Cost Management

Business

Quiz 14 :

Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial Performance Measures

Quiz 14 :

Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial Performance Measures

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One of the purported benefits of moving to a JIT system is improvements in customer response time (CRT). Define the following terms: total customer response time; manufacturing (production) cycle time; cycle-time efficiency; value-added time; and non-value-added time.
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We might define total customer response time as the amount of time between the time a customer places an order and the time when that order is received by the customer. Manufacturing (production) cycle time can be defined as the time-lapse between when the manufacturing department receives the order and when the order is completed (i.e., when finished goods are created). (Note: manufacturing cycle time is sometimes referred to as manufacturing lead time.) As noted in the text, processing cycle efficiency (PCE) is a method of assessing process efficiency, based on the relationship between actual processing time and total production time. In formula form, we can define PCE as:
PCE = processing time/total manufacturing time
PCE = processing time/(processing time + moving time + storage time + inspection time)
Alternatively, we can view PCE as the ratio of "value-added time" to the sum of "value-added time" + "non-value-added time." These terms are defined, and viewed, from the perspective of the customer. That is, would the customer be willing to pay for the indicated activities/time Does the activity add value in the eyes of the customer

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Explain what is meant by the term "management by exception." What is the relationship between the process of standard cost variance analysis and management by exception
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Direct cost Sales variance Control Systems
Sales variance is the breakdown of sales volume and which includes components like manufacturing cost (which is a direct cost), labour cost, material costs. Certain procedures are set in place, which help the organisation to control performance, which will include components from planning to evaluation. Similarly, operational financial controls are also applied for cost control in their respective areas.
Discussion and analysis:
Scarce is time management. Management by exception has a philosophy that managers are departing materially from plan i.e. not going according to plan and give primary attention to things. As the corollary, according to the basically proceeding plan the areas are given relatively less attention by the managers. When the things are not going according to the plan to identify situation from a financial standpoint, the variance can be referred as information signals. Thus, there on part of managers, no intervention is needed in which variances are deemed small or immaterial. On the other hand, to uncover the underlying cause which may lead to some changes or intervention, it may trigger the need of investigation. In that case the variance is considered abnormal.

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Refer to Exhibit 14.8 and the accompanying discussion in the text. Demonstrate that the materials usage variance for PVC during October 2013 was $2,400F. Reference: img
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Material usage variance is defined as the difference between the actual raw material units used and the standard