MODULE 4 - 16 TO 20 (FINAL PARTS)
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Questions and Answers

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.

    True

    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.

    <p>less</p> Signup and view all the answers

    How is the sales volume profit variance calculated?

    <p>Difference between actual units sold and budgeted units sold multiplied by the standard profit per unit</p> Signup and view all the answers

    A higher actual selling price compared to the standard selling price results in a favorable selling price variance.

    <p>True</p> Signup and view all the answers

    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?

    <p>$5.50</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Selling Price Variance = Effect on expected profit of a different selling price Sales Volume Profit Variance = Difference between actual units sold and budgeted units sold Standard Selling Price = Expected price at which a product should sell Actual Selling Price = Price at which the product was sold</p> Signup and view all the answers

    What are possible favorable causes for sales price variance?

    <p>Price increase following increased demand</p> Signup and view all the answers

    An unfavorable sales variance means that actual sales were higher than budgeted sales.

    <p>False</p> Signup and view all the answers

    The __________ shows how the combination of variances reconciles budgeted profit and actual profit.

    <p>operating statement</p> Signup and view all the answers

    Match the following variances with their definitions:

    <p>Material price variance = Difference between actual cost and expected cost of materials Labour rate variance = Difference between actual labour cost and standard cost Variable overhead efficiency variance = Cost of variable overheads compared to budgeted overheads Fixed overhead volume variance = Difference between budgeted and actual fixed overhead costs</p> Signup and view all the answers

    A price cut can lead to an unfavorable sales price variance but might stimulate a favorable sales volume variance.

    <p>True</p> Signup and view all the answers

    The budgeted profit before sales and administration costs is reconciled in the __________.

    <p>operating statement</p> Signup and view all the answers

    Selling and administration expenses are included in the standard cost calculation.

    <p>False</p> Signup and view all the answers

    What is one way the overall consequence of an unfavorable sales variance should be analyzed?

    <p>Consider counterbalancing favorable variances</p> Signup and view all the answers

    What should be deemed significant when establishing control limits?

    <p>Any variance exceeding 10% of standard</p> Signup and view all the answers

    All variances that exceed control limits require detailed investigation.

    <p>False</p> Signup and view all the answers

    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.

    <p>$210</p> Signup and view all the answers

    The method used to display the cumulative sum of variances over a period is called a _______.

    <p>cusum chart</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Control limits = Standards set to determine acceptable variance Adverse variance = When actual costs exceed standard costs Favourable variance = When actual costs are less than standard costs Cumulative sum = Total of variances over multiple periods</p> Signup and view all the answers

    What is a potential outcome when variances are not significant?

    <p>They will fluctuate around the average.</p> Signup and view all the answers

    Control action can only be taken if the variance is deemed controllable.

    <p>True</p> Signup and view all the answers

    If a variance is controllable, management can take action to bring the system _______.

    <p>back under control</p> Signup and view all the answers

    Match the situations with the appropriate action:

    <p>Variance investigated but cause known = No further investigation required Significant adverse variance = Possible control action needed Cumulative variance shows drift = Immediate assessment required Control limits exceeded without clear reason = Further analysis necessary</p> Signup and view all the answers

    Control action always requires immediate implementation.

    <p>False</p> Signup and view all the answers

    What can be revised if a variance is uncontrollable and not due to chance?

    <p>Forecast of expected results or the budget.</p> Signup and view all the answers

    What can cause measurement errors in recording systems?

    <p>Misreading of scales</p> Signup and view all the answers

    Outdated price standards are only caused by inflation.

    <p>False</p> Signup and view all the answers

    What action should be taken if variances are due to poor planning and outdated standards?

    <p>Review and update the standards frequently.</p> Signup and view all the answers

    Random or chance fluctuations are classified as a variance if they fall within the predictable __________.

    <p>range</p> Signup and view all the answers

    Match the type of variance with its cause:

    <p>Measurement errors = Misreading of scales Poor planning = Outdated cost standards Random fluctuations = Deviations within average Efficient operations = Better quality materials</p> Signup and view all the answers

    Which of the following is an implication of the interdependence between variances?

    <p>A favorable rate variance can be offset by an unfavorable efficiency variance.</p> Signup and view all the answers

    Control action is always necessary when variances are detected.

    <p>False</p> Signup and view all the answers

    What is one likely consequence of utilizing cheaper and lower quality materials?

    <p>Material wastage and an unfavorable usage variance.</p> Signup and view all the answers

    Variance due to __________ usually requires investigation to determine operational efficiency.

    <p>inefficient operations</p> Signup and view all the answers

    When should variances be classified as random or chance fluctuations?

    <p>When they fall within the predictable range</p> Signup and view all the answers

    What is indicated when variances occur consistently over time?

    <p>They may reflect a trend that needs investigation.</p> Signup and view all the answers

    A minor planning error in standard cost should always be investigated regardless of its size.

    <p>False</p> Signup and view all the answers

    What should be established to determine significant variances?

    <p>Tolerance limits</p> Signup and view all the answers

    Which of the following is typically NOT a reason for investigating a variance?

    <p>It's a minor variance</p> Signup and view all the answers

    What is a potential consequence of consistently unfavorable labour efficiency variances?

    <p>Indicates a possible issue with productivity or standards.</p> Signup and view all the answers

    Sales variances are reported after cost variances.

    <p>False</p> Signup and view all the answers

    The trend of variances should be assessed over several ________ to appreciate their significance.

    <p>periods</p> Signup and view all the answers

    What is the primary method for visualizing control limits?

    <p>Control charts</p> Signup and view all the answers

    Which of the following would not typically indicate a learning curve effect?

    <p>Repeated increases in labour rate variances</p> Signup and view all the answers

    What might a consistent unfavourable material price variance indicate?

    <p>Possible ongoing decision to use cheaper materials.</p> Signup and view all the answers

    It is essential to investigate every small variance in production.

    <p>False</p> Signup and view all the answers

    Investigating variances can be ________ and costly.

    <p>time-consuming</p> Signup and view all the answers

    What is the significance of evaluating variances in relation to standards and cost drivers?

    <p>It helps in understanding operational efficiency and potential issues.</p> Signup and view all the answers

    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.

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