ACCT2102 Lecture Notes - Lecture 10: Cost Driver, Deutsche Luft Hansa

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27 Jun 2018

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ACCT2102: Variances

Variance Analysis: Variances can help to identify deviations from planned performance and be used for

evaluating performance and to motivate managers. Variances can help managers with their planning and

control functions as well with their strategy settings. For example, sometimes large variances can suggest

that the company should consider a change in strategy or a change in standard setting and control.

Variances effect on operating income: All variances can have either a favorable or an unfavorable impact

on operating incomes. Favorable variances have a positive impact on operating income and increase it

(relative to the budgeted amount), while unfavorable variances have a negative impact on the operating

income and decrease it.

Possible causes of a favorable direct materials price variance are:

- purchasing ofﬁcer negotiated more skillfully than was planned in the budget,

- purchasing manager bought in larger lot sizes than budgeted, thus obtaining quantity

discounts,

- materials prices decreased unexpectedly due to, say, industry oversupply,

- budgeted purchase prices were set without careful analysis of the market, and

- purchasing manager received unfavorable terms on nonpurchase price factors (such as lower

quality materials).

Possible causes of an unfavorable direct manufacturing labor effciency variance

Some possible reasons for an unfavorable direct manufacturing labor efﬁciency variance are the hiring and

use of underskilled workers; inefﬁcient scheduling of work so that the workforce was not optimally

occupied; poor maintenance of machines resulting in a high proportion of non-value- added labor; unrealistic

time standards. Each of these factors would result in actual direct manufacturing labor-hours being higher

than indicated by the standard work rate.

Variance analysis should be based on ﬂexible budget instead of static budget.

Static budget ignores actual levels of output. It compares the budgeted costs/revenues for a planned level of

output versus actual costs/revenues for an actual level of output. The actual level of output may differ from

the planned level, and may necessitate different levels of costs.

Thus, the results could be misleading. For example, a favorable cost variance based on a ﬂexible budget can

be changed to an unfavorable cost variance based on a static budget and, therefore, lead to wrong decision/s.

This is why performance of variance analyses should be based on ﬂexible budgets.

Flexible budget vs Static budget

A ﬂexible budget can be similar to a static budget if the actual outputs are equal to the planned outputs. This

is because the only difference between a static budget and a ﬂexible budget is that the static budget is

prepared for the planned output, whereas the ﬂexible budget is based on the actual output.

Standard costs:

Standard costs take into consideration issues related to the past costs such as past inefﬁciencies and take into

account expected future changes.

VARIANCES

Causes and responsibilities of different variances. Should they be investigated?

Materials Price Variance (MPV)

Purchase of materials

Responsibility: Purchasing manager. To get the best prices available for purchased goods and services

through skilful purchasing practices.

Causes: Higher price used for high-quality material?

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Document Summary

Variance analysis: variances can help to identify deviations from planned performance and be used for evaluating performance and to motivate managers. Variances can help managers with their planning and control functions as well with their strategy settings. For example, sometimes large variances can suggest that the company should consider a change in strategy or a change in standard setting and control. Variances effect on operating income: all variances can have either a favorable or an unfavorable impact on operating incomes. Favorable variances have a positive impact on operating income and increase it (relative to the budgeted amount), while unfavorable variances have a negative impact on the operating income and decrease it. Possible causes of a favorable direct materials price variance are: Purchasing of cer negotiated more skillfully than was planned in the budget, Purchasing manager bought in larger lot sizes than budgeted, thus obtaining quantity discounts, Materials prices decreased unexpectedly due to, say, industry oversupply,

Related Questions

All of the following are advantages of decentralizationexcept:

to improve customer relations.

to encourage use of expert knowledge.

to increase employee motivation.

to allow goal congruence to be achieved more easily.

All of the following are responsibility centersexcept:

profit centers.

investment centers.

customer centers.

cost centers.

3. Thedifferences between actual and budgeted figures are known as:

fluctuations.

variances.

overages.

underages.

4. Which of thefollowing is a performance measure commonly used to assess theperformance of investment centers?

Return on investment

Profit margin

Current ratio

Gross income

5. Residualincome is calculated as:

revenues less expenses.

contribution margin less minimum acceptable income.

operating income less minimum acceptable income.

sales less variable costs.

