Revised Study Note Akt MGT CPA Review HT

PPAK – UNTAR Exam
PRESENTED BY: Dr. Hendang T., CPA, CA, CPMA
hendangt@gmail.com 1
Financial accounting system
follows established rules and conventions to provide
information (financial statements) to external users
such as investors, government agencies, and banks.
Cost management system
identifies, collects, measures, classifies, and reports
information that is useful to managers in costing
(determining what something costs), planning,
controlling, and decision making.
Cost accounting system
assigns costs to individual products and services and
other cost objects as specified by management;
satisfies financial reporting and management
decision-making needs
Operational control system

provides accurate and timely feedback concerning
performance; concerned with what activities should
be performed and assessing those activities.
Total Quality Management
◦ Continual improvement and elimination of waste
are the two foundation principles that govern a
state of manufacturing excellence.
◦ A philosophy of total quality management, in which
managers strive to create an environment that will
enable organizations to manufacture perfect
products, has replaced the acceptable quality
attitudes of the past.
Advances in Management Environment
◦ Theory Of Constraints is used to continuously
improve manufacturing activities and
nonmanufacturing activities.
◦ Just-in-Time Manufacturing is a demand-pull
system that strives to produce a product only when
it is needed and only in the quantities demanded by
customers.
 Responsible for generating financial
information required by the firm for
◦ Internal reporting
◦ External reporting
 Accounting system information is used by

management to
◦ Plan
◦ Control
◦ Make decisions
Planning
◦ Detailed formulation of future actions to achieve a
particular end.
◦ Requires setting objectives and identifying methods
to achieve those objectives.
Controlling
◦ The managerial activity of monitoring a plan’s
implementation and taking corrective action as
needed.
◦ Feedback is information that can be used to
evaluate or correct the steps being taken to
implement a plan.
 Performance reports compare budgeted and actual
data
Continuous Improvement
◦ Required in a dynamic environment if a firm is to
remain competitive or to establish a competitive
advantage.
◦ Searching for ways to increase overall efficiency
through
 Reduction of waste
 Quality improvement
 Cost reduction
Decision Making
◦ The process of choosing among competing
alternatives.
◦ Decisions are based on information provided by the
accounting system
 Direct materials: those materials directly
traceable to the goods or services being
produced.
◦ Example: The cost of wood in furniture.
 Direct labor: labor that is directly traceable
to the goods or services being produced.
◦ Example: Wages of assembly-line workers.
 Overhead: all other manufacturing costs.
◦ Example: Plant depreciation, utilities,
property taxes, indirect materials, indirect
labor, etc.
Direct + Direct = Prime
Materials Labor Costs
Direct Labor + FOH = Conversion

Costs
 Amount and timing of benefit cannot be
reasonably estimated
 Period costs
◦ Not inventoried
◦ Expensed as incurred
 Examples
◦ Research and development
◦ Marketing costs
◦ Administrative costs
A system of accounting for costs in which
both fixed and variable production costs are
considered product costs.
Fixed
Costs
Product
Variable
Costs
8-
A system of cost accounting that only assigns
the variable cost of production to products.
Fixed
Costs
Product
Variable
Costs
8-
Example
In an automated process direct material may be

the only unit-level cost and so is the only product cost.
All other manufacturing costs are expensed as period cost
Incentive to Average unit cost does

overproduce not vary with changes
is reduced in production levels.
Advantages
8-
Management finds it Consistent with
easy to understand. CVP analysis.
Emphasizes contribution in
Advantages
short-run pricing decisions.
Impact of fixed Profit for period not

costs on profits affected by changes
emphasized. in fixed mfg. overhead.
8-
Fixed manufacturing overhead is
treated the same as the other product
costs, direct material and direct labor.
Consistent with long-run

Advantages
pricing decisions that must
cover full cost.
External reporting
and income tax law
require absorption costing.
8-
In a JIT inventory system . . .
Production tends
to equal sales . . .
So, the difference between variable and

absorption income tends to disappear.
8-
Activity-Based Costing (ABC)
Traditional Costing Activity-Based Costing
Resource Costs Resource Costs
Directly traced Directly traced

or allocated or allocated
Cost Pools: Cost Pools:

