for the activities of buying and using inputs which occur at different points in time
113
When is the purchasing manager's responsibility exercised?
When materials are purchased
114
When is the production manager's responsibility exercised?
Only when the materials are used, which could be months later
115
What should management consider for variance investigation?
Why did it arise?
By how much has it increased/decreased?
116
What is standard costing system used for (control)
Control costs, direct and motivate employees and measure efficiencies
117
What is standard costing system used for (assign)
Assign cost to inventories of raw materials, work in process and finished goods
118
What is standard costing system used for (decisions)
Assist in planning by providing management with insights into the probable effect of decisions on cost levels
119
Scope of a budget?
A statement of expected costs (to direct activities to an agreed action plan)
120
Highlights of a budget?
Volume of activity and level of costs to be maintained (as desired by management).
121
Scope of standards?
Specify what costs should be for a level of performance achieved
122
Highlights of standards?
Level to which costs should be reduced (to increase profit)
123
How is price per unit of input is usually set?
To reflect current market prices for the budgeted period
124
How is quantity of materials usually set?
Determined by a "bill of materials" prepared by product design, the engineering department or a works foreman
125
How are direct labour hours usually set?
"time and motion" studies of operations may be used to determine the most efficient production method
126
How are wage rates usually set?
Wage rates are determined by company policy/negotiations between management and unions
127
How are cariable overheads usually set?
A rate per unit of activity is calculated