6. Which of thefollowing is NOT a strategy for determining the transfer price of aproduct?

Related party discounted price

Market price

Cost or cost-plus a markup

Negotiated price

7. Employeecapabilities, information system capabilities, and the companyâsâclimate for actionâ are important factors of the:

employee perspective.

customer perspective.

internal business perspective.

learning and growth perspective.

8. AssumeCucumber Company expects each division to earn an 8% target rate ofreturn. Assume the Companyâs Pickle Division had the followingresults:

Sales $24,500,000

Operatingincome 1,250,000

Totalassets 15,500,000

The Divisionâs ROI is:

8.1%.

15.8%.

5.1%.

8.0%.

Assume Ametrine Company expects each division to earn an 8%target rate of return. Assume the Companyâs Division A had thefollowing results:

Sales $24,500,000

Operatingincome 1,250,000

Totalassets 15,500,000

The Divisionâs RI is:

â$10,000.

$10,000.

â$710,000.

$710,000.

10. Which of the followingare examples of KPIs?

Average customer satisfaction ratings

Number of repeat customers

Sales revenue growth

All of the above are examples of KPIs

Which of the following is NOT an advantage of using standardcosts and variances?

Use as a performance benchmark for evaluation of actualcosts

Use as a basis for components of the master budget

Simplification of bookkeeping

Change in behavior of managers to obtain desired variances

One level of a companyâs flexible budget was prepared forproduction of 8,000 units. Total costs were $38,000 and includeddirect materials, direct labor, and variable overhead at $1.50,$2.50, and $0.50 per unit respectively. What is the total cost ofproduction of 8,500 units?

$ 2,000

$38,000

$38,250

$40,250

3. The directlabor price variance was unfavorable and much greater thananticipated. Who would be in the best position to explain why theunfavorable variance occurred?

Both the production and human resource supervisors

The production supervisor

The purchasing manager

Both the purchasing manager and production supervisor

4. A managerpurchased better quality materials for a slightly higher cost thananticipated. However, as a result, there was less spoilage thannormal. What is the effect on the price and quantity variancesrespectively?

Favorable, favorable

Favorable, unfavorable

Unfavorable, favorable

Unfavorable, unfavorable

5. Acompany uses a single raw material in its production process. Thestandard price for a unit of material is $2.00. During the monththe company purchased and used 600 units of this material at aprice of $2.25 per unit. The standard quantity required perfinished product is 2 units and during the month, the companyproduced 310 finished units. How much was the material pricevariance?

$150 favorable

$150 unfavorable

$155 favorable

$155 unfavorable

6. Acompany uses a single raw material in its production process. Thestandard price for a unit of material is $2.00. During the monththe company purchased and used 600 units of this material at aprice of $2.25 per unit. The standard quantity required perfinished product is 2 units and during the month, the companyproduced 310 finished units. How much was the material quantityvariance?

$40 favorable

$40 unfavorable

$45 favorable

$45 unfavorable

7. Acompany produced 2,200 units of output during a production processthat normally requires 2 hours of labor per unit of output. Thestandard labor rate is $16 per hour, but the company paid $15 perhour. Actual hours needed to complete the production process were4,600. How much was the labor efficiency variance?

$3,000 favorable

$3,000 unfavorable

$3,200 favorable

$3,200 unfavorable

8. Acompany produced 2,200 units of output during a production processthat normally requires 2 hours of labor per unit of output. Thestandard labor rate is $16 per hour, but the company paid $15 perhour. Actual hours needed to complete the production process were4,600. How much was the labor rate variance?

$4,400 favorable

$4,400 unfavorable

$4,600 favorable

$4,600 unfavorable

9. Which of thefollowing formulas is used to compute variable overheadrate (or spending) variance?

actual hours Ã (actual rate â standard rate)

standard hours allowed Ã (actual rate â standard rate)

actual rate Ã (actual hours â standard hours allowed)

standard rate Ã (actual hours â standard hours allowed)

10. Which of the followingis a true statement regarding fixed overhead volume variance?

If production volume is less than anticipated, then fixedoverhead has been underallocated and the fixed overhead volumevariance is favorable.

If production volume is less than anticipated, then fixedoverhead has been underallocated and the fixed overhead volumevariance is unfavorable.

