2011 Paper F5 QandA Sample Download v1

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ACCA Paper F5 Performance Management
Tony Surridge Online Limited, 2011
For full version covering 14 topics, go to www.tonysurridge.co.uk
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ACCA Paper F5: PERFORMANCE MANAGEMENT Diagnostic Tests - Questions and Answers
Published by Tony Surridge Online Limited in 2011
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ACCA Paper F5 Performance Management (PM) Diagnostic Test Practice Questions & Answers
Syllabus
The structure of the syllabus Intellectual levels Learning hours Guide to exam structure Guide to examination assessment Aim Main capabilities Relational diagram of main capabilities Rationale Detailed syllabus Approach to examining the syllabus
Study Guide
A B C D E Specialist cost and management accounting techniques Decision-making techniques Budgeting Standard costing and variance analysis Performance measurement and control
Diagnostic Test Topics

1: 2: 3: 4: 5: 6: 7: Activity Based Costing (ABC) Target Costing Life-Cycle Costing (LCC) Backflush Accounting Throughput Accounting Multi-limiting Factors and the Use of Linear Programming Pricing Decisions 8: 9: 10: 11: 12: 13: 14: Make or Buy and Other Short-Term Decisions Dealing with Risk and Uncertainty Budgetary Systems and Types of Budgets Quantitative Analysis in Budgeting Standard Costing and Variance Analysis Planning and Operational Variances The Scope of Performance Measurement
ONLY TOPIC 12 IN THIS SAMPLE: Standard Costing and Variance Analysis For full version, go to www.tonysurridge.co.uk
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Formulae Sheet
Learning curve
Y = axb Where Y a x b LR = = = = = cumulative average time per unit to produce x units the time taken for the first unit of output the cumulative number of units the index of learning (log LR/log 2) the learning rate as a decimal
Regression analysis
y = a + bx b = nxy xy n x 2 - ( x ) 2 y b x n n nxy xy
2
a =
r =
(nx
- (x) 2 ny 2 - (y)2
)(
Demand curve P = a - bQ b = change in price change in quantity
a = price when Q = 0 MR = a - 2bQ

THIS FORMULA SHEET IS PROVIDED IN THE EXAM
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Diagnostic Test
Standard Costing and Variance Analysis

