Podcast
Questions and Answers
What does the selling price variance measure?
What does the selling price variance measure?
- Difference between expected and actual units sold
- Change in standard cost per unit
- Effect on expected profit of a different selling price (correct)
- Impact of promotional discounts on sales
The sales volume profit variance is calculated using the actual units sold and the budgeted quantity valued at the standard profit per unit.
The sales volume profit variance is calculated using the actual units sold and the budgeted quantity valued at the standard profit per unit.
True (A)
What is the selling price variance if the standard selling price is $15 and the actual selling price is $15.30 for 2000 units sold?
What is the selling price variance if the standard selling price is $15 and the actual selling price is $15.30 for 2000 units sold?
$600 (F)
If a company budgets to sell 8000 units but only sells 7700 units, the sales volume profit variance is unfavorable because actual sales were ______ than budgeted.
If a company budgets to sell 8000 units but only sells 7700 units, the sales volume profit variance is unfavorable because actual sales were ______ than budgeted.
How is the sales volume profit variance calculated?
How is the sales volume profit variance calculated?
A higher actual selling price compared to the standard selling price results in a favorable selling price variance.
A higher actual selling price compared to the standard selling price results in a favorable selling price variance.
If the standard full cost is $7 per unit and the actual selling price is $12.50 while selling 7700 units, what is the contribution per unit?
If the standard full cost is $7 per unit and the actual selling price is $12.50 while selling 7700 units, what is the contribution per unit?
Match the following terms with their definitions:
Match the following terms with their definitions:
What are possible favorable causes for sales price variance?
What are possible favorable causes for sales price variance?
An unfavorable sales variance means that actual sales were higher than budgeted sales.
An unfavorable sales variance means that actual sales were higher than budgeted sales.
The __________ shows how the combination of variances reconciles budgeted profit and actual profit.
The __________ shows how the combination of variances reconciles budgeted profit and actual profit.
Match the following variances with their definitions:
Match the following variances with their definitions:
A price cut can lead to an unfavorable sales price variance but might stimulate a favorable sales volume variance.
A price cut can lead to an unfavorable sales price variance but might stimulate a favorable sales volume variance.
The budgeted profit before sales and administration costs is reconciled in the __________.
The budgeted profit before sales and administration costs is reconciled in the __________.
Selling and administration expenses are included in the standard cost calculation.
Selling and administration expenses are included in the standard cost calculation.
What is one way the overall consequence of an unfavorable sales variance should be analyzed?
What is one way the overall consequence of an unfavorable sales variance should be analyzed?
What should be deemed significant when establishing control limits?
What should be deemed significant when establishing control limits?
All variances that exceed control limits require detailed investigation.
All variances that exceed control limits require detailed investigation.
For example, it may be known from past experience that the cost of investigating a particular variance is $150 and that cost savings amounting to $1200 can be made if the variance is corrected successfully. However, it is also known that there is only a 30 per cent possibility of the variance being corrected once the cause is found.
For example, it may be known from past experience that the cost of investigating a particular variance is $150 and that cost savings amounting to $1200 can be made if the variance is corrected successfully. However, it is also known that there is only a 30 per cent possibility of the variance being corrected once the cause is found.
The method used to display the cumulative sum of variances over a period is called a _______.
The method used to display the cumulative sum of variances over a period is called a _______.
Match the following terms with their definitions:
Match the following terms with their definitions:
What is a potential outcome when variances are not significant?
What is a potential outcome when variances are not significant?
Control action can only be taken if the variance is deemed controllable.
Control action can only be taken if the variance is deemed controllable.
If a variance is controllable, management can take action to bring the system _______.
If a variance is controllable, management can take action to bring the system _______.
Match the situations with the appropriate action:
Match the situations with the appropriate action:
Control action always requires immediate implementation.
Control action always requires immediate implementation.
What can be revised if a variance is uncontrollable and not due to chance?
What can be revised if a variance is uncontrollable and not due to chance?
What can cause measurement errors in recording systems?
What can cause measurement errors in recording systems?
Outdated price standards are only caused by inflation.
Outdated price standards are only caused by inflation.
What action should be taken if variances are due to poor planning and outdated standards?
What action should be taken if variances are due to poor planning and outdated standards?
Random or chance fluctuations are classified as a variance if they fall within the predictable __________.
Random or chance fluctuations are classified as a variance if they fall within the predictable __________.
Match the type of variance with its cause:
Match the type of variance with its cause:
Which of the following is an implication of the interdependence between variances?
Which of the following is an implication of the interdependence between variances?
Control action is always necessary when variances are detected.
Control action is always necessary when variances are detected.
What is one likely consequence of utilizing cheaper and lower quality materials?
What is one likely consequence of utilizing cheaper and lower quality materials?
Variance due to __________ usually requires investigation to determine operational efficiency.
Variance due to __________ usually requires investigation to determine operational efficiency.
When should variances be classified as random or chance fluctuations?
When should variances be classified as random or chance fluctuations?