If production volume is greater than anticipated, then fixedoverhead has been underallocated and the fixed overhead volumevariance is favorable.

If production volume is greater than anticipated, then fixedoverhead has been overallocated and the fixed overhead volumevariance is unfavorable.

purpleherring947

LOOKING FOR SOLUTION TO PART 2,3,4

Section I: Cost-Volume-Profit Analysis

The Hampshire Company manufactures umbrellas that sell for$12.50 each. In 2014, the company made and sold 60,000 umbrellas.The company had fixed manufacturing costs of $216,000. It also hadfixed costs for administration of $79,525. The per-unit costs ofeach umbrella are as follows:

Direct Materials: $3.00

Direct Labor: $1.50

Variable Manufacturing Overhead:$0.40

Variable Selling Expenses: $1.10

Using the information above, perform a cost-volume-profit (CVP)analysis by completing the steps below. All CVP calculations shouldbe completed in the Hampshire Company Spreadsheet. Note:The CVP analysis satisfies Part A of Section I.

Compute net income before tax.

Compute the unit contribution margin in dollars and thecontribution margin ratio for one umbrella.

Calculate the break-even point in units and dollars of revenue.Note: This is a required part of the CVP analysis andsatisfies Part C of Section I.

Calculate the margin of safety:

In units

In sales dollars

As a percentage

Calculate the degree of operating leverage.

Assume that sales will increase by 20% in 2015. Calculate thepercentage of before-tax income for this increase. Providecalculations to prove that your percentage increase is correctbased on the operating leverage calculated in step 5.

Compute the number of umbrellas that Hampshire is required tosell if it plans to earn $150,000 in income before taxes by usingthe target income formula. Proof your calculation.

A company that specializes in tours in England has offered topurchase 5,000 umbrellas at $11 each from Hampshire. The variableselling costs of these additional units will be $1.30 as opposed to$1.10 per unit. Also, this production activity will incur another$15,000 of fixed administrative costs. Should Hampshire agree tosell these additional 5,000 umbrellas to the touring business?Provide calculations to support your decision.

Additionally, complete Parts B and D of Section I as outlined inthe Final Project Guidelines and Rubric document.

Section II: Inventory Management

The information below represents the beginning and endinginventory amounts along with the production and sales for the monthin umbrella units.

Beginning Inventory: 0 Umbrellas

Production: 80,000 Umbrellas

Sales: 60,000 Umbrellas

Ending Inventory: 20,000Umbrellas

Using the information provided above and the costs and salesinformation provided in Section I, complete the following in theHampshire Company Spreadsheet in order to assist you in respondingto all components of Section II:

Prepare a variable costing income statement.

Prepare an absorption costing income statement.

Additionally, complete Parts A through E of Section II asoutlined in the Final Project Guidelines and Rubric document.

Section III: Benchmarking

The management of the Hampshire Company would like to implementbenchmarking. Standard costs have been established and arepresented below. You will want to complete a variance analysis toinclude efficiency and price variances for materials (cloth andhandle assemblies) and labor based on the following data:

Units Produced = 80,000

Units Sold = 60,000

Direct Materials Purchased and Used

Actual square yards of cloth purchased and used: 128,000

Actual price incurred per yard: $1.25

Actual handles purchased and used: 80,808

Actual price per handle/rib/stretcher assembly: $0.99

Direct Manufacturing Labor Used

Actual direct labor hours used: 15,748

Actual price per hour: $7.62

Direct labor costs: $120,000

Standard Rates

Standard labor hours per unit: 0.20

Standard labor price per hour: $7.50

Square yards material per unit: 1.50

Standard price per yard: $1.15

Handle/rib/stretcher assembly per unit: 1

Standard price per handle assembly: $1.05

Companies can use variance analysis and benchmarking to measureperformance within their own company and against competitors. Thiscan be done by setting standards/budgets and comparing a completedvariance analysis to results from prior periods or comparing themto competitorsâ results. Using the information provided above,complete the following calculations (steps 1 and 2) in theHampshire Company Spreadsheet. This will assist you in respondingto all components of Section III.

Calculate price variances for material and labor and denotewhether they are favorable or unfavorable.

Calculate efficiency variances for material and labor and denotewhether they are favorable or unfavorable.