Questions
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Question 1
C Company uses a standard costing system. The standard cost card for one of its products shows that the product should use 4 kg of material B per finished unit and that the standard price per kg is $4.50. C Company values its inventory of materials at standard prices. During April when the budgeted production level was 1,000 units, 1,040 units were made. The actual material quantity of material B used was 4,100 kg and material B inventories were reduced by 300 kg. The cost of the material B which was purchased was $14,400. The material price and usage variances for April were Price $ 2,700 F 2,700 F 4,050 F 2,700 F Usage $ 450 A 270 F 270 F 1,620 F
A B C D
(3 marks)
Question 2
S Company has extracted the following details from the standard cost card of one of its products. Direct Labour 4.5 hours @ $6.40 per hour
During March, S Company produced 2,300 units of the product and incurred direct wages costs of $64,150. The actual hours worked were 11,700. The direct labour rate and efficiency variances were Rate $ 2,090 F 2,090 F 10,730 F 10,730 F Efficiency $ 7,402 A 8,640 A 7,402 A 8,640 A
A B C D
(2 marks)
Question 3
The following details relate to product T, which has a selling price of $44.00. $/unit 15.00 12.00 6.00 4.00 37.00
Direct materials Direct labour (3 hours) Variable overhead Fixed overhead
During April, the actual production of T was 800 units, which was 100 units fewer than budgeted. The budget shows an annual production target of 10,800, with fixed costs accruing at a constant rate throughout the year.
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Actual overhead expenditure totaled $8,500 for April. The overhead variances for April were Volume variance $ 1,000 A 400 A 1,000 A 400 A
A B C D
Expenditure $ 367 A 500 A 100 A 100 A
(2 marks)
Question 4
Z Company uses a standard costing system and has the following labour cost standard in relation to one of its products. 4 hours skilled labour @ $6.00 per hour $24.00 During October, 3,350 of these products were made which was 150 units less than budgeted. The labour cost incurred was $79,893 and the number of direct labour hours worked was 13,450. The direct labour variances for the month were Rate $804 (F) $804 (F) $807 (F) $840 (F) Efficiency $300 (A) $300 (F) $300 (A) $3,300 (F)
A B C D
(2 marks)
Question 5
J Company uses a standard costing system and has the following data relating to one of its products. $ Selling price Variable costs Fixed costs Profit per unit 4.00 3.00 $ 9.00 7.00 2.00
Its budgeted sales for October were 800 units, but actual sales were 850 units. The revenue earned from these sales was $7,480. If a profit reconciliation statement were to be drawn up using marginal costing principles, the sales variances would be Price $160 (A) $160 (A) $170 (A) $170 (A) Volume $100 (F) $250 (F) $250 (F) $100 (F)
A B C D
(2 marks)
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Question 6
T Company uses a standard costing system, with its material inventory account being maintained at standard costs. The following details have been extracted from the standard cost card in respect of direct materials. 8 kg @ $0.80/kg = $6.40 per unit Budgeted production in April was 850 units. The following details relate to actual materials purchased and issued to production during April when actual production was 870 units. Materials purchased Materials issued to production 8,200 kg costing $6,888 7,150 kg
Which of the following correctly states the material price and usage variances to be reported? Price $286 (A) $286 (A) $286 (A) $328 (A) Usage $152 (A) $280 (A) $294 (A) $152 (A)
A B C D
(2 marks)
Question 7
PG Company operates a standard costing system for its only product. The standard cost card is as follows. Direct materials Direct labour Variable overhead Fixed overhead (4 kg @ $2/kg) (4 hours @ $4/hour) (4 hours @ $3/hour) (4 hours @ $5/hour) $ 8.00 $16.00 $12.00 $20.00
Fixed overheads are absorbed on the basis of labour hours. Fixed overhead costs are budgeted at $120,000 per annum arising at a constant rate during the year. Activity in period 3 is budgeted to be 10% of total activity for the year. Actual production during period 3 was 500 units, with actual fixed overhead costs incurred being $9,800 and actual hours worked being 1,970. The fixed overhead expenditure variance for period 3 was A B C D $2,200 (F) $200 (F) $50 (F) $200 (A)
(2 marks)
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Question 8
F Company has the following budget and actual data. Budgeted fixed overhead cost Budgeted production (units) Actual fixed overhead cost Actual production (units) The fixed overhead volume variance A B C D is $500 adverse is $2,500 adverse is $10,000 adverse is $17,500 adverse $100,000 20,000 $110,000 19,500
(2 marks)
Question 9
J Company operates a standard cost accounting system. The following information has been extracted from its standard cost card and budgets. Budgeted sales volume Budgeted selling price Standard variable cost Standard total cost 5,000 units $10.00 per unit $5.60 per unit $7.50 per unit
If it used a standard marginal cost accounting system and its actual sales were 4,500 units at a selling price of $12.00, its sales volume variance would be A B C D $1,250 adverse $2,200 adverse $2,250 adverse $3,200 adverse
(2 marks)
Question 10
Which of the following is likely to be a consequence of switching from labour intensive to automated production systems in manufacturing industries? A B C D Ideal and attainable standards should now be the same. Any reported variances are likely to be due to uncontrollable causes. The significance of any direct labour cost variances will be reduced. It will not be possible to establish standard costing systems properly.
(2 marks)
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The following data refers to Questions 11 - 13 Armenia Sling Company manufactures and sells a single product. Shown below is a summary of the budget for the year and actual results. Budget $ Sales Direct materials costs Other costs (all fixed) Profit 200,000 250,000 450,000 50,000 $ 500,000 $ 300,000 250,000 550,000 50,000 Actual $ 600,000
Fanny Bone, the company's owner, made two decisions on 1 January (1st day of the year). (1) (2) She reduced the sales price of the product by 25% for all units sold in the year. She switched to a different supplier for direct materials, purchasing a lower quality material but obtaining a 20% reduction on the budgeted price. There were no inventories of direct materials, work in progress or finished goods on either 1 January or 31 December.
It is to be assumed that the original budget shown above was an accurate estimate of the likely results for the year before these two decisions were made. The original budget is to be taken as a basis for comparison with actual results, for budgetary control purposes.
