MA: Variances

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  • Created by: charlie
  • Created on: 27-05-17 17:35
standard cost definition (NOT budget cost)
predetermined estimated unit cost (target cost under efficient operating conditions)/ usually only production costs (input specified + output measured)/ NOT budget cost (per unit not per activity)
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how standards are set: mat/ labour/ OH take into account...
MAT: contracts/ quotations/ discussions/ forecasts/ quality/ wastage/ LAB: min. wage/ unions/ bonus'/ idle time/ unavoidable delays/ OH: Variable (linked to lab) Fixed (budgeted units if 1 product/ budgeted hrs if multiple products)
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standard cost advantages (used in MANUFACTURING) + stages
future costs for decision making/ setting motivational target/ setting budget (reliable data source)/ control device (variances that aren't to plan)/ 'management by exception' (can't control everything so focus on areas needed)/ less time for P/L acc
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standard cost disadvantages (quantitative/ qualitative)
outdated (released before month end)/ focus on 1 financial target/ may need to beat std. (high competition)/ moral suffers (focus on -ves)/ LAB: prod. is lab. paced + VC/ (F) is just as bad (quality)
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4 types of standards
(1) IDEAL always (A) var. (perfect operating conditions) / (2) ATTAINABLE (allows inefficiencies + employs help set)/ (3) CURRENT (no improvement incentive) (4) BASIC outdated (unaltered over long time)
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Variance definition (A)/(F)
difference between std. cost/ revenue and act. cost/ revenue/ (A)= actual results worse than expected/ (F)= actual results better than std.
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Cost variances (actual production x std.): material price var.
impact on profit from paying different price from std.CAUSES: market (inflation)/ supplier quality/ bargaining skills (discounts)
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Cost variances: material usage variance / causes
impact on profit from using different quantity per unit than budgeted (difference in units valued @ std. $)/CAUSES: quality/ labour skills (learning curves/ wastage)/ change in production (mat. mix, tech, methods)/ stealing
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Cost variances: labour rate variance / causes
impact on profit from paying a different wage rate per hour than budgeted / CAUSES: unions/ abnormal overtime/ skill of labour quality
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Cost variances: labour efficiency variance / causes
impact on profit of working a different number of hours per unit than budgeted (difference in hrs x std. $)/ CAUSES: abnormal idle time/ motivation (redundancies/ conditions)/ skills + training (learning curve)
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Cost variances: variable OH rate variance / causes
impact on profit of incurring a different amount of variable OH per lab. hr worked than budgeted/ CAUSES: depends if lab/ manu (price/ economies/ cost control) --> would want to compare for individual items
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Cost variances: variable OH efficiency variance / causes
impact on profit of working different number of hrs from that expected to produce actual output (lab hrs x std $ of var OH)/ CAUSES: depends if lab/ manu (ease of use/ efficiency curves/ labour skills) --> would want to compare for individual items
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Cost variances: fixed OH expenditure variance (MC + TAC) / causes
impact on profit of fixed OH being over/ under spent compared to budget (use UNIT COSTS not per hr)/ CAUSES: CAUSES: future expansion/ planning errors/ cost definitions (VC/FC)/ in LT all OH variable --> would want to compare for individual items
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Cost variances: fixed OH volume variance (TAC only)
impact on profit of fixed OH being over/ under absorbed (recovered) due to vol. change (use UNIT COSTS not per hr)
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Sales variances: (act. sales x std.) price variance / causes
impact on std. profit of selling price differing from budget/ CAUSES: company (planning of price inc/ dec)/ competitors/ market (inflation/ comp. prices)
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Sales variances: volume variance / causes
impact on std. profit of selling at different vol. than budgeted (value @ std. PROFIT)/ CAUSES: company (advertising)/ competitors/ market (health of economy (recessions)/ product (lifecycle)
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Reconciling the budget: TAC layout
budgeted profit (budgeted prod. x std. profit) / sales vol. variance (flex) / = std. profit on act. sales / sales price variance / cost variances (incl fixed OH expenditure + vol.)/ = actual profit (given)
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Reconciling the budget: MC layout
budgeted contn (budgeted prod. x std. contn) / sales vol. variance (flex) /= std. contn on act. sales / sales price variance / cost variances (excl fixed OH) /= act. contn / less: actual fixed OH /= act. profit
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MC vs TAC difference in variance treatment (2)
(1) sales vol. variance (difference values @ std. contn) /(2) Fixed OH vol. variance = 0 (cannot over/ under abs. as haven't abs. in first place)