What is indicated when variances occur consistently over time?
What is indicated when variances occur consistently over time?
A minor planning error in standard cost should always be investigated regardless of its size.
A minor planning error in standard cost should always be investigated regardless of its size.
What should be established to determine significant variances?
What should be established to determine significant variances?
Which of the following is typically NOT a reason for investigating a variance?
Which of the following is typically NOT a reason for investigating a variance?
What is a potential consequence of consistently unfavorable labour efficiency variances?
What is a potential consequence of consistently unfavorable labour efficiency variances?
Sales variances are reported after cost variances.
Sales variances are reported after cost variances.
The trend of variances should be assessed over several ________ to appreciate their significance.
The trend of variances should be assessed over several ________ to appreciate their significance.
What is the primary method for visualizing control limits?
What is the primary method for visualizing control limits?
Which of the following would not typically indicate a learning curve effect?
Which of the following would not typically indicate a learning curve effect?
What might a consistent unfavourable material price variance indicate?
What might a consistent unfavourable material price variance indicate?
It is essential to investigate every small variance in production.
It is essential to investigate every small variance in production.
Investigating variances can be ________ and costly.
Investigating variances can be ________ and costly.
What is the significance of evaluating variances in relation to standards and cost drivers?
What is the significance of evaluating variances in relation to standards and cost drivers?
Study Notes
SALES VARIANCES
- Selling price variance affects expected profit due to differences between actual and standard selling prices.
- Calculated by comparing actual sales revenue at actual selling price to the expected revenue at standard price.
- Example: Standard price for product X is 15 and actual price is 15.30; selling price variance is favorable with a variance of $600 for 2000 units sold.
- Sales volume profit variance measures the impact of actual units sold versus budgeted sales, valued at standard profit per unit.
- Example: Suppose that a company budgets to sell 8000 units of product J for $12 per unit. The standard full cost per unit is $7. Actual sales were 7700 units, at $12.50 per unit.
- Favourable variances can arise from price increases due to higher quality or increased demand.
- Unfavourable variances may stem from price cuts to stimulate demand or economic slumps.
- Interdependence of price and volume variances is critical; a price drop can increase demand, offsetting a negative price variance with a positive volume variance.
OPERATING STATEMENTS
- Used to reconcile budgeted and actual profit through variances.
- Regular management report showing actual costs and revenues alongside budgeted expectations.
- Standard costing system applied for consistent variance analysis
- All variances such as material price, usage, labour cost, and overheads are calculated to assess profit deviation and performance efficiency.
- Presenting an operating statement includes sales variances followed by cost variances, leading to an overall profit figure.
INVESTIGATING VARIANCES
- Decide on investigating variances based on pre-set tolerance limits; significant deviations warrant attention.
- Trends in variances are more informative than single-period variances; consistent small variances may indicate systemic issues.
- Monitoring should account for past performance and operational decisions, recognizing long-term patterns.
- Control limits for variances can be established statistically or through managerial judgment, determining significant variances to be investigated.
- Cumulative sums of variances can reveal trends indicative of underlying issues requiring control action.
CONTROL ACTION
- Significant variances need manager intervention; control actions aim to address controllable variances to regain operational efficiency.
- Variance analysis focuses on what has gone wrong to facilitate future corrective measures.
- Types of control actions depend on the cause of a variance, ranging from correcting measurement errors to updating out-of-date standards.
- Long-term improvements are favored, but some control actions may only yield temporary benefits or necessitate budget adjustments.
- The effectiveness of control action can vary in terms of immediate impact and sustainability of results over time.
- Investigations into variances often reveal general market price changes instead of resource acquisition efficiencies or inefficiencies.
- Standards can become outdated due to technological advancements or unaccounted learning curve effects.
- Regular reviews and updates of standards are essential to maintain their accuracy.
Random or Chance Fluctuations
- Standards represent average figures, leading to expected unpredictable deviations within a defined range.
- Variances within this range are classified as random fluctuations, which do not require control actions.
Efficient vs. Inefficient Operations
- Efficiency can be affected by factors such as spoilage, the quality of materials, and the skill level of labor.
- Investigating these variances helps identify causes of inefficiencies or efficiencies, leading to corrective actions.
- For instance, stricter supervision may be implemented to reduce wastage.
Interdependence Between Variances
- One variance may be explained by another, showcasing the interconnected nature of operational metrics.
- Purchasing cheaper but lower quality materials may improve material price variance while causing usage variance due to wastage.
- Highly skilled workers might earn more than standard wages but could compensate with greater efficiency, offsetting negative rate variances.
- Use of lower quality materials can lead to unfavorable efficiency variances as workers struggle with processing difficulties.
- Increased selling prices often lead to decreased sales volume, indicating a relationship between sales price and volume variances.
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Description
This quiz covers the concepts of selling price variance and sales volume profit variance as they relate to expected profit. Understand how different selling prices and actual sales volumes can impact budgeted profits. Explore the definitions and calculations associated with these important sales metrics.
