MODULE 4 - 10 TO 14

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What does a favourable variance indicate in budgetary control?

Revenue has decreased compared to the budget.

Actual performance is worse than expected.

Costs are higher than budgeted.

Actual performance is better than expected. (correct)

In budgetary control, variance analysis primarily focuses on which of the following?

Comparing total revenues with sales variances.

Comparing budgeted costs against fixed costs.

Comparing actual results with previous years.

Comparing actual results with a flexible budget. (correct)

What is the best description of a static budget in the context of budgetary control?

A budget that adjusts for changes in activity levels.

A budget that is revised monthly based on new forecasts.

A budget that remains constant regardless of actual performance. (correct)

A budget created based solely on past performance.

Which of the following types of variances is not included in the main groups of variances identified in budgetary control?

Fixed marketing overhead variances Signup and view all the answers

What is the purpose of control reports in budgetary control?

To compare actual results with the budget periodically. Signup and view all the answers

What happens when costs exceed budgeted amounts according to variance analysis?

An investigation into the causes is initiated. Signup and view all the answers

What is the main purpose of adjusting the original budget when analyzing variances?

To account for changes in volume and maintain accurate comparisons. Signup and view all the answers

Which cost categories were identified as variable costs in Windy Ltd's budgetary analysis?

Direct materials, direct labour, and maintenance costs. Signup and view all the answers

What does an unfavourable direct materials variance indicate about purchasing material?

Materials were purchased at a higher price than planned. Signup and view all the answers

When performing a flexible budget analysis, what is essential to consider?

The relationship between actual output and budgeted variable costs. Signup and view all the answers

In the analysis of variances, how is an overall cost variance interpreted?

Represents a broader financial performance snapshot. Signup and view all the answers

What information is immediately actionable from a variance report?

Areas requiring corrective actions based on significant variances. Signup and view all the answers

Why is it important to distinguish between fixed and variable costs in budgeting?

To accurately allocate costs based on production levels. Signup and view all the answers

What is indicated by a profit that is higher than the flexible budget profit in a variance analysis?

Sales performance exceeded expectations under current volume. Signup and view all the answers

How is the total direct material variance defined?

The total actual cost minus the expected standard cost of materials. Signup and view all the answers

In which situation will fixed costs impact variance analysis during the accounting period?

When production volume exceeds the capacity planned. Signup and view all the answers

How does Windy Ltd ensure better budgetary control with variable costs?

By creating a flexible budget based on actual production volumes. Signup and view all the answers

If the direct labour rate variance is $2,600 (F), what does this indicate about the labour rate?

The actual labour rate was less than the standard rate. Signup and view all the answers

What is the effect of an efficiency variance of $1,500 (U) in direct labour?

The company worked more hours than planned. Signup and view all the answers

How is the variable overhead total variance calculated in relation to produced units?

It is based on the difference between standard costs for actual units and actual costs. Signup and view all the answers

In the context of variable production overheads, what does an expenditure variance indicate?

The company spent more on variable overheads than budgeted. Signup and view all the answers

What does an efficiency variance in variable production overheads reflect?

The total hours worked surpassing the planned hours. Signup and view all the answers

How can the fixed production overhead volume variance be classified?

As an expenditure and capacity variance. Signup and view all the answers

If the variable production overhead efficiency variance shows 40 hours (F), what does this indicate?

The workforce was more productive than planned. Signup and view all the answers

Which of the following represents the correct formula for calculating the direct labour efficiency variance?

(Standard hours - Actual hours) × Standard rate Signup and view all the answers

If a company has a variable production overhead expenditure variance of $90 (U), what does this imply?

The actual variable overhead spending is greater than budgeted. Signup and view all the answers

When calculating production overheads, what factor is crucial to understanding idle time's effect?

Idle time does not contribute to variable overhead costs. Signup and view all the answers

Why might a fixed production overhead variance be considered important?

It allows management to assess production efficiency. Signup and view all the answers

What is the calculation for the direct material total variance?

Difference between total standard cost and actual cost for produced units Signup and view all the answers

How is the direct material price variance calculated?

Total cost of actual materials purchased minus expected cost at standard price Signup and view all the answers

Which of the following best defines the direct material usage variance?

The discrepancy in the amount of materials projected versus what was actually used, valued at standard price Signup and view all the answers

If the direct material price variance is favorable, what does this indicate?

Actual material costs were lower than anticipated costs Signup and view all the answers

When calculating the direct material price variance at the time of materials purchase, which is the correct basis?

Total quantity of materials received in the period Signup and view all the answers

What happens when a company values its inventory at actual cost using FIFO?

