ACCOUNTING PRODMA BANA REVIEWER.

1. ACCOUNTING REVIEWER
CHAPTER IV: STANDARD COST VARIANCE ANALYSIS
TOPIC 1: STANDARD COST AND VARIANCE
Standard costing is technique businesses use to keep track of their costs. It involves setting a "standard" cost for each item or activity and comparing actual costs to these standards. Standard
costing can be used to track both direct and indirect costs.
Variance analysis is a technique used to compare actual costs to standard costs. This comparison can help managers identify areas where costs are higher than expected and take corrective
action if necessary. Variance analysis can also assess the impact of price changes, volumes, or other factors on overall cost levels.
Standard costing and variance analysis are essential tools for any business trying to control costs. They can help managers identify areas where costs need to be reduced and take action to
improve profitability.
` Standard cost variances occur when there is a difference between the actual cost of goods sold and the Standard Cost of those same goods. Standard costing is an accounting method
that uses predetermined costs for materials and labor to value inventory and calculate the cost of goods sold. Variance analysis is then used to compare actual results to the Standard to identify
where differences exist. Standard cost variances can be caused by many things but are typically due to changes in material prices, labor rates, or productivity.
Categories of Standard Cost Variances
1. Price Variances occur when the actual price paid for materials or labor differs from the Standard Price. For example, if the Standard Price of a rubber is P 10 per unit, but the company pays P
20 per unit for the wallet it purchases, this would result in a Price Variance of P 10 per unit.
2. Efficiency Variances occur when throughput (the rate at which materials are converted into finished products) is less than expected. For example, if it takes longer than expected to assemble a
product, this will result in an Efficiency Variance.
3. Usage Variances occur when more or less material is used than expected. For example, if the Standard Price of a rubber is P 10 per unit, and the Standard Usage is 10 rubber per finished
product. Still, the company actually uses 12 rubber per finished product; this would result in a Usage Variance of 2 rubber per finished product.
All three types of Standard Cost Variances can be further classified as either favorable or unfavorable. A Favorable Variance occurs when the actual results are better than the Standard Results,
while an Unfavorable Variance occurs when the actual results are worse than the Standard Results.
For example, if the Standard Price of a rubber is P 10 per unit, but the company pays P 6 per unit for the rubber it purchases, this would result in a Favorable Price Variance of P 4 per rubber. On
the other hand, if the Standard Price of a rubber is P 10 per unit, but the company pays P 1 per unit for the rubber it purchases, this would result in an Unfavorable Price Variance of P 1 per
widget.
Similarly, if it takes less time than expected to assemble a product, this would result in a Favorable Efficiency Variance. On the other hand, if it takes longer than expected to assemble a product,
this would result in an Unfavorable Efficiency Variance.

2. Finally, if the Standard Usage is 10 rubber per finished product, but the company uses 8 rubber per finished product, this would result in a Favorable Usage Variance of 2 per finished product. On
the other hand, if the Standard Usage is 10 rubber per finished product, but the company uses 12 rubber per finished product, this would result in an Unfavorable Usage Variance of 2 per finished
product.
TOPIC 2: VARIANCE COMPUTATION AND ANALYSIS, MATERIALS LABOR COST AND FACTORY OVERHEAD VARIANCE ANALYSIS
Standard costs provide information that is useful in performance evaluation. Standard costs are compared to actual costs, and mathematical deviations between the two are termed variances.
Favorable variances result when actual costs are less than standard costs, and vice versa. The following illustration is intended to demonstrate the very basic relationship between actual cost and
standard cost. AQ means the “actual quantity” of input used to produce the output. AP means the “actual price” of the input used to produce the output. SQ and SP refer to the “standard”
quantity and price that was anticipated. Variance analysis can be conducted for material, labor, and overhead.
Management is responsible for evaluation of variances. This task is an important part of effective control of an organization. When total actual costs differ from total standard costs, management
must perform a more penetrating analysis to determine the root cause of the variances. The total variance for direct materials is found by comparing actual direct material cost to standard direct
material cost. However, the overall materials variance could result from any combination of having procured goods at prices equal to, above, or below standard cost, and using direct materials
than anticipated. Proper variance analysis requires that the Total Direct Materials Variance be separated into the:
• Materials Price Variance: A variance that reveals the difference between the standard price for materials purchased and the amount actually paid for those materials [(standard price –
actual price) X actual quantity].
• Materials Quantity Variance: A variance that compares the standard quantity of materials that should have been used to the actual quantity of materials used. The quantity variation is
measured at the standard price per unit [(standard quantity – actual quantity) X standard price].
The Total Direct Labor Variance consists of:
• Labor Rate Variance: A variance that reveals the difference between the standard rate and actual rate for the actual labor hours worked [(standard rate – actual rate) X actual hours].
• Labor Efficiency Variance: A variance that compares the standard hours of direct labor that should have been used to the actual hours worked. The efficiency variance is measured at
the standard rate per hour [(standard hours – actual hours) X standard rate].
Factory Overhead Variances
Variance analysis should also be performed to evaluate spending and utilization for factory overhead. Overhead variances are a bit more challenging to calculate and evaluate. As a result, the
techniques for factory overhead evaluation vary considerably from company to company. To begin, recall that overhead has both variable and fixed components (unlike direct labor and direct
material that are exclusively variable in nature). The variable components may consist of items like indirect material, indirect labor, and factory supplies. Fixed factory overhead might include rent,
depreciation, insurance, maintenance, and so forth. Because variable and fixed costs behave in a completely different manner, it stands to reason that proper evaluation of variances between
expected and actual overhead costs must take into account the intrinsic cost behavior. As a result, variance analysis for overhead is split between variances related to variable overhead and
variances related to fixed overhead.