Question 11
Contribution is the difference between sales price and variable cost. What were the sales volume contribution variance and the sales price variance in the year, in $'000? Sales volume variance $ 60 (F) $150 (F) $180 (F) $180 (F) Sales price variance $150 (A) $200 (A) $150 (A) $200 (A)
A B C D
(3 marks)
Question 12
What was the direct materials price variance in the year in $'000? A B C D $20 (F) $50 (F) $60 (F) $75 (F)
(2 marks)
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Question 13
The direct materials usage variance in the year (in $'000) was A B C D $60 (A) $55 (A) $25 (A) $20 (F)
(3 marks)
The following data refers to Questions 14 - 15 The budgeted sales of Product X in August were 2,400 units. Bruce Chinn Company, the company that manufactures Product X, uses a standard costing system, and the standard cost per unit of Product X is $21. The company recorded the following variances for the month. Sales price variance Sales volume profit variance $ 300 (A) $1,200 (F)
During August 2,700 units of Product X were actually sold.
Question 14
What was the budgeted profit for Product X in August? A B C D $6,300 $7,200 $9,600 $10,800
(2 marks)
Question 15
What was the actual sales revenue for Product X in August? A B C D $57,600 $67,200 $67,500 $68,400
(2 marks)
Question 16
A cleaning detergent, D5, is manufactured by mixing three materials. Standard cost details of the product are as follows: Cost per batch of 15 litres of D5: Material X Material Y Material Z 9 litres at $4.50 per litre 4.5 litres at $1.50 per litre 1.5 litres at $7.50 per litre $ 40.50 6.75 11.25 58.50
This question is continued on the next screen
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In October, the actual mix used was 300 litres of X, 112.5 litres of Y and 37.5 litres of Z. The output achieved was 420 litres of detergent D5. The material mix variance for each material was: Material X $135 (F) $130 (F) $135 (A) $130 (A) Material Y $42.85 (A) $42.85 (F) $33.75 (F) $33.75 (A) Material Z $52.50 (A) $56.25 (A) $56.25 (F) $52.50 (F)
A B C D
(2 marks)
Question 17
Compare and contrast standard costing with the calculation of variances through budget flexing. (4 marks)
Question 18
Describe briefly five purposes of a system of standard costing. (5 marks)
Question 19
Explain three different levels of performance which may be incorporated into a system of standard costing. (3 marks)
Question 20
Comment on whether standard costing applies in both manufacturing and service businesses and how it may be affected by modern initiatives of continuous improvement and cost reduction. (4 marks)
Question 21
Discuss the problems associated with the use of traditional standard costing and variance analysis. (8 marks)
Question 22
Comment on the meaning of the material mix variance and the yield variance. (3 marks)
Question 23
"A high rate of inflation tends to make standard costing and variance analysis a waste of time" said the production manager to her managing director. You are required, as the management accountant, to draft a brief memorandum to the production manager in reply to her statement. (5 marks)
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Question 24
Briefly outline 4 advantages of flexed budgets over fixed (or static) budgets (4 marks)
Question 25
Briefly outline 8 ways that the level of efficiency of labour could be improved. (8 marks)
Question 26
Define Manufacturing idle time. (1 mark)
Question 27
Briefly outline 5 causes for manufacturing idle time. (5 marks)
Question 28
Briefly outline the implications of material mix variances (3 marks)
Question 29
Briefly discuss the Interrelationships between material price, mix and yield variances (3 marks)
Question 30
Briefly discuss 2 reasons for a favourable sales price variance. (2 marks)
Question 31
Briefly discuss 2 reasons for an adverse sales price variance. (2 marks)
Question 32
Briefly discuss 2 reasons for a favourable sales volume variance. (2 marks)
Question 33
Briefly discuss 2 reasons for an adverse sales volume variance. (2 marks)
A A
Question 34
Briefly discuss 3 reasons for a favourable material price variance. (3 marks)
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Question 35
Briefly discuss 3 reasons for an adverse material price variance. (3 marks)
A A
Question 36
Briefly discuss 3 reasons for a favourable material usage variance. (3 marks)
Question 37
Briefly discuss 5 reasons for an adverse material usage variance. (5 marks)
A A
Question 38
Briefly discuss 1 reason for a favourable labour rate variance. (1 mark)
Question 39
Briefly discuss 1 reason for an adverse labour rate variance. (1 mark)
A A
Question 40
Briefly discuss 2 reasons for an favourable labour efficiency variance. (2 marks)
Question 41
Briefly discuss 6 reasons for an adverse labour efficiency variance. (6 marks)
Question 42
Briefly discuss 2 reasons for a favourable production overhead expenditure variance. (2 marks)
Question 43
Briefly discuss 2 reasons for an adverse production overhead expenditure variance. (2 marks)
Question 44
Joel Demski categorised the general causes of variances in five groups. What are they? (5 marks)
Question 45
Managers with responsibilities in a standard costing system are likely to receive control reports for each reporting period, itemising variances for every resource item in their area of responsibility for which standard usage and/or cost has been set. What should an effective manager do after receiving a control report? Should he/she investigate the cause and consequence of every deviation? Managers have limited time, and to interrupt work flow is expensive. The manager faces a difficult decision. To investigate every reported variance will be costly and, probably without commensurate benefits, but if reported variances are not investigated or followed up, then the control function of the standard costing system becomes non-functional.
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Between the two extremes of investigating every variance that is reported and of investigating none of them, lies the optimal policy. However decision models specifying exactly which variances to investigate cannot deal with all aspects of the problem and in practice the decision becomes a subjective one, and is often left to the manager using discretion within the framework of general rules. Briefly outline five investigation decision-rule models that could be used to help resolve the problems identified above. (5 marks)
Question 46
Briefly discuss the weakness of using the monetary size of the variance investigation model. (6 marks)
END
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END OF THE DIAGNOSTIC TEST FOR STANDARD COSTING AND VARIANCE ANALYSIS
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Diagnostic Test
Standard Costing and Variance Analysis

