Variance analysis
3 important questions on Variance analysis
What are the three ways to quantify volumes?
- Budgeted volume: budgeted # of units * the standard number of input per unit
- Standard volume: how much input should have been used = # product units produced * standard input per unit
- Actual volume: the amount of the volume measure actually occurred
Absorbed overhead = overhead rate * standard volume
- Standard volume: how much input should have been used = # product units produced * standard input per unit
- Actual volume: the amount of the volume measure actually occurred
Absorbed overhead = overhead rate * standard volume
What is the total overhead variance?
Total = actual overhead cost - overhead absorbed cost
adding and deducting flexible budget at actual volume and flexible budget at standard volume = spending variance + efficiency variance + volume variance
THREE OVERHEAD VARIANCES
- Spending variance = actual overhead cost - flexible budget at actual volume. The difference between the actual overhead and how much overhead should have been incurred for the actual volume measure used
- efficiency variance = flexible budget at actual volume - flexible budget at standard volume. Captures inefficiencies in using variable overhead.
- volume variance = flexible budget at standard volume - absorbed overhead. Captures overused or underused capacity of the facility.
adding and deducting flexible budget at actual volume and flexible budget at standard volume = spending variance + efficiency variance + volume variance
THREE OVERHEAD VARIANCES
- Spending variance = actual overhead cost - flexible budget at actual volume. The difference between the actual overhead and how much overhead should have been incurred for the actual volume measure used
- efficiency variance = flexible budget at actual volume - flexible budget at standard volume. Captures inefficiencies in using variable overhead.
- volume variance = flexible budget at standard volume - absorbed overhead. Captures overused or underused capacity of the facility.
What were the modules in cost management?
- Cost terminology: fixed vs variable costs, break even point, indirect vs direct cost
- Cost allocation is relevant in different contexts
- Allocating service department costs to operating units
- transfer pricing
- joint costing
- absorption costing & criticism
- standard costing: a benchmark to control & manage costs
- trade offs in choice of cost driver or number of cost drivers
- costing method should fit to the production specificities
- pay attention to the purposes of cost allocation
- wrong accounting may lead to wrong decisions
- Cost allocation is relevant in different contexts
- Allocating service department costs to operating units
- transfer pricing
- joint costing
- absorption costing & criticism
- standard costing: a benchmark to control & manage costs
- trade offs in choice of cost driver or number of cost drivers
- costing method should fit to the production specificities
- pay attention to the purposes of cost allocation
- wrong accounting may lead to wrong decisions
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