Plants or Activities or
Departments Activity Centers
Predetermined Cost driver

overhead rates for
rate each activity
Cost Objects Cost Objects

Identify and classify the
activities related to the
company’s products or
services.
Estimate the cost of each
activity identified in .
Calculate a cost-driver rate for
each activity.
Assign activity costs to
products using the cost-driver
rate.
UNIT-LEVEL ACTIVITES
Resources acquired and activities performed for individual units.
BATCH-LEVEL ACTIVITES
Resources acquired and activities performed for a group or batch
of similar products or services.
PRODUCT-LEVEL ACTIVITES
Resources acquired and activities performed to produce and sell a
specific product or service.
CUSTOMER-LEVEL ACTIVITES
Resources acquired and activities performed to serve specific
customers.
FACILITY-LEVEL ACTIVITIES
Resources acquired and activities performed to provide general
capacity to produce goods or services.
When estimating the cost
of an activity, only the EXAMPLE
costs associated with the Suppose we rent a 1,000 square foot
product should be used warehouse for $1,000 per month. Only
(practical capacity). The 800 sq. ft. are used to store Product A.
cost of “unused capacity” The rest of the warehouse is “unused”.
should not be applied to How much rent cost should be
products. allocated to Product A?
Theoretical Capacity
} Planned or
unavoidable
downtime
Practical Capacity
} Excess
capacity
Demand for Output
 More accurate and informative
product costs lead to better
decisions.
 More accurate measurements of
the activities driving costs.
 Provides managers with easier
access to relevant costs.
An ABC system is very expensive

to develop and implement; it is
also very time-consuming.
Evaluates the costs . . . To identify
and values of process opportunities to
activities . . . improve
efficiency.
Activity-Based Valued-Added • Process improvements

Costing Analysis • Improve customer value
+ = • Reduce costs
ABC ABM adds:
 Identification of value-
 Understanding the way added and non-value-
resources are used in the
added activities.
current processes.
 More accurately measures
?
product costs by analyzing  Identifies the customer
costs associated with perceived value of each
identified activities in the activity.
processes.
 Identifies opportunities to
enhance value-added
activities and reduce or
eliminate non-value-added
activities.
5-
Study closely all the customer-related
activities that drive costs.
Typical Customer-Related Activities Include:
 Processing Orders ⚫ Billing

 Sales Contacts ⚫ Engineering/Desig
 Sales Visits n Changes
 Processing ⚫ Special Packaging
Shipments
⚫ Special Handling
Which is
more
important?
 Conflict between TQM and ROQ
exists only at very high levels of
quality.
 Most organizations operate
below the optimum quality level
in the ROQ model, so improving
quality results in higher profits
just as in the TQM model.
33
W. Edwards Deming proposed that
improving quality reduces cost and Quality can be and should
improves profitability. be improved continuously.
Revenues
Total Revenues & Costs
Max Profit
Cost
Max Quality
Quality
There is a trade-off between the costs and benefits of quality.
Profit is maximized at The optimum quality level is always achieved
the optimum quality before maximum quality level is reached.
level.
Cost
Total Revenues & Costs
Revenues
Max Profit
Optimum Quality
Quality
Out-of-pocket costs associated with quality
generally fall into two categories:
Costs associated with activities

to correct failure to control
quality.
Costs associated with

controlling quality.
Prevention Appraisal
Activities that seek to prevent Activities for inspecting inputs
defects in the products or and attributes of individual
services being produced. units of product and service.
•Certifying Suppliers •Inspecting Materials
•Designing for •Inspecting Machines
Manufacturability •Inspecting Processes
•Quality Training •Statistical Process Control
•Quality Evaluations
•Sampling and Testing
•Process Improvements
Value Added Non-Value Added

The objective of JIT is to . . .
•purchase materials
• produce products
•and deliver products
. . . just when they are needed.
Prevention
Activities that seek to prevent
defects in the products or
services being produced.
Companies with
•Certifying Suppliers the highest quality
•Designing for
Manufacturability levels tend to
•Quality Training have most of their
•Quality Evaluations
quality expenditures
•Process Improvements
in this area.
Value Added
Internal Failure External Failure
Costs associated with defects Costs associated with defects
in processes and products that in processes and products that
are found prior to delivery to are detected after delivery to
customers. customers.
•Disposing of Scrap •Warranty Repairs
•Rework •Field Replacements
•Product Liability
•Reinspecting/Retesting
•Customer Complaints
•Delaying Processes •Restoring Reputation
•Lost Sales
Non-Value Added Non-Value Added