Answer Guides
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Answer to Question 1
Price variance 3,800 kg should cost (x $4.50) but did cost Material price variance Note Units purchased
B $ 17,100 14,400 2,700 (F)
= Units used + Closing inventory - Opening inventory = 4,100 - 300 = 3,800 kg
Usage variance 1,040 units should use (x 4 kg) but did use Variance in kg x standard cost per kg Material usage variance 4,160 kg 4,100 kg 60 kg (F) $4.50 $270 (F)
D $ 74,880 64,150 10,730 (F) 10,350 hrs 11,700 hrs 1,350 hrs (A) x $6.40 $8,640 (A)
11,700 hrs should cost (x $6.40) but did cost Labour rate variance 2,300 units should take (x 4.5 hrs) but did take Variance in hrs x standard rate per hr Labour efficiency variance
D $ 8,400 8,500 100 (A) $
Overhead expenditure should have been ((800 x $6) + ((10,800 x $4)/12) but was Overhead expenditure variance
Budgeted production at standard rate of absorption of fixed overheads ([10,800/12] x 4) Actual production at standard rate (800 x 4) Overhead volume variance
3,600 3,200 400 (A)
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C $ 80,700 79,893 807 (F) 13,400 hrs 13,450 hrs 50 hrs (A) x $6 $ 300 (A)
13,450 hours should have cost (x $6) but did cost Direct labour rate variance 3,350 units should have taken (x 4 hrs) but did take Variance in hrs x standard rate per hour Direct labour efficiency variance
C 850 units 800 units 50 units (F) x $5 $250 (F) $ 7,650 7,480 170 (A)
Actual sales Budgeted sales Variance in units x standard contribution per unit ($(9 - 4)) Sales contribution volume variance
Revenue for 850 units should have been (x $9) but was Selling price variance
D If material inventory is valued at standard cost, the price variance is based on actual purchases, i.e. the whole variance is eliminated as soon as the material is purchased. Price variance 8,200 kg should have cost (x $0.80) but did cost Usage variance 870 units should have used (x 8 kg) but did use Usage variance in kg x standard cost per kg $ 6,560 6,888 328 (A) 6,960 kg 7,150 kg 190 kg (A) x $0.80 $ 152 (A)
B Assumption. There are twelve equal periods in one year. $ 10,000 9,800 200 (F)
Budgeted fixed overhead cost per period ($120,000 12) Actual fixed overhead cost Fixed overhead expenditure variance
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Q
$ 97,500 100,000 2,500 (A)
Standard fixed overhead cost per unit = $100,000/20,000 = $5 per unit
Actual production at standard rate (19,500 x $5) Budgeted production at standard rate (20,000 x $5) Fixed overhead volume variance
B Since J Company uses a standard marginal costing system, the sales volume variance will be valued at the standard contribution of $4.40 per unit ($10.00 - $5.60). Budgeted sales volume Actual sales volume Sales volume variance in units x standard contribution per unit Sales contribution volume variance in $ 5,000 units 4,500 units 500 units (A) x $4.40 $2,200 (A)
C Standard costing systems can be established in an automated manufacturing system. Variances might identify controllable causes (such as inefficient maintenance) and automation does not mean that ideal and attainable standards are the same. However, direct labour costs will become a much smaller proportion of total costs, and so the significance of any direct labour cost variances will be much less than in non-automated systems or systems with a bigger labour element.
D Remove the price increase from the actual sales revenue: $600,000/0.75 = $800,000 (at budget prices). Actual sales (at same price level as budget) increased by $300,000 ($800,000 - $500,000.)
The contribution in the budget is $500,000 - $200,000 = $300,000, or 60c per $1 of sales. Sales contribution volume variance Actual sales in the year Sales price actually charged Actual sales at original budgeted price Sales price variance ($800,000 - $600,000) = = = = = = 60% of $300,000 (F) $180,000 (F) $600,000 75% of original budgeted sales price $800,000 $200,000 (A)
D Actual direct materials costs in the year = $300,000. This is 80% of the original budgeted price. Actual purchase quantities at original budget price = $300,000 0.80 = $375,000. Material price variance = $375,000 - $300,000 = $75,000 (F)
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B Actual production and sales = 160% of original budgeted quantity. ($800,000/$500,000) $
160% of original budget quantity should use (x 1.6) ($200,000 x 1.6) but did use ($300,000/0.8) Usage variance Note $ Budgeted profit Sales price variance Sales volume variance Materials price variance Materials usage variance Total variances Actual profit (given in question) 200,000 (A) 180,000 (F) 75,000 (F) 55,000 (A)
320,000 of materials at budget price 375,000 of materials at budget price 55,000 (A)
$ 50,000
0 50,000
C Budgeted sales Actual sales Sales volume variance in units x standard profit per unit Sales volume variance in $ Thus, standard profit per unit (1,200 300) Budgeted profit in the month (2,400 units x $4)
2,400 units 2,700 units 300 units (F) X (unknown!) $1,200 (F) $4 (thus, X = $4.) $9,600
Standard profit per unit Standard cost per unit Standard selling price per unit
B $ 4 21 25 $ 67,500 300 (A) 67,200
2,700 units should sell for (x 25) Sales price variance 2,700 units did sell for
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Workings:
Weighted average standard price (WASP) per litre = $58.50/15 litres = $3.90. Actual usage Standard mix litres litres 300 (9/15) 270 112.5 (4.5/15) 135 37.5 (1.5/15) 45 450 450 Mix variance litres 30 (A) 22.5 (F) 7.5 (F) Rate $ 4.50 1.50 7.50 Mix variance $ 135 (A) 33.75 (F) 56.25 (F) 45 (A)
Material X Material Y Material Z
The calculation of variances through budget flexing is achieved by adjusting the budget for the period to produce a realistic budget cost allowance for the actual level of activity achieved. The variance is the difference between the actual cost or revenue and the budgeted cost or revenue for the actual level of activity. The analysis of variances in a standard costing system is achieved by the comparison of the cost incurred with the standard cost that should have been incurred for the actual level of activity. There are therefore similarities between variance analysis with flexible budgets and standard costs. Both approaches compare the actual costs for a given level of activity with the expected costs for that volume of activity. However, there are differences between the two approaches. With standard costing, variances are analysed in detail, reporting for example direct material price and direct material usage variances. With flexible budgeting, the reported cost variances are more likely to be total cost variances, e.g. total direct material cost variance. All products or services are valued at standard cost in a standard costing system. With flexible budgeting there is not necessarily a standard costing system. Output is costed using normal costing methods. With standard costing, all products or services have a standard selling price. With flexible budgeting, standard selling prices are unlikely to be used.