3. Variable Factory Overhead Variances
The cost behavior for variable factory overhead is not unlike direct material and direct labor, and the variance analysis is quite similar. The goal will be to account for the total “actual” variable
overhead by applying: (1) the “standard” amount to work in process and (2) the “difference” to appropriate variance accounts.
Review the following graphic and notice that more is spent on actual variable factory overhead than is applied based on standard rates. This scenario produces unfavorable variances (also known
as “underapplied overhead” since not all that is spent is applied to production). As monies are spent on overhead (wages, utilization of supplies, etc.), the cost (xx) is transferred to the Factory
Overhead account. As production occurs, overhead is applied/transferred to Work in Process (yyy). When more is spent than applied, the balance (zz) is transferred to variance accounts
representing the unfavorable outcome.
A good manager will want to explore the nature of variances relating to variable overhead. It is not sufficient to simply conclude that more or less was spent than intended. As with direct material
and direct labor, it is possible that the prices paid for underlying components deviated from expectations (a variable overhead spending variance). On the other hand, it is possible that the
company’s productive efficiency drove the variances (a variable overhead efficiency variance). Thus, the Total Variable Overhead Variance can be divided into a Variable Overhead Spending
Variance and a Variable Overhead Efficiency Variance.
V. ABSORPTION AND VARIABLE COSTING
5.1 Absorption or Full Costing Analysis, Variable Costing Analysis, Distinction between Period Cost and Product Cost
What Is Absorption Costing?
Absorption costing, sometimes called “full costing,” is a managerial accounting method for capturing all costs associated with manufacturing a particular product. All direct and indirect costs, such
as direct materials, direct labor, rent, and insurance, are accounted for when using this method.
Under generally accepted accounting principles (GAAP), U.S. companies may use absorption costing for external reporting, however variable costing is disallowed.
Understanding Absorption Costing
Absorption costing includes anything that is a direct cost in producing a good in its cost base. Absorption costing also includes fixed overhead charges as part of the product costs. Some of the
costs associated with manufacturing a product include wages for employees physically working on the product, the raw materials used in producing the product, and all of the overhead costs
(such as all utility costs) used in production.
In contrast to the variable costing method, every expense is allocated to manufactured products, whether or not they are sold by the end of the period.
Components of Absorption Costing
The components of absorption costing include both direct costs and indirect costs. Direct costs are those costs that can be directly traced to a specific product or service. These costs include raw
materials, labor, and any other direct expenses that are incurred in the production process.

4. Indirect costs are those costs that cannot be directly traced to a specific product or service. These costs are also known as overhead expenses and include things like utilities, rent, and insurance.
Indirect costs are typically allocated to products or services based on some measure of activity, such as the number of units produced or the number of direct labor hours required to produce the
product.
In absorption costing, both direct and indirect costs are included in the cost of a product. This means that the cost of each unit of a product includes not only the direct costs of producing that
unit, but also a portion of the indirect costs that were incurred in the production process.
Variable Costing Analysis
What is Variable Costing?
Variable costing is a concept used in managerial and cost accounting in which the fixed manufacturing overhead is excluded from the product-cost of production. The method contrasts with
absorption costing, in which the fixed manufacturing overhead is allocated to products produced. In accounting frameworks such as GAAP and IFRS, variable costing cannot be used in financial
reporting.
Variable Costing in Financial Reporting
Although accounting frameworks such as GAAP and IFRS prohibit the use of variable costing in financial reporting, this costing method is commonly used by managers to:
• Conduct break-even analysis to determine the number of units needed to be sold to begin earning a profit
• Determine the contribution margin on a product, which helps to understand the relationship between cost, volume, and profit
• Facilitate decision-making by excluding fixed manufacturing overhead costs, which can create problems due to how fixed costs are allocated to each product
Variable Costing vs. Absorption Costing
Under variable costing, the following costs go into the product:
• Direct material (DM)
• Direct labor (DL)
• Variable manufacturing overhead (VMOH)
Under absorption costing, the following costs go into the product:
• Direct material (DM)
• Direct labor (DL)
• Variable manufacturing overhead (VMOH)
• Fixed manufacturing overhead (FMOH)