European
Japan Community
The objective of JIT is to . . .
•purchase materials
• produce products
•and deliver products
. . . just when they are needed.
Production environment Costing procedure
◦ Homogenous units  Costs are recorded for a
department.
◦ Mass produced  Department costs are
◦ Automated assigned equally to units
produced.
◦ Continuous flow
A number of products are produced
from a single raw material input.
Product 1
Single Input Product 2
Product 3
Concept: in some industries, a number of products are
produced from a single raw material input.
Key terms:
◦ Joint products – products resulting from a process
with a common input.
◦ Split-off point – the stage of processing where joint
products are separated.
◦ Joint cost – costs of processing joint products prior to
the split-off point.
◦ Final product – ready for sale without further
processing.
◦ Intermediate product – requires further processing
before sale.
9-
Intermediate Final
products products
Joint
Costs Separate Final
Oil Processing Sale
Common Separate
Joint Processing Costs
Production
Input
Process
Separate Final
Gasoline
Processing Sale
Split-Off Separate
Point Processing Costs
Identify final Forecast the
products possible sales price of
from the joint each final
process. product.
The usual objective in the

production of joint products
is to maximize profits.
Choose the set Estimate costs

of products to further process
with the overall joint products into
maximum profit. final products.
 Joint product costs incurred prior to the split-
off point are sunk costs — not affected by a
decision to process further after the split-off
point.
 A product should be processed beyond the
split-off point only if if the incremental revenue
exceeds the incremental processing costs.
Value is added only if the

incremental value from
processing exceeds the
incremental processing costs.
 Sawmill, Inc. cuts logs from which unfinished
lumber and wood chips are the joint
products.
 Unfinished lumber is sold “as is” or processed
further into finished lumber.
 Wood chips can also be sold “as is” for
landscaping or processed further into 4 × 8
composition boards.
Product
Oil Gasoline Total
Output quantities in gallons 240,000 360,000 600,000
Proportionate share:
240,000 ÷ 600,000 40%
360,000 ÷ 600,000 60%
Allocated joint costs:
?
?
Product
Oil Gasoline Total
Output quantities in gallons 240,000 360,000 600,000
Proportionate share:
240,000 ÷ 600,000 40%
360,000 ÷ 600,000 60%
Allocated joint costs:
$500,000 × 40% $ 200,000
$500,000 × 60% $ 300,000
$275,000 joint material cost plus

$225,000 joint conversion cost
Joint conversion
cost = $225,000 Sales
Separate Value
Oil Processing $500,000
Common Separate
Joint material Processing Costs
Production
cost = $275,000 Process $200,000
Sales
Separate Value
Gasoline
Processing $1,200,000
Split-Off Separate
Point Processing Costs
$500,000
Product
Oil Gasoline Total
Estimated NRV at split-off point $ 300,000 $ 700,000 $ 1,000,000
Less allocated joint costs 150,000 350,000 500,000
Gross margin $ 150,000 $ 350,000 $ 500,000
Gross margin as a percent of sales
$150,000 ÷ $300,000 50.0%
$350,000 ÷ $700,000 50.0%
$500,000 ÷ $1,000,000 50.0%
The net realizable value method results in

equal gross margin percentages for all products.
Summary of Variable and Fixed Cost Behavior
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains the Fixed cost per unit goes
same even when the activity down as activity level goes up.
level changes.
Total Costs = Fixed Costs + Variable Costs

TC = F + VX
V is the variable cost per cost driver unit (cost driver rate).
X is the number of cost driver units.
The Scattergraph
The slope of this line is the variable unit cost. (Slope is the change in total
cost for a one-unit change in activity).
20
* ** *
1,000s of Dollars
Vertical
Total Cost in
* * distance
** is the
10 * * change
in cost.
Horizontal distance is
the change in activity.
0
0 1 2 3 4
Activity, 1,000s of Units Produced
The high-low method uses two points to estimate the general
cost equation TC = F  VX
TC = the value of the estimated

total cost
F = a fixed quantity that represents

the value of Y when X = zero
V = the slope of the line, the unit

variable cost .
X = units of the cost driver activity.
The High-Low Method
Units Cost
High activity level 9,000 $ 9,700
Low activity level 5,000 6,100
Change 4,000 $ 3,600
 Unit variable cost = $3,600 ÷ 4,000 units = $.90 per unit