A standard costing system supports management in a number of ways. For example: (i) (ii) It can assist in the planning of budgets. Standards are the building blocks of periodic budgets. Standards are used for control purposes. They are used as performance indicators and the variances that are derived from the system reveal activities which are different from plans. This informs management of the need to take action to take advantage of any circumstances which have produced favourable variances or reduce or mitigate the effects of any adverse variances. If the prerequisites of a standard costing system are observed, the existence of appropriately set standards can act as targets and become a source of employee motivation.
(iii)
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(iv)
Standards are estimated costs which can be used to support decision making - such as pricing decisions. Standard costs are often used for the valuation of inventory - raw materials, work-in-progress, finished goods.
(v)
Three different levels of performance are as follows: (a) Ideal standards An ideal standard is one which can be attained under the most favourable conditions possible (using maximum capacity) in the forthcoming period. The ideal standard will be revised period by period in the light of developments in technology, etc. Ideal standards will be used where management believe that they will provide the best type of standard needed for motivation and cost control. In some cases it will be reasonable to expect that no wastage of material will occur. However, in terms of labour efficiency, ideal standards, which would assume no inefficiency, no extra breaks, no loss of efficiency due to fatigue, may be no more than a pipe-dream. Attainable standards A currently attainable standard will show the cost to be incurred under normal efficient operating conditions (the use of practical capacity). Allowances are made for normal wastage of materials, machine breakdowns, and loss of efficiency from fatigue. However although a currently attainable standard should be possible to achieve, it should also represent a high standard of performance. Standard costs determined in this way can be used for a variety of purposes, for example for budget preparation, for cost control by means of variance analysis, for product costing and for motivation. Budget standard The budget standard is the standard set for the budget period and is normally based on the sales volume, and thus production volume, budgeted for the period concerned.
(b)
(c)
Relevant for mass production Standard costing is most suited to organisations whose activities consist of a series of common or repetitive operations. Typically, mass production systems are indicative of its main area of application. Use in service provision businesses It is possible to envisage the operation of standard costing and variance analysis systems within the service sector, though standards might not be set with the same degree of accuracy which apply in manufacturing due to the heterogeneous and intangible nature of services. For example, banks will have common processes for dealing with customer transactions, processing cheques etc, transport companies will have standard routes and vehicles, hotels and restaurants often use standard recipes for food preparation, and so on. Standards used in modern industry In modern industry, which includes both the manufacturing and service sectors, continuous improvement and cost reduction can be key issues which render standard costing difficult to apply. In order to remain competitive, it is essential that businesses address the cost levels of their various operations. But the continuous quest to reduce costs may mean that standards become transient and soon out of date. In such a situation, an alternative to the use of standard costing is to compare actual costs with those of a previous period, or to benchmark actual costs against industrial norms.
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Managers must decide It is for management to judge the pros and cons of employing standard costing, and consequently whether such a system is appropriate for their needs.
Q Q
Traditional standard costing systems are widely used though they present weaknesses. Examples are:
E N D
Emphasis on monetary values. The monetary values are used at the exclusion of important non-monetary measures and indicators. No encouragement for managers to exceed the standard set. The cybernetic control system does not respond when standards are achieved. Difficulty in setting accurate standards. Even the use of different policy levels of standard ('ideal', 'attainable' and 'budgeted') does not resolve the difficulties of setting accurate standards.
Batch related management reporting. The system is normally periodical (say monthly or fourweekly) and relates to batches. This long delay in reporting is unacceptable to operational managers working in modern factories. Aggregated financial figures are often used. Reported figures are aggregates, and thus lose management value. What is the 'knowledge and understanding' difference between a reported variance of, say, $10,000 (A) and $12,000 (A)? Surrogate financial figures are often used. The system places financial surrogate values on events which may cause inaccuracies, misunderstanding and subjectivity. Furthermore, the act of evaluating events in financial values tends to slow the reporting cycle. Includes variances which might not be helpful for management. For example. conventional variances relating to material price, material usage, labour efficiency are not helpful in modern 'JIT' orientated factories. Standards often include costs that are not relevant. Standard costs are often used for costbased decisions. Standards do not relate to 'relevant costs' and may not be appropriate for shortrun decisions.
Tutorial comment: Remember our mnemonic 'END BASIS
The material mix variance shows the increase (or reduction) in costs caused by the substitution of expensive materials for more cheaper (or cheaper materials for more expensive). It is not clear that a favourable mix variance represents an improvement for the firm. A short-term saving in costs may lead to a reduction in product quality with consequent quality costs. The standard is set with an appropriate mix. A deviation from this standard might represent a reduction in customer satisfaction (consider increasing the cheaper materials in a cake mix) with subsequent losses of sales in the future.
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An adverse yield variance represents an over-usage of materials in respect of the output actually achieved. A favourable yield variance represents a savings of normal loss. If a normal loss is not budgeted it is difficult to envisage a favourable yield variance, unless again, there has been a loss of quality. The mix and yield variance add to the total of the usage variances of the different materials incorporated in the mix, and in this respect are related. For example, a change in the mix could result in an increase in defective units (and thus an increase in the material usage). In the same way as for a usage variance, the usage variance could be due to a number of factors not related to the mix, such as machine malfunctioning, poor quality labour, and so on.
