Management accounting - Appunti

accounts.Material usage variance.

Material price variance.

Labor variance (broken down in Chapter 20)

Overhead variance (broken down in Chapter 20)

Material Variances- Production cost variances covered in greater depth in Chapter 20- Material usage variance :(Standard quantity • Standard price) - (Actual quantity • Standard price)

(Standard quantity - Actual quantity) • Standard price

Quantity • Standard price

- Material price variance(Actual quantity • Standard price) - (Actual quantity • Actual price)

(Standard price - Actual price) • Actual quantity

Price • Actual quantity

- Total variance is spread out among different elementsDisposition of Production Cost Variances- Production cost variances represent amount by which goods produced in an accounting period have been“miscosted”

- Disposing : Best matching : Allocate proportionately among(i.e., zero out variance accounts)- work in process inventory,

finished goods inventory, and cost of goods sold. Why these accounts?- Most practical: Assign all to cost of goods sold

Variations in Utilizing Standard Cost- May have only some elements of standard costE.g., for labor, but not for materials‣ E.g., use of material standards only when issued into production

Variance account is generated after point of shift from actual to standardUses of Standards- ControlStarting point for measuring performance (i.e., comparing actual costs to what should have been done).‣

Decision makingPricing and alternative choice decisions.‣

More rational costs.Not subject to price and productivity variations.‣

Record-keeping savings.Must determine standard cost, but only done infrequently. Eliminates need to compute actual cost for‣ each requisition, each unit of product.Easier to determine inventory amounts, cost of goods sold‣ 2 - 4 {chapter 19}Variance computation-- Variance analysis changes according to the cost or revenuesCostVariable costs

Fixed costs: Overhead costs (production) (fix c. not production)

Revenues

VARIABLE COSTING SYSTEM

• Absorption cost (full cost) system: Both variable and fixed production costs are assigned to product. Required by GAAP and tax regulations.
• Variable costing system: Useful for management decision making. Only variable production costs are included in inventory. Fixed costs are treated as period costs (i.e., viewed as cost of maintaining capacity). Can be based on actual and/or standard costs. But only used by a small minority of companies (reasons why discussed later).

Advantages of Variable Costing:

• Simplifies recordkeeping. Fixed component of overhead costs is not calculated. Fixed overhead makes it more complicated because it requires an estimate of standard volume.
• Helps eliminate confusion. Makes overhead variance a pure spending variance (i.e., not affected by changes in actual vs. standard volume).
• Useful for control purposes. Easier to control variable cost items on a per unit basis.

and fixed cost items on a total cost basis.

Also useful for breakeven and differential cost analysis.

- Reported income directly related to sales volume.

Under absorption costing, reported monthly income is related to both sales and production volumes.

If production is higher (lower) than sales, absorption costing results in higher (lower) income than variable costing. Why? Because of increased (decreased) fixed overhead in inventory.

Comparison of Overhead Rates

- Variable costing system.

Easier, because overhead rate is only for variable overhead items.

Therefore, similar to accounting for direct material and direct labor costs.

- Absorption cost (full cost) system.

In effect, the sum of two rates (i.e., variable and fixed). Variable rate is to absorb variable overhead costs (i.e., rate is variable overhead per unit of volume).

Fixed rate is to charge each unit of activity with its fair share of fixed overhead costs (i.e., rate is average budgeted fixed overhead per unit of volume).

1. Why Use Full Costing?
   • Variable costing may lead management to focus excessively on contribution margin and not enough on fixed costs.
   • Makes costs tied up in inventory look smaller.
   • May show company is more profitable than is actually the case. Why is this especially true for highly automated companies?
2. Splitting overhead costs into variable and fixed components can be difficult.
3. Variable costing usage is limited. Full costing still needed for pricing decisions, financial reporting, tax reporting.
4. QUALITY COSTS
   • Prevention costs
   • Quality appraisal costs
   • Internal failure costs
   • External failure costs
   • Detection costs
   • Cost of preventing defects and poor quality.
   • Cost of correcting defects before product is delivered.
   • Cost of correcting defects after delivery.
   • Cost of finding defects before product is delivered.
   • Refunds, warranty costs for repairs and replacements.
   • Scrap costs, rework costs.
   • Education costs, certification costs, supplier costs.

• product redesign liability costs, etc.
• testing costs, etc.
• costs, process
• What is the most important external etc. failure cost (but difficult to measure)?

JOINT-PRODUCT COSTING

- Used when two or more dissimilar end products result from a single production process (e.g., products resulting from crude oil processing).

- Difficulty is allocation of joint (common) costs incurred before production process (i.e., split-off point)

- Costs beyond split-off point handled in usual manner (i.e., end products are cost objects)

- Allocation of joint costs to end products

Sales value method

• Proportionately to sales value of end products (minus separate processing and marketing costs)

Weight method

• Proportionately to weight of end products

- By-product costing

Minor product not intended by production process

• Usually costed so that zero profit is reported

- Where Differences in Judgment Can Affect Cost:

• Capital vs. product vs.

• period costs
• Affects measurement of cost and profitability.
• Measurement of direct costs (e.g. including or not including benefits as part of direct labor costs)
• Direct vs. indirect cost
• Classification may affect how much cost is allocated to a product.
• Alternative allocation methods (e.g., how costs are assigned to service centers and then to production centers)
• Choosing an activity measure (e.g., direct labor hours vs. machine hours)
• Estimating volume (e.g., how volume affects the predetermined overhead rate)
• Defining cost centers (e.g., many vs. few)

Cost System Design Choices

• Job order or process system?
• Actual cost or standard cost system?
• Absorption costing or variable costing?
• How many cost centers?
• How should volume be measured in each cost center?
• What step-down cost order should be used for allocating service center cost to production cost centers?
• Should labor-related and material-related costs be treated as direct costs or part of

overhead?- Simple system or an activity based costing model? 4 - 4 {chapter 20}Management accounting : Production Cost Variance Analysis

VARIANCES!! standard = budget | actual = effective !!-- Total variance =(unitary price at standard level • efficiency at standard level • volume at budget level) - (unitary price at‣ effective level efficiency at actual level • volume at actual level)·- Price variance =(unitary price at standard level - unitary price effective) • efficiency at actual level • volume effective)‣- Efficiency variance =(efficiency at standard level - efficiency at actual level) • unitary price at standard level • volume‣ effective- Volume variance =(volume at budget level - volume at actual level) • unitary price at standard level • efficiency at standard‣ levelIf you sum price, efficiency and volume must give you the total variance-- Variance :Difference between performance standard and measured performance (ie,

Variance analysis:

Breakdown of a variance into factors that caused variance

Sales volume plays no role in calculating any production cost variance

Favorable variances:

Actual costs were less than expected

Unfavorable variances:

Actual costs were greater than expected

Appears as a debit in variance account