It necessitates tracking price variances for each batch issued Signup and view all the answers

What does a direct labour efficiency variance typically measure?

Comparative efficiency between intended labor hours and actual worked hours Signup and view all the answers

What main outcome does a direct labour rate variance indicate?

Disparity between the standard wage rate and the actual wage rate paid Signup and view all the answers

Why might management prefer calculating the material price variance at the receipt of materials?

To alert management to cost overruns before they escalate Signup and view all the answers

What is the result of a favorable direct material price variance when analyzed at standard cost?

Less expenditure on materials than expected workers to influence profit positively Signup and view all the answers

What is a potential disadvantage of valuing inventory at actual cost rather than at standard cost?

Increases administrative complexity due to pricier materials tracking Signup and view all the answers

Which term describes the overall difference between expected and actual labor costs incurred while producing a product?

Total labor cost variance Signup and view all the answers

Which of the following is a key factor in analyzing direct material usage variance?

Standard quantity of materials for actual output Signup and view all the answers

What is measured by the fixed overhead expenditure variance?

The difference between budgeted fixed overhead expenditure and actual fixed overhead expenditure. Signup and view all the answers

What will cause an under-absorption of fixed overheads?

Both B and C Signup and view all the answers

Which calculation is correct for the fixed overhead total variance?

Actual fixed overhead incurred minus fixed overhead absorbed. Signup and view all the answers

What does the fixed overhead volume variance specifically measure?

The under- or over-absorbed overhead due to changes in the actual activity level compared to budgeted levels. Signup and view all the answers

If the actual fixed overhead expenditure is $22,000 and budgeted fixed overhead is $20,000, what is the fixed overhead expenditure variance?

$2,000 (U) Signup and view all the answers

Given a budgeted fixed overhead of $20,000 and standard production of 1,000 units, what is the absorption rate per unit?

$20 per unit Signup and view all the answers

Which of the following is a common reason for fixed overhead volume variance?

Greater than expected efficiency of the labor force. Signup and view all the answers

If a company produced 1,200 units instead of the budgeted 1,000 units, what would be the expected impact on the fixed overhead volume variance?

It will be favorable as actual production was higher than planned. Signup and view all the answers

Which of the following statements about fixed overhead variances is incorrect?

The positive variance indicates under-absorbed overhead. Signup and view all the answers

What happens if budgeted fixed overhead is understated?

You will have under-absorbed overhead. Signup and view all the answers

If the actual activity level is lower than the budgeted one, which variance is likely to be unfavorable?

Fixed overhead volume variance. Signup and view all the answers

When calculating fixed overhead volume variance, what factor must be multiplied with the difference in actual and budgeted production?

Standard absorption rate per unit. Signup and view all the answers

What is the purpose of analyzing fixed overhead variances?

To assess the effectiveness of budgeting and production efficiency. Signup and view all the answers

In an absorption costing system, which of the following best describes fixed production overhead variances?

They attempt to explain variations in fixed overhead absorption. Signup and view all the answers

Study Notes

Budgetary Control and Variance Analysis

Variance: Difference between planned/budgeted cost and actual cost; also applicable to revenues.
Variance analysis: Process analyzing total differences between standard and actual results.

Budgetary Control

System of management control based on feedback; compares actual results with budget.
Control actions initiated when significant deviations from budget are found.
Control reports are usually prepared monthly for individual responsibility centers and the entire organization.
Key method: Variance analysis compares actual results with a flexible budget.
Variances categorized as:
- Favourable Variance (F): Actual results better than expected.
- Unfavourable Variance (U): Actual results worse than expected.
Main variance groups:
- Variable cost variances
- Sales variances
- Fixed production overhead variances

Example: Windy Ltd

Budgeted production: 2,000 units; Actual production: 3,000 units.
Significant variances include:
- Sales Revenue: 20,000budgeted,20,000 budgeted, 20,000budgeted,30,000 actual (F) $10,000
- Direct Materials: 6,000budgeted,6,000 budgeted, 6,000budgeted,8,500 actual (U) $2,500
- Direct Labour: 4,000budgeted,4,000 budgeted, 4,000budgeted,4,500 actual (U) $500
- Total Profit: Increased from 1,900to1,900 to 1,900to6,800 (F) $4,900

Flexible Budgeting

Adjust original budget to account for production level changes:
- Direct materials and labour are variable costs; rents are fixed.
- Flexible budget profit is recalculated based on actual output.

Direct Material Variances

Total variance calculated as difference between expected and actual material costs.
Price Variance: Difference in standard vs. actual cost of materials used or purchased.
Usage Variance: Difference between standard quantity of materials and actual quantity used, valued at standard price.