MEMORANDUM To: From: Production manager Management accountant
10th September Subject: Standard costing and variance analysis under inflationary conditions
I have been requested by the managing director to respond to your comment on standard costing and variance analysis in time of inflation. Standard costs are made up of two elements: (i) (ii) a quantity of resource required per unit, and an estimated price per unit of the resource.
When setting a value for the price element two possibilities exist: (i) (ii) to use a price prevailing at the start of the year; or to estimate an average price to be paid during the year ahead.
Both methods cause difficulties. Method (i) will cause adverse (often uncontrollable) price variances as inflation causes prices to rise. Method (ii) would (in theory) cause favourable variances in the early periods of a year and adverse variances in the later periods of a year which will (if the estimated price is accurate) total to a nil variance for the year. Either of these techniques will allow an analysis of the trends of costs to be recognised. A further alternative is to revise the price element of the standard cost each accounting period, but this makes trend analysis very difficult. Variances arising from the use of Method (i), which involves retaining the standard price (unchanged) for the year can be improved and made more meaningful by the use of planning and operational variances. Using this approach the inflationary element might be treated as a planning variance, which is uncontrollable as far as operational management are concerned, with operational variances, the controllable element of the activity, highlighted for management attention. Thus the two price related variances may be of use under inflationary conditions.
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The main advantages of flexed budgets over fixed (or static) budgets are: (i) (ii) (iii) (iv) They are prepared for a range of activity instead of a single level. They supply a dynamic basis for comparison because they are automatically geared to changes in volume. They aid in the planning of budgets based on estimated capacity levels. They make variable costs and fixed costs transparent for management attention.
An improvement in the level of efficiency of labour can be achieved in different ways:
S E E W E Q U I C K
Satisfaction (job satisfaction) for workers. This relates to Motivation Theory. Effective recruitment and selection of staff. Use of good interviewing techniques and psychographic testing, etc. Employees being fully supported by managers, particularly workers new to the job.
Working conditions. Efficient and effective work systems (routing, machine loading and logistical planning, etc.).
Quality of plant and machinery, and its maintenance. Use of payments by results payment schemes. Increase in the level of training. Constructive teambuilding and teamwork. Knocking down of demarcation walls dividing workers, managers and departments. Tutorial comment: Remember our mnemonic SEE WE QUICK
Manufacturing idle time can be defined as: time when an employee is unable to work because of some factor beyond his or her control. Usually the worker receives payment during idle time.
The main causes for manufacturing idle time are:
Short orders. The budgeted sales order capacity is less than the attainable manufacturing capacity. P Production mix which is impossible to route through the factory without causing bottlenecks, or else bottlenecks caused by the differing capacities of equipment which are manufacturing the same product. A Absenteeism of staff, for whatever reason, can cause idle time for other employees. S Stock-outs when substitution material (if technically suitable) is also not available. M Machine malfunctions, also machine maintenance and setting-up machines between batch runs. Tutorial comment: Remember our mnemonic SPASM
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A favourable mix variance would result from substituting cheaper materials for more expensive materials but this may not always be in a firm's best interests as the quality of the product may suffer or output may be reduced. An adverse mix variance would have the opposite effect of substituting expensive materials in the place of cheaper materials. There are two main reasons why this may occur: (i) a stock-out of the cheaper material occurs and it is economical to use expensive materials and maintain throughput; or
(ii) there is a fault in the process, probably in the mixing machinery (most mixing is done by machine, like petrol and air is mixed in a car engine).
Generally, the use of a less expensive mix of material input will mean the production of fewer output than standard. This may be because of an increase in rejects due to imperfections in the lower quality inputs, or other similar factors. The overall result may be: favourable material price variance - because less expensive materials are purchased favourable mix variance - because some of these less expensive materials have been substituted for more expensive materials adverse yield variance because the inferior materials have resulted in more defects and waste.
Possible causes of a favourable sales price variance are: Increase of sales price to take advantage of market price elasticity. A reduction in discounts planned. (Discounts effectively reduce the sales price.)
Possible causes of a averse sales price variance are: Reduction of sale price to take advantage of market price elasticity. The unplanned discounts given to customers.
Possible causes of a favourable sales volume variance are:
A reduction in the sales price has resulted in an increase in sales volume (demand). An increase in the firms share of market due to marketing activities such as advertising, product positioning, etc.
Possible causes of a averse sales volume variance are: An increase in the sales price has resulted in a fall in sales volume (demand). Loss of share of market due to ineffective marketing activities and offensive actions of competitors.
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Possible causes of a favourable material price variance are: Unforeseen discounts received. Greater effectiveness in purchasing. Change in material prices.
Possible causes of a averse material price variance are: Price increases. Ineffective purchasing. Change in suppliers discount policy.
Possible causes of a favourable material usage variance are: Material used of higher quality than standard. More effective use made of material. Errors in allocating materials to jobs (mix of materials).