 Fixed cost = Total cost – Total variable cost
Fixed cost = $9,700 – ($.90 per unit × 9,000 units)
Fixed cost = $9,700 – $8,100 = $1,600
 Total cost = Fixed cost + Variable cost (TC = F + VX)
TC = $1,600 + $0.90X
11
-
A statistical method used to create an
equation relating dependent (or Y) variables
to independent (or X) variables.
Past data is used to estimate relationships
between costs and activities.
Independent variables are the Before doing the analysis, take

cost drivers that drive the time to determine if a logical
variation in dependent relationship between the
variables. variables exists.
11
-
Regression Analysis
The objective of the regression method is still a

linear equation to estimate costs TC = F + VX
TC = value of the dependent variable, estimated cost
F = a fixed quantity, the intercept, that

represents the value of TC when X = 0
V = the unit variable cost, the coefficient of

the independent variable measuring the
increase in TC for each unit increase in X
X = value of the independent variable, the cost driver
The correlation coefficient, r, is a measure of the linear
relationship between variables such as cost and activity.
20
* ** *
* * **
Total Cost
10 *
*The correlation coefficient is highly positive (close
to 1.0) if the data points are close to the regression
line.
0
0 1 2 3 4
Activity
Terms in the equation have the same
meaning as in simple regression with
only one independent variable.
TC = F + V1X1 + V2X2
Adding independent variables increases

the proportion of explained variation, R2,
which is then adjusted for the number
of independent variables.
Here is the proof!
Total Per Unit Percent

Sales (400 surf boards) $200,000 $ 500 100%
Less: variable expenses 120,000 300 60%
Contribution margin $ 80,000 $ 200 40%
Less: fixed expenses 80,000
Net income $ -
400 × $500 = $200,000 400 × $300 = $120,000
Calculate the break-even point in sales dollars
rather than units by using the contribution
margin ratio.
Contribution margin
= CM Ratio
Sales
Fixed expense Break-even point

=
CM Ratio (in sales dollars)
We can determine the number of
surfboards that Curl must sell to earn a
profit of $100,000 using the contribution
margin approach.
Units sold to earn

Fixed expenses + Target income = the target income
Unit contribution margin
$80,000 + $100,000
$200 per surf board
=900 surf boards
Operating leverage Contribution margin
factor = Net income
Actual sales
500 Board
Sales $ 250,000
Less: variable expenses 150,000
Contribution margin 100,000
Less: fixed expenses 80,000
Net income $ 20,000
$100,000
= 5
$20,000 hendangt@gmail.com 66
Let’s use the concepts
of the general model to
calculate standard cost
variances, starting with
direct material.
Sensible Cost Management by
Comparisons Exception
Performance Employee
Evaluation Motivation
Advantages
Stable Product
Costs
Too aggregate, Not specific
too late
Too much focus Disadvantages Stable production

on direct-labor required
Shorter life Narrow

cycles definition
Focus on cost
minimization
Standard Cost Variances
Price Variance Quantity Variance
The difference between The difference between

the actual price and the the actual quantity and
standard price the standard quantity
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
Price or Rate Quantity or Efficiency

Variance Variance
MaterialsAQ(AP
price variance
- SP) Materials quantity variance
SP(AQ - SQ)
Labor rate variance Labor efficiency variance
AQ Variable
= Actualoverhead
Quantity
spending variance
Variable overhead
SP = Standard Price
efficiency variance
AP = Actual Price SQ = Standard Quantity
Actual Quantity Actual Quantity
Purchased Purchased
× ×
Actual Price Standard Price
We should compute the
40,000 sqm. 40,000 sqm. price variance using the
× × actual quantity purchased.
$8.15 per sqm. $8.00 per sqm.
$326,000 $320,000
Price variance
$6,000 Unfavorable
SQ = 3,000 tents × 12 sqm. per tent
SQ = 36,000 sqm.
Actual Quantity
Used Standard Quantity
× ×
Standard Price Standard Price
We should compute the
quantity variance using the
actual quantity used. 36,400 sqm. 36,000 sqm.
× ×
$8.00 per sqm. $8.00 per sqm.
$291,200 $288,000
Quantity variance
$3,200 Unfavorable
SH = 3,000 tents × 2 hours per tent
SH = 6,000 hours
Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
5,900 hours 5,900 hours 6,000 hours