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Causes of variances: general (5)
(1) std set at IDEAL (instead of attainable) (2) inflation not accounted for (3) incorrectly recorded (filling out time sheets) (4) incorrectly established (learning curves not accounted for) (5) no regular control
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Investigating variances: 4 criteria (assignable causes + benefits>costs)
(1) Variance size (% of budget) (2) Sign of variance ((A) more urgency) (3) likelihood of control (harder if external) (4) nature of costs (some will naturally fluctuate so don't investigate)
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Investigating variances: 2 methods +ves / -ves
(1) RULE OF THUMB (variance > set level)/ simple/ doesn't consider c-b analysis (2) STATISTICAL INVESTIGATION MODEL (control charts with determined level of allowed variance)
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Cost variances: *materials joint price usage variance (mutual effect)
when joint mutual price/ quantity effect (e.g. purchasing officer accepts price inc+ production manager accepts usage inc but not at inc price) SPLIT: pure price variance + joint price/quantity variance
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Reconciling the budget: stocks
since stocks are values at std. cost (TAC/ MC) they can be excluded from the operating statement
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sales vol variance: (1) sales mix variance/ causes
effect of selling a range of products/ services at different proportions from budget (changing mix of act. sales from std.)/ CAUSES: proportion of profitable product sold/ advertising/ demand and supply
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sales vol variance: (2) sales quantity variance
effect of changing total amount sold from budget (value @ avg. contn p.u. or weighted std. profit)
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sales quantity variance: (1) market size variance/ causes
effect in changes of overall market size (EXTERNAL)/ CAUSES: number of new competitors
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sales quantity variance: (1) market share variance/ causes
effect in changes of overall market share (INTERNAL)/ CAUSES: competitors pricing policies
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weighted std. profit equation
.
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reasons for revising standards (4)
(1) manu. methods SIG. change (2) relation between normal capacity + act. activity SIG. out of balance (3) SIG. difference between std. and expected. performance (4) SIG. difference exists of existing standard (measure error)
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problems with frequently revising standard (2)
(1) motivation (moving goal posts) (2) admin costs (fees)
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solution to revising standards
(1) revised once a year (or when changes of LT/ permanent nature) (2) should really be changed as soon as measurement basis changes (allows accurate comparison) (3) budget revisions with hindsight (after) is manager rewarded on budget achievement
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Total variance: planning variance (OUT of control)/ causes
compares original std. with revised std. that should/would have been used if knows in advance (e.g. exchange rates)/ CAUSES: unlikely anything can be done unless want to blame (possibly poor budgeting by managers)
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Total variance: operational variance (IN control)/ causes
compares actual result with revised result (e.g. material price/ usage)/ CAUSES: operating results differing from actual
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Operational variance: price/ rate
difference between what act. paid and should have paid @ revised std price
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Operational variance: usage/ efficiency
difference between what act. used and should have used (@ revised std. cost
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Budget vs Standard: definitions
BUDGET: quantified monetary plan for future period that management try to achieve/ STANDARD: carefully predetermined target which can be achieved in certain conditions
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Budget vs Standard: similarities (3)
(1) Future forecasting (likely to happen under circumstances) (2) Used for control (targets compared to actual + action taken) (3) Interrelation (budgeted expenditure = std unit cost x budgeted activity level)
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Budget vs Standard: differences (3)
(1) BUDGET: for activity/ department STD: for single task/ unit /(2) BUDGET: prepared for all functions STD: only where output can be measured/ (3)BUDGET: expressed in money STD: can be std. vol/ market share
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Card 2

Front

how standards are set: mat/ labour/ OH take into account...

Back

MAT: contracts/ quotations/ discussions/ forecasts/ quality/ wastage/ LAB: min. wage/ unions/ bonus'/ idle time/ unavoidable delays/ OH: Variable (linked to lab) Fixed (budgeted units if 1 product/ budgeted hrs if multiple products)

Card 3

Front

standard cost advantages (used in MANUFACTURING) + stages

Back

Preview of the front of card 3

Card 4

Front

standard cost disadvantages (quantitative/ qualitative)

Back

Preview of the front of card 4

Card 5

Front

4 types of standards

Back

Preview of the front of card 5
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