Possible causes of a averse material usage variance are: Defective material Excessive waste. Theft. Stricter quality control (more rejects) Errors in allocating material to jobs. (mix of materials).
The main possible cause of a favourable labour rate variance is the use of apprentices or other workers at a rate of pay lower than standard.
The main possible cause of a averse labour rate variance results from unplanned wage rate increases.
Possible causes of a favourable labour efficiency variance are: Output produced more quickly than expected, i.e. actual output in excess of standard output set for the same number of hours because of staff motivation, effective supervision, better quality of equipment or materials, etc. Errors in allocating time to jobs.
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Possible causes of a averse labour efficiency variance are: Idle time in excess of standard allowed. Machine breakdown(s). Non-availability of materials (stock outs). Absence or injury of workers. Output lower than standard because of deliberate labour go slow, lack of training, or sub-quality material used. Errors in allocating time to jobs.
Possible causes of a favourable production overhead expenditure variance are: Savings in costs incurred. More economical use of services.
Possible causes of a averse production overhead expenditure variance are: Increase in cost of services used. Change in type of services used.
Joel Demski categorised the causes of variances in five groups: (i) Implementation deviation caused by a human or mechanical failure to achieve attainable standard, e.g. an over-usage of material due to ineffective supervision in the factory. (ii) Prediction deviation caused from errors in specifying the standard costs or other parameter values in a decision model, e.g. in determining the labour cost standard affected by a learning rate, ex ante predictions must be made, inter alia, of the future level of activity and the extent of learning. If the predictions are incorrect the labour standard will be wrong and variances will occur. (iii) Measurement deviation caused as a result of error in measuring the actual outcome, e.g. an adverse material variance reported in one process with a favourable usage variance for the same material in another process, caused by incorrect postings by the storekeeper. (iv) Model deviation which results from an error in the formulation of a decision model, e.g. in formulating a model to determine the rate of pay of workers involved in a group incentive bonus scheme, the treatment of allowances (such as contingency, relaxation and process allowances) incorporated in the basic standard hour may be incorrectly specified or dealt with. (v) Random deviations due to chance fluctuations of a cost or other parameter for which no cause can be identified, e.g. a small adverse labour efficiency variance for a period in which climatic temperature was particularly warm, a factor which may, or may not, have caused the variance. By definition a random variance per se calls for no control action affecting the current process.
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The investigation decision-rule models that can be identified are: (i) Monetary significance of the variance model A variance is investigated if it exceeds a certain monetary size - say $500.
(ii)
Fixed percentage significance of standard model Another simple rule is to choose a fixed percentage, say 10 per cent and investigate all variances that exceed the standard by this amount. Using, for example, a material 'NN' used in a manufacturing process with a standard usage of 2.1 kilograms per standard hour. With a 10 per cent significance the upper and lower control limits are 2.31 (2.1. x 1.1) and 1.89 (2.1 x 0.9) kilograms respectively. If the average usage of material for a control period was reported as 2.25 kilograms it would not be highlighted for attention. The model is easy to implement, once the manager on the basis of the historical results, or comparisons with other work aided by experience and judgement, specifies the appropriate percentage to use.
(iii)
Statistical significance model The model requires that a measure of expected dispersion be specified for each account item. Using for example, a material NN with a standard usage of 2.1 kilograms per standard hour, obtained from records of the average usage of the material in the process over the previous fifteen months and when production levels were approximately equal in each of the months sampled so that each observation can be weighed equally, and the data used to calculate a standard deviation, of say 0.056 kilos. The data could be used to set control limits based on: say a confidence level of 95% (which is 1.96 standard deviation from the average) the assumption of normally distributed deviations (say, +/- 0.11 kilos).
If variance is over 2.21 kgm (2.1 + 0.11) or under 1.99 (2.1 - 0.11) the manager could accept that the deviation is unusual, because probability of it occurring is less than 0.05 (5 chances in 100). (iv) Decision with costs and benefits of investigation model A simple decision theory model, based on cost-benefit analysis, using prior-period result analysis (i.e. probabilities of events based on previous periods). The use of rule of thumb policy Managers take subjective judgement based on the situation, their experience, intuition and needs. Usually this means that the bigger the variance the more chance there is that it will be investigated. Hunch plays a part in the decision process. However, in practice, the size of a variance and its significance may not correlate. Such an informal approach to the investigation of variances would probably lead to unproductive investigative work.
(v)
The weaknesses of the monetary size of the variance include the following:
This answer is continued on the next screen
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(i) (ii) (iii) (iv) (v)
(vi)
Q the choice of the monetary size, $500, $1,000, $1,500, or whatever, is likely to be subjective; it ignores the cost of investigating a variance; it does not consider type and probable cause of the variance; it does not reflect that some accounts are more important than others, in terms of interrelationships, trade off, etc.; it will not signal when an important account that historically has been controlled very closely, suddenly departs from its historical pattern but with a variance that is still within the present monetary values; it will trigger investigation into accounts where sizable fluctuation is normally experienced from period to period.
The model can be improved by the use of cost-benefit analysis based on statistical probabilities. With this approach probabilities (based on historical analysis of variances) that a variance of a certain size is likely to be controllable are measured. The net benefits from control action, the costs of investigation and the costs of control are incorporated in the decision-rule model.
END
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Score sheet: Diagnostic Test: Standard Costing and Variance Analysis

