What is a standard cost and

why is it important?

A standard cost is an estimate of the cost the company

expects to incur in the production process.
Standard costs are required in order to evaluate how a
company performed during a period because performance
is measured against the standard cost.

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 What are the Level 1 variances?

Static budget variances. These are based on the income

statement and compare the actual result to the master
budget.

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 What are the Level 2 variances?

1) The flexible budget variance:

Actual Results – Flexible Budget Amount

2) The sales volume variance:

Flexible Budget Amount – Static Budget Amount

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 How is the direct material
quantity variance calculated?

(Actual Quantity − Standard Quantity for Actual Output)

× Standard Price

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How is the direct material price
variance calculated?

(Actual Price − Standard Price) × Actual Quantity

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How is the direct labor rate
variance calculated?

(Actual Rate – Standard Rate) × Actual Hours

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How is the direct labor efficiency
variance calculated?

(Actual Hours − Standard Hours for Actual Output)

× Standard Rate

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 How is the material price (or labor
rate) variance calculated when
there is more than one input?

The price (or rate) variance is calculated for each input

individually and then added together.

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 How is the material quantity (or
labor efficiency) variance calculated
when there is more than one input?

The quantity (or efficiency) variance is calculated for each

input individually and then added together.

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 When there is more than one
material input or labor class, what
are the two quantity sub-variances?

1) The mix variance

2) The yield variance

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 What is the formula for
the mix variance?

(waspAM – waspSM) × AQ

See the textbook for the details of this formula.

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 What is the formula for
the yield variance?

(AQ – SQ) × waspSM

See the textbook for the details of this formula.

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 What are the four
overhead variances?

1) Variable overhead spending variance

2) Variable overhead efficiency variance
3) Fixed overhead spending variance
4) Fixed overhead production-volume variance

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 How is the total variable
overhead variance calculated?

Actual total variable overhead incurred (money

spent on these items)
(AP x AQ)
– Variable overhead applied to production using
predetermined rate
(SP x SQ)
= Total variable overhead variance

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 How is the variable overhead
spending variance calculated?
Actual total variable overhead incurred (money actually
spent) (AP x AQ)
– Budgeted variable overhead based on inputs actually
used (SP x AQ)
= Variable overhead spending variance

or
(AP − SP) × AQ

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 How is the variable overhead
efficiency variance calculated?
Budgeted variable overhead based on inputs actually
used (AQ x SP)
− Standard variable overhead allowed for
production/applied to production (SQ x SP)
= Variable overhead efficiency variance

or
(AQ − SQ) × SP

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 How is the total fixed overhead
variance calculated?

Actual fixed overhead incurred (money actually

spent)
– Standard fixed overhead applied (standard rate ×
standard usage for actual output)
= Total fixed overhead variance

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How is the fixed overhead spending
variance calculated?

Actual Fixed Overhead Incurred

– Budgeted Fixed Overheads (the flexible budget OR
the static budget amount)
= Fixed Overhead Spending/Flexible Budget
Variance

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 How is the fixed overhead
production-volume
variance calculated?

Budgeted Fixed Overheads (the flexible budget OR

the static budget amount)
– Standard fixed overhead applied (standard rate ×
standard input for actual output)
= Fixed Overhead Production-Volume Variance

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 What are the variances in
3-way variance analysis?

1) The volume variance is equal to the production-volume

variance as calculated for fixed overhead.
2) The efficiency variance is equal to the variable
overhead efficiency variance.
3) The spending variance is equal to the variable
overhead spending variance plus the fixed overhead
spending variance.

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 What are the variances in
2-way variance analysis?

1) The volume variance is equal to the production-volume

variance for fixed overhead.
2) The controllable variance is equal to the sum of the
remaining three variances, which are the variable
spending variance, variable efficiency variance, and
fixed spending variance.

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 How are sales variances
calculated in comparison to
the input variances?

Sales variances are calculated in much the same way as

input variances, except that sales variances should use
contribution per unit instead of sales price per unit (if that
information is available).

This is also the case when sales variances for multiple

products are calculated.

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 What are the four types of
responsibility centers and
what is each responsible for?

1) Cost center – the incurrence of costs

2) Revenue center – generating revenues
3) Profit center – both costs and revenues
4) Investment center – both profit and a return on
investment

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 What are the two ways of
allocating common costs?

1) Stand-alone allocation
2) Incremental cost allocation

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 How is the contribution income
statement prepared?
Net revenues
- Variable manufacturing costs
= Manufacturing contribution margin
- Variable nonmanufacturing costs
= Contribution margin
- Controllable fixed costs
= Controllable margin
- Non-controllable, traceable fixed costs
= Contribution by strategic business unit
- Non-controllable, untraceable fixed costs
= Operating income

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 How is manufacturing contribution
margin calculated?

Net revenues
- Variable manufacturing costs
= Manufacturing contribution margin

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 How is contribution margin
calculated?

Manufacturing contribution margin

- Variable nonmanufacturing costs
= Contribution margin

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 How is controllable margin
calculated?

Contribution margin
- Controllable fixed costs
= Controllable margin

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 How is contribution by strategic
business unit calculated?

Controllable margin
- Non-controllable, traceable fixed costs
= Contribution by strategic business unit

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 How is operating income
calculated?

Contribution by strategic business unit

- Non-controllable, untraceable fixed costs
= Operating income

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 What are the methods of
setting the transfer price?

• Market price
• Cost of production plus opportunity cost
• Variable cost
• Full cost
• Cost plus
• Negotiated price
• Arbitrary pricing
• Dual-rate pricing
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How is the transfer price calculated
when the producing department
has available capacity?

When there is available capacity, the transfer price needs

to cover the variable costs of production.

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How is the transfer price calculated
when the producing department
does not have available capacity?

When there is no available capacity, the transfer price

needs to cover:
1)The variable costs of production, and
2)The contribution that the producing department loses
from any orders that they could not fulfill because they
produced the internal order.

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How is return on investment
calculated?

Income of the Business Unit

Assets (Investment) of the Business Unit

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How is residual income calculated?

Operating income before taxes for the division,

project, or investment opportunity
– Target return in dollars: Employed assets of the
business unit × required rate of return
= Residual Income

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 What are the four perspectives
in the balanced scorecard?

1) The financial perspective

2) The customer perspective
3) The internal process perspective
4) The learning and growth perspective

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