In order to measure performance and make use of the varianceanalysis completed, management understands the need to compareresults with their competitors. Following the steps outlined below,you will research benchmarking and propose the most effectiveapproach for your company. Respond to Parts A through C of SectionIII as outlined in the Final Project Guidelines and Rubricdocument.

Section IV: Alternative Costing Method

Hampshire has always produced stick umbrellas. However, it isconsidering expanding its production to include collapsibleumbrellas. This consideration has been spurred by Tours Today, atouring company that is interested in providing its customers withcollapsible umbrellas imprinted with its logo. The management atHampshire is currently working out a deal with the touring companyto produce 3,000 collapsible umbrellas and believes it can sellthose umbrellas for $14.00 each. Here are the costs that can bedirectly traced to this special order:

Direct Materials: $9,300

Direct Labor Hours: 600

Hourly Rate of Direct labor:$8.00

In the traditional costing approach, overhead is applied at therate of $24.60 per labor hour. This expansion in production willadd additional overhead costs. The total overhead costs (assumingproduction of the stick and collapsible umbrellas) to include thecost pools and cost drivers are provided in Table 2.

An alternative costing method that might benefit Hampshire isthe implementation of activity-based costing (ABC).Hampshire would like to implement an ABC approach to analyze theproduction of this special order of collapsible umbrellas. Thecontroller has assembled the following information:

	Stick	Collapsible
Units Sold	60,000	3,000
Selling Price	$12.50	$14.00
Direct Material Cost per Unit	$3	$3.10
Direct Labor Cost per Hour	$7.50	$8.00
Variable Manufacturing Overhead	$0.40	$0.40
Variable Selling Costs	$1.10	$1.10
Labor Hours per Unit	0.2	0.2
Sales Orders	120	1
Purchase Orders	50	3
Production Runs	45	6
Material Moves	86	10
Machine Setups	130	6
Machine Hours	525	32
Inspections	200	10
Shipments	60	3

Table 1: Direct Cost Information and Activities

Activity	Activity Cost	Activity Cost Driver
Order Processing	$35,000	Number of Sales Orders
Purchasing	$36,000	Number of Purchase Orders
Material Handing	$28,000	Material Moves
Machine Setup	$14,000	Machine Setups
Production	$99,000	Production Runs
Assembly	$80,000	Machine Hours
Inspecting	$11,000	Number of Inspections
Shipping	$7,500	Number of Shipments

Table 2: Activity Cost Pools and Cost Drivers

Another alternative to traditional costing and ABC istime-driven activity-based costing (TDABC). You will need todetermine which of these three methods would be the best approachfor the Hampshire Company. The following article may assist you inyour analysis: Time-Driven Activity-Based Costing. Additionally,you may want to use the Shapiro Library to conduct further researchon the three methods. You will need to defend your position whenanswering the prompts for the written portion of this section.

Using the information provided above, complete the following inthe Hampshire Company Spreadsheet in order to assist you inresponding to all components of Section IV:

1.Calculate the allocation rates foreach cost driver using ABC.

2.Use the traditional costing approachto calculate the total cost and the unit cost of the stick andcollapsible umbrellas.

3.Use ABC to compute the total costsand the unit cost for the stick and collapsible umbrellas.

4.Compute the difference between theproduct cost per stick and collapsible umbrellas using the unitcost that you computed with the traditional approach and the onethat you computed using ABC.

Based on your calculations from steps 1â4, respond to Parts Athrough C in Section IV as outlined in the Final Project Guidelinesand Rubric document.

Section V: Memo to Management

The management of the Hampshire Company is very interested inmeasuring performance. They would like you to recommend a strategyto increase business performance. They are not sure whether theyshould focus on product differentiation or cost leadership.Research additional performance tools to include the balancedscorecard. During your research, consider what performancemeasurements you would use based on the four perspectives. Provideexamples.

In your recommendation, you will want to include the outcome ofyour previous quantitative analysis and research performed relatedto cost-volume-profit (CVP), variable and absorption costing,just-in-time (JIT), standard costs, variances, and benchmarking.You will want to review key points and make recommendations basedon your current research and prior analysis completed and researchperformed.

Your two- to three-page memo to management must be submitted asa Word document and must include your responses to Parts A throughC of Section V as outlined in the Final Project Guidelines andRubric document.

coffeeprairie-dog291

QUESTION 1

Value stream costing eliminates most of the transactions associated with conventional cost accounting because it ...