Question number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Marks available 3 2 2 2 2 2 2 2 2 2 3 2 3 2 2 2 4 5 3 4 8 3 5 4 Score Question number Marks available Score
Total score b/fwd 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 Total score 8 1 5 3 3 2 2 2 2 3 3 3 5 1 1 2 6 2 2 5 5 6 143
Total score c/fwd Percentage (%)
111 143 marks

73 110 marks
0 72 marks 33
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+AddVance ACCA F5 Diagnostic Tests
Contents
Screen Tutorial Tutorial 1 Tutorial 2 Tutorial 3 Tutorial 4 Tutorial 5 Tutorial 6 Tutorial 7 Tutorial 8 Tutorial 9 Tutorial 10 Tutorial 11 Tutorial 12 Tutorial 13 Tutorial 14 Tutorial 15 Syllabus classification Questions Activity Based Costing (ABC) Target Costing Life-Cycle Costing (LCC) Throughput Accounting (TA) Environmental Accounting Cost behaviour and break-even analysis Multi-limiting factors and the use of linear programming Pricing Decisions Make-or-Buy and other short-term decisions Dealing with risk and uncertainty Budgetary systems and types of budgets Quantitative analysis in budgeting Standard costing and variance analysis (This test is activated for this free sample) Planning and operational variances The scope of performance measurement Answers
19 36 84 57 77 88 124 136 157 186 218 261 291 324 334
25 40 51 66 81 104 130 143 168 197 227 271 304 328 344
Trust in Allah, but tie your camel first. Arabic proverb
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ACCA Paper F5 Performance Management

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No snowflake in an avalanche ever feels responsible. Voltaire

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ACCA Paper F5 Performance Management

Demand curve P = a - bQ b = change in price change in quantity

a = price when Q = 0 MR = a - 2bQ

ACCA Paper F5 Performance Management

ACCA Paper F5 Performance Management

Standard Costing and Variance Analysis

ACCA Paper F5 Performance Management

Direct materials Direct labour (3 hours) Variable overhead Fixed overhead

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Expenditure $ 367 A 500 A 100 A 100 A

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ACCA Paper F5 Performance Management

During August 2,700 units of Product X were actually sold.

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ACCA Paper F5 Performance Management

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ACCA Paper F5 Performance Management

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ACCA Paper F5 Performance Management

ACCA Paper F5 Performance Management

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ACCA Paper F5 Performance Management

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ACCA Paper F5 Performance Management

ACCA Paper F5 Performance Management

Standard Costing and Variance Analysis

ACCA Paper F5 Performance Management

B $ 17,100 14,400 2,700 (F)

= Units used + Closing inventory - Opening inventory = 4,100 - 300 = 3,800 kg

D $ 8,400 8,500 100 (A) $

3,600 3,200 400 (A)