Where standard costs deviate significantly from

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Unformatted text preview: se scenario Practical strong, likely case scenario Standards set for Direct Materials, Direct Labor, Variable Manufacturing Overhead, Fixed Manufacturing Overhead Since standard costs and actual costs will differ, variances will occur. Variances in variable costs can occur because managers misassess 1) the price per unit of product, or 2) the amount of materials, labor, etc. needed per unit. Key Variable Cost Variances Direct materials price variance: Actual Quantity used times how much the price per unit varies = Actual Quantity (AQ) x (Actual Price(AP) Standard Price (SP)) Direct materials usage variance: Standard Price (SP) x (Actual Quantity (AQ) Standard Quantity (SQ)) Total direct materials variance = Direct materials price variance + Direct materials usage variance Direct labor rate variance: Actual quantity of Hours worked (AH) x (Actual Rate (AR) Standard Rate (SR)) Direct labor efficiency variance: Standard Rate (SR) x (Actual Hours (AH) Standard Hours (SH)) Total direct labor variance = Direct labor rate variance + Direct labor efficiency variance Variable overhead spending variance: Actual quantity of Hours (AH) x (Actual Rate (AR) Standard Rate (SR)) Variable overhead efficiency variance: Standard Rate (SR) x (Actual Hours (AH) Standard Hours (SH)) Total variable overhead variance = Variable overhead spending variance + Variable overhead efficiency variance Fixed Cost Variances Fixed Overhead Spending Variance = Actual Fixed Overhead Budgeted Fixed Overhead Fixed Overhead Volume Variance = Budgeted Fixed Overhead Applied Fixed Overhead Total Fixed Overhead Variance = Over/under applied Fixed Overhead = Fixed Overhead Spending Variance + Fixed Overhead Volume Variance Decentralization Types of responsibility centers: Cost center Revenue Center Profit Center Investment center Reasons for decentralization: Reasons against decentralization: Better access to local information Cognitive limitations information overflow More timely response Focusing of central management Training and evaluation Motivation Enhanced competition Out of touch with overall company goals Suboptimization of departments Measures of performance Return on investment Operating Income/ Average Operating Assets = Margin * Turnover Margin = Operating Income / Sales; Turnover = Sales / Average Operating Assets Residual income Operating income (Minimum Rate of Return x Average Operating Assets) Aftertax operating income (Weighted average cost of capital x total capital employed) Economic value added Incentive Compensation for Managers Cash Noncash Compensation Stockbased Compensation Transfer Pricing Floor = incremental cost to produce : If no capacity problems, then incremental cost is variable cost. Ceiling = outside market price Relevant Costing Relevant costing is concerned with tactical decision making. These include questions like (be able to do these kinds of calculations): Should I make or a buy a component for my product? Should I discontinue a product line? Should I sell a product now or process further? These calculations will hinge only on additional (or incremental or marginal) costs and revenues compared to your other alternatives. Review the terms: Sunk cost ( which is irrelevant) Opportunity cost (which is relevant) Are You Ready for a Break? Congratulations, you have just completed the overview of managerial accounting!...
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This note was uploaded on 03/27/2012 for the course ACCT 2302 taught by Professor Shall during the Spring '08 term at Texas A&M University, Corpus Christi.

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