	A.	makes more extensive use of standard costing.
	B.	gathers and reports financial data in summary form at the value stream level rather than for each production job or product.
	C.	automates financial reporting processes.
	D.	uses more detailed and accurate overhead cost allocations than standard costing.

1 points

QUESTION 2

In value stream costing, the labor costs assigned to a value stream ...

	A.	include the costs of all personnel assigned to the value stream, plus allocations for support staff in all departments that support the value stream.
	B.	include the costs of all personnel assigned to the value stream, but few if any allocations for any support staff outside the value stream.
	C.	include the costs of all direct and indirect labor hours in the value stream, plus allocations of staff outside the value stream providing production support; but exclude any sales, marketing, or administrative personnel in the value stream.
	D.	include the costs of all direct and indirect labor hours in the value stream, but exclude the costs of any sales, marketing or administrative personnel in the value stream.

1 points

QUESTION 3

Value stream costing simplifies accounting in part by ...

	A.	centralizing and consolidating the purchasing function.
	B.	increasing the number of cost centers to more easily expose cost overruns.
	C.	allocating all overhead using actual direct labor hours or machine hours rather than relying on more complex calculations.
	D.	eliminating detailed labor reporting, including the distinction between direct and indirect labor.

1 points

QUESTION 4

When using value stream costing, managers evaluate decisions about product rationalization (keeping or dropping a product) by ...

	A.	examining the effects on overall value stream results of continuing to produce and sell a product versus dropping it.
	B.	comparing the production cost per unit of all products in the value stream.
	C.	disregarding the financial impact, and examining instead the effects on the value stream operating measures shown in the box score of continuing to produce and sell a product versus dropping it.
	D.	comparing the gross profit margins for all products.

1 points

QUESTION 5

Exotic Chocolates had material costs of $24,000 and conversion costs of $18,000 in their most recent month containing 20 working days. At the end of the month, Exotic Chocolates had material on hand equal to six days of production, work-in-process equal to three days of production, and finished goods equal to eight days of production. The value for ending inventory using the âdays of stockâ method is ...

A.

$ 28,950

B.

$ 32,550

C.

$ 35,700

D.

$ 42,000

1 points

QUESTION 6

Which of the following is an example of a good use of the value stream box score?

	A.	Plant and division managers using the box score analyze variances from budgeted standard costs.
	B.	Plant and division managers using the box score to encourage and evaluate the results of competition between their value streams for best overall performance.
	C.	Value stream continuous improvement teams using the box score to design high-impact kaizen events and improvement plans.
	D.	Employees in the production cells using the box score to manage daily performance.

1 points

QUESTION 7

The box score measures three dimensions of performance in the value stream: operational, financial, and ...

A.

quality.

B.

capacity.

C.

flow.

D.

strategic.

1 points

QUESTION 8

Displaying actual value stream results in a box score with a column for each week in a quarter is a good way to use the box score to ...

	A.	show the effects of planned lean improvements.
	B.	track value stream performance and continuous improvement.
	C.	evaluate the effect of tactical decision alternatives, such as accepting a special order.
	D.	evaluate the effect of management decision alternatives, such as adding a product line.

1 points

QUESTION 9

Displaying current state performance and future states based on the expected results of pursuing different strategy alternatives. is a good way to use the box score to ...

	A.	evaluate the effect of strategic decision alternatives, such as adding a product line.
	B.	track value stream performance and continuous improvement.
	C.	show the effects of planned lean improvements.
	D.	show the impact of actual lean improvements.

1 points

QUESTION 10

A good way to use the box score to evaluate the impact of lean improvements is to ...

	A.	display current state performance and a future state based on planned improvements.
	B.	display current state performance and future states based on the expected results of pursuing different strategy alternatives.
	C.	display actual box score results for all the weeks in a quarter to show the trends in performance.
	D.	display current performance for the most current week or month, without reference to expected future states or performance trends.

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ACCT2102 Lecture Notes - Lecture 10: Cost Driver, Deutsche Luft Hansa

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QUESTION 10

	A.	$ 28,950
	B.	$ 32,550
	C.	$ 35,700
	D.	$ 42,000

	A.	quality.
	B.	capacity.
	C.	flow.
	D.	strategic.