Example: Direct Material Variances

For Product X:
- Budgeted cost: 100perunitfor1,000units=100 per unit for 1,000 units = 100perunitfor1,000units=100,000.
- Actual cost: 98,600,indicatingatotalvarianceof98,600, indicating a total variance of 98,600,indicatingatotalvarianceof1,400 (F).
- Price variance calculated separately to assess material costs based on quantity purchased.

Direct Labour Cost Variances

Total labour variance can be split into:
- Rate Variance: Difference between standard rate and actual rate for hours paid.
- Efficiency Variance: Difference between expected hours worked and actual hours worked.

Example: Direct Labour Variances

For Product X:
- Cost for 1,000 units: 10,000expectedvs.10,000 expected vs. 10,000expectedvs.8,900 actual (F) $1,100.
- Rate variance shows favourable outcomes due to lower actual costs than budgeted rates.

Variable Production Overhead Variances

Total variable overhead variance split into:
- Expenditure Variance: Difference between expected variable overheads and actual.
- Efficiency Variance: Difference between actual hours worked and expected hours for production.

Example: Variable Production Overhead Variances

Variable overhead cost per unit: $3.
Actual costs reported higher than expected, revealing the need for analysis despite higher output.

Fixed Production Overhead Variances

Total fixed overhead variance split into:
- Expenditure Variance: Difference in actual vs. budgeted fixed overheads.
- Volume Variance: Impact due to differences in actual production output relative to budget expectations.### Fixed Production Overhead Variance
Fixed production overhead volume variance can be further divided into efficiency and capacity variance.
Variable cost variances for labor, materials, and variable overheads are calculated similarly, unlike fixed production overhead variances.
In absorption costing, fixed production overhead variances attempt to clarify under- or over-absorption of fixed costs in production.

Components of Fixed Production Overhead Variance

Fixed production overhead total variance includes:
- Expenditure variance
- Volume variance

Under- or Over-Absorption

Overhead absorption rate is calculated as:
- Overhead absorption rate = Budgeted fixed overhead / Budgeted activity level
Inaccurate budget estimates can lead to under- or over-absorption, stemming from:
- Budgeted fixed overhead (numerator)
- Budgeted activity level (denominator)

Fixed Overhead Expenditure Variance

It arises from discrepancies between budgeted and actual total expenditures on fixed overhead.
Calculated as:
- Fixed overhead expenditure variance = Budgeted expenditure – Actual expenditure

Fixed Overhead Volume Variance

Occurs when actual activity levels differ from budgeted levels used for the absorption rate.
Influenced by:
- Workforce efficiency variances
- Variances due to changes in hours worked, such as overtime or strikes

Calculation Definitions

Fixed overhead total variance: Difference between incurred overhead and absorbed overhead.
Fixed overhead expenditure variance: Difference between budgeted fixed overhead expenditure and actual expenditure.
Fixed overhead volume variance: Difference between actual and budgeted volume multiplied by the standard absorption rate per unit.

Worked Example Overview

Planning to produce 1,000 units of product E with a budgeted fixed overhead of $20,000.
Actual fixed overhead expenditure was $20,450; however, 1,100 units were produced.

Variance Calculations

Fixed overhead total variance:
- Fixed overhead incurred: $20,450
- Fixed overhead absorbed (1,100 units at 20/unit):20/unit): 20/unit):22,000
- Result: $1,550 favorable (F)
Fixed overhead expenditure variance:
- Budgeted fixed overhead: $20,000
- Actual fixed overhead: $20,450
- Result: $450 unfavorable (U)
Fixed overhead volume variance:
- Actual production at standard rate: 1,100 units at 20/unit=20/unit = 20/unit=22,000
- Budgeted production at standard rate: 1,000 units at 20/unit=20/unit = 20/unit=20,000
- Result: $2,000 favorable (F)

Summary of Variances

Expenditure variance: $450 (U)
Volume variance: $2,000 (F)
Total fixed overhead variance: $1,550 (F)

General Notes on Variances

A favorable cost variance indicates actual results are less than expected.
Fixed overhead volume variance can yield favorable variances when actual production exceeds budgeted production and unfavorable when actual production falls short.
Understanding fixed production overhead variances can be challenging but is crucial for effective budgeting and variance analysis.

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Description

This quiz covers key concepts of budgetary control and variance analysis, highlighting the differences between expected and actual costs. Understand how these methods are used in financial management to ensure accurate performance evaluation and control. Test your knowledge on the principles and processes involved.