× × ×
$19.00 per hour $18.00 per hour $18.00 per hour
$112,100 $106,200 $108,000
Rate variance Efficiency variance

$5,900 Unfavorable $1,800 Favorable
 Standard costing – the use of carefully
predetermined product costs for budgeting and
performance evaluation.
◦ Standard costs are typically used in established
production processes.
 Kaizen costing – the emphasis is on continuous
reduction of production costs.
◦ Rather than standards or targets, the goal is current
costs that are less than previous costs.
Total budgeted Budgeted variable Total Budgeted fixed
monthly overhead cost per
= × activity + overhead cost
overhead cost activity unit units per month
Variable-Overhead Variances
× × ×
Actual Rate Standard Rate Standard
Rate
AH × AR AH × SR SH × SR
Variable-overhead Variable-overhead
spending variance efficiency variance
Variable-Overhead Variances
× × ×
Actual Rate Standard Rate Standard
Rate
AH × AR AH × SR SH × SR
1,550 1,000 tents 1,550
× 1.5 hours 1,500
× × ×
$13.20 $13.00 $13.00
$20,460 $20,150 $19,500
$310 Unfavorable $650 Unfavorable

Variable-overhead Variable-overhead
spending variance efficiency variance
Fixed-overhead Actual fixed- _ Budgeted fixed-
budget variance = overhead overhead
_
$550 Favorable = $8,450 $9,000
Budget Variance
Results from paying more or less
than expected for overhead items.
17
-
1. Cost centers - responsible for the cost of a
well defined activity.
2. Discretionary cost centers – responsible for
the cost of an activity that is not well defined.
3. Revenue center – responsible for revenue
attributed to the subunit.
4. Profit center – responsible for profit of a
subunit.
5. Investment center – responsible for profit and
the invested capital of a subunit.
Income
ROI
Invested capital
=
or
Income Sales revenue
ROI = ×
Sales revenue Invested capital
Income
ROI =
Invested Capital
Income × Sales Revenue

ROI =
Sales Revenue Invested Capital
Sales Capital
Margin Turnover
 As division manager at Winston, Inc., your
compensation package includes a salary plus
bonus based on your division’s ROI -- the
higher your ROI, the bigger your bonus.
 The company requires an ROI of 15% on all
new investments -- your division has been
producing an ROI of 30%.
 You have an opportunity to invest in a new
project that will produce an ROI of 25%.
As division manager would you
invest in this project?
Investment center profit
– Investment charge
= Residual income
Investment capital
× Imputed interest rate
= Investment charge
Investment center’s
minimum required
rate of return
 Flower Co. has an opportunity to invest
$100,000 in a project that will return
$25,000.
 Flower Co. has a 20 percent required rate of
return and a 30 percent ROI on existing
business.
Let’s calculate residual income.

Investment center profit = $25,000
– Investment charge = 20,000
= Residual income = $ 5,000
Investment capital = $100,000

× Imputed interest rate = 20%
= Investment charge = $ 20,000
Investment center’s
minimum required
rate of return
13
-
Investment center’s after-tax operating income
– Investment charge
= Economic Value Added
( Investment
center’s
total assets
–
Investment
center’s
current liabilities
) 
Weighted
average
cost of capital
(
After-tax Market
cost of  value
debt of debt
) (
Cost of
capital
Market
 equity  value
of equity
)
Market Market
value  value
of debt of equity
The value placed on transfer goods is used
to make it possible to transfer goods
between divisions while allowing them to
retain their autonomy.
In a decentralized organization, the
managers of profit centers and investment
centers often have considerable autonomy
in deciding whether to accept or reject
orders and whether to buy from inside or
outside the organization.
The goal in setting the transfer price is to provide
incentives for each division manager to act in the
company’s best interests.
The ideal transfer price allows
each division manager to make
decisions that maximize the
company’s profit, while
attempting to maximize his/her
own division’s profit.
Additional outlay Opportunity cost per
cost per unit unit to the
Transfer incurred because organization because
Price = goods are + of the transfer
transferred
Let’s consider two different
examples of setting transfer
prices.
1. The company has no excess capacity.
2. The company has excess capacity.
General Rule When Producing Division Has
No Excess Capacity and Perfect
Competition Prevails
Transfer price = Outlay cost + Opportunity cost
Transfer price = Market price
Financial performance
How should we appear to
our shareholders?
Vision Business and production

