Standard Costing Flashcards
(17 cards)
Total Fixed Overhead Varience
Standard FO Absorbed By Actual Production - Actual FO Incurred
Positive = Favourable
Fixed Overhead Expenditure Varience
Budgeted FO - Actual FO Incurred
Positive = Favourable
Fixed Overhead Volume Varience
Budgeted FO - Standard Cost Absorbed by Actual Production
Positive = Adverse
Fixed Overhead Capacity Varience
Budgeted OH - (Actual Hours Worked x OH Absorption Rate)
Positive = Adverse
Fixed Overhead Efficiency Variance
(Total Actual Hours Worked - Total Standard Hours For Actual Production) x Standard OH Rate
Positive = Adverse
Reason for favourable Material Usage Variance (MUV)
- Use of better quality material than standard
- If also adverse Material Price Variance (MPV) - more expensive
- If favourable Labour Efficiency Variance (LEV) - easier to work with
Reasons for Favourable Labour Rate Variance (LRV)
- Employment of less skilled workers than standard so cheaper to employ
- If adverse Labour Efficiency Variance (LEV) - less productive
- If adverse Material Usage Variance (MUV) - make more mistakes so more waste
Reason for Favourable Sales Volume Variance (SVV)
- Reducing selling price to increase volume
- Selected discounts given to selected customers to increase total sales
- Seasonal sales have increased volume
Reason for Adverse Sales Volume Variance (SVV)
- Increased costs have been passed onto customers
- Goods are less fashionable
- Competition from other businesses have increased
Reasons for Favourable Sales Price Variance (SPV)
- Increased costs passed onto customer - inflation
- Fewer discounts offered
- Improved products allows increase in price
Reasons for Adverse Sales Price Variance (SPV)
- More competition
- More discounts
- Strategy of reducing prices to gain market share
Reasons for Favourable Material Price Variance (MPV)
- Offered discounts from suppliers
- Lower quality material
What is Variance Analysis?
Variance is the difference between budgeted amount (cost or revenue) and actual amount. Variance analysis is the way to identify and explain the difference
Accounting Rate of Return (ARR)
Average Annual Profit/Average Investment
OR
Average Annual Profit/Average Investment + Increase in Working Capital
Internal Rate of Return (IRR)
P + [(P-N) x p/p+n]
Where:
*P = rate giving positive NPV
*N = rate giving negative NPV
*p = the positive NPV
*n = the negative NPV
How should IRR be analysed?
*IRR is the true annual % return on a project
*Represents maximum firm willing to pay for finance
*Can be compared with rate earned on other capital
*For example if IRR less than present ROCE, project will dilute the present profitability
How is NPV analysed?
*Greater NPV the better
*Negative NPV indicates project should not be considered