5. • For your reference, the diagram provided below provides an overview of which costs go into variable costing vs. absorption costing methods:
Period Costs vs. Product Costs: An Overview
Period costs and product costs are two categories of costs for a company that are incurred in producing and selling their product or service. Below, we explain each and how they differ from one
another.
Product Costs
Product costs are the direct costs involved in producing a product. A manufacturer, for example, would have product costs that include:
• Direct labor
• Raw materials
• Manufacturing supplies
• Overhead that is directly tied to the production facility such as electricity
For a retailer, the product costs would include the supplies purchased from a supplier and any other costs involved in bringing their goods to market. In short, any costs incurred in the process of
acquiring or manufacturing a product are considered product costs.
Product costs are often treated as inventory and are referred to as "inventoriable costs" because these costs are used to value the inventory. When products are sold, the product costs become
part of costs of goods sold as shown in the income statement.
Period Costs
Period costs are all costs not included in product costs. Period costs are not directly tied to the production process. Overhead or sales, general, and administrative (SG&A) costs are considered
period costs. SG&A includes costs of the corporate office, selling, marketing, and the overall administration of company business.
Period costs are not assigned to one particular product or the cost of inventory like product costs. Therefore, period costs are listed as an expense in the accounting period in which they occurred.

6. Other examples of period costs include marketing expenses, rent (not directly tied to a production facility), office depreciation, and indirect labor. Also, interest expense on a company's debt would
be classified as a period cost.
Short-Term Decisions
• Model cost/revenue behavior to make shortterm operating decisions
• Assume that capacity is fixed
facility, workers or relocate
• Impact the future long-term decisions
• Cannot be planned during the normal planning
process
environment and must be addressed in a
timely manner
Cost-Volume-Profit Analysis (CVP)
• Study of how costs, revenues, and profits change in response to changes in the volume of goods or services provided to the customer
What is the CVP Model?
• Cost-volume-profit model (short-term)
lore relationships among costs,volumes, and profits
• Assumptions (linearity)

7. sold
Sensitivity Analysis
• Change in selling price
—decreases breakeven
—increases breakeven
• Change in variable cost
—increases breakeven
—decreases breakeven
What are Product and Nonproduct Costs?
• Product costs
onnection with buying or making the product.
with producing the product
• Nonproduct costs
ection with selling the product and administering (running) the company
g the product and administering the company
What are the 3 Types of Product Costs?
• Direct materials
• Direct labor
• Manufacturing overhead

8. materials or labor
indirect labor, and other manufacturing costs)
What are the Activity Levels
Associated with Costs?
• Unit-related
• Batch-related
ches (groups) regardless of the number of units in the batch
• Product-sustaining
Vary with the number of product lines
• Facility-sustaining
What are the 2 Characteristics of a Relevant Variable?
• Future
• Different
alternatives considered
Relevant Variables Continued
• Sunk costs

9. • Opportunity costs
making
• Incremental costs/revenues
between alternatives
• Helps determine what is relevant to a
particular decision situation

11. MM104 – PRODMA

13. Regression Analysis
Regression analysis is a tool for building mathematical and statistical models that characterize relationships between a dependent (ratio) variable and one or more independent, or explanatory
variables (ratio or categorical), all of which are numerical.
Simple linear regression involves a single independent variable.
Multiple regression involves two or more independent variables.
.
Regression Statistics
Multiple R - | r |, where r is the sample correlation coefficient. The value of r varies from -1 to +1 (r is negative if slope is negative)
R Square - coefficient of determination, R2, which varies from 0 (no fit) to 1 (perfect fit)
Adjusted R Square - adjusts R2 for sample size and number of X variables
Standard Error - variability between observed and predicted Y values. This is formally called the standard error of the estimate, SYX.
Regression as Analysis of Variance
ANOVA conducts an F-test to determine whether variation in Y is due to varying levels of X.
ANOVA is used to test for significance of regression:
H0: population slope coefficient = 0
H1: population slope coefficient ≠ 0
Excel reports the p-value (Significance F).
Rejecting H0 indicates that X explains variation in Y.
Confidence Intervals for Regression Coefficients
Confidence intervals (Lower 95% and Upper 95% values in the output) provide information about the unknown values of the true regression coefficients, accounting for sampling error.
We may also use confidence intervals to test hypotheses about the regression coefficients.
To test the hypotheses