Customer performance
and process performance
How should be appear to
Strategy At what business practices
our customers
must we excel?
Learning and growth performance

How should we sustain our ability
to change and improve?
Financial
Vision
and Internal
Customer
Strategy Operations
Learning and Growth
Information is relevant to a decision
problem when . . .
1. It has a bearing on the future,
2. It differs among competing alternatives.
Budget
1. Planning
a detailed plan,
expressed in 2. Facilitating
quantitative terms, that Communication and
specifies how resources Coordination
will be acquired and 3. Allocating Resources
used during a specified
4. Controlling Profit and
period of time.
Operations
5. Evaluating Performance
and Providing
Incentives
100
Sales of Services or Goods
Ending
Inventory Production
Budget Budget
Work in Process
and Finished
Goods
Ending Direct Direct Selling and

Overhead
Inventory Materials Labor Administrative
Budget Budget Budget Budget
Budget
Direct Materials
Cash Budget
Budgeted Income
Statement
Budgeted
Balance Sheet
Budgeted Statement
of Cash Flows
Budgetary Slack: Padding the Budget
People often perceive that their performance will look
better in their superiors’ eyes if they can “beat the
budget.”
9-
10
Top Management
Middle Middle
Management Management
Supervisor Supervisor Supervisor Supervisor
Flow of Budget Data

9-
10
The transfer price affects the profit measure for
both the selling division and the buying division.
A higher transfer
price for batteries
means . . .
Battery Division greater Auto Division

profits for the lower profits
battery division. for the
auto division.
The ideal transfer price allows
each division manager to make
decisions that maximize the
company’s profit, while
attempting to maximize his/her
own division’s profit.
Additional outlay Opportunity cost
cost per unit per unit to the
Transfer incurred because organization
price = goods are
transferred
+ because of
the transfer

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PPAK – UNTAR Exam

PRESENTED BY: Dr. Hendang T., CPA, CA, CPMA

Operational control system

 Accounting system information is used by

Direct Labor + FOH = Conversion

In an automated process direct material may be

All other manufacturing costs are expensed as period cost

Incentive to Average unit cost does

Impact of fixed Profit for period not

Consistent with long-run

So, the difference between variable and

Resource Costs Resource Costs

Directly traced Directly traced

Cost Pools: Cost Pools:

Predetermined Cost driver

Cost Objects Cost Objects

Demand for Output

An ABC system is very expensive

Activity-Based Valued-Added • Process improvements

Typical Customer-Related Activities Include:

 Processing Orders ⚫ Billing

Costs associated with activities

Costs associated with

Value Added Non-Value Added

Non-Value Added Non-Value Added

Single Input Product 2

The usual objective in the

Choose the set Estimate costs

Value is added only if the

$275,000 joint material cost plus

The net realizable value method results in

Total Costs = Fixed Costs + Variable Costs

TC = the value of the estimated

F = a fixed quantity that represents

V = the slope of the line, the unit

X = units of the cost driver activity.

 Unit variable cost = $3,600 ÷ 4,000 units = $.90 per unit

Independent variables are the Before doing the analysis, take

The objective of the regression method is still a

TC = value of the dependent variable, estimated cost

F = a fixed quantity, the intercept, that

V = the unit variable cost, the coefficient of

X = value of the independent variable, the cost driver

Adding independent variables increases

Total Per Unit Percent

400 × $500 = $200,000 400 × $300 = $120,000

Fixed expense Break-even point

Units sold to earn

Too much focus Disadvantages Stable production

Shorter life Narrow

Price Variance Quantity Variance

The difference between The difference between

Price or Rate Quantity or Efficiency

Actual Hours Actual Hours Standard Hours

5,900 hours 5,900 hours 6,000 hours

Rate variance Efficiency variance

$20,460 $20,150 $19,500

$310 Unfavorable $650 Unfavorable

Income × Sales Revenue

Let’s calculate residual income.

Investment capital = $100,000

Transfer price = Outlay cost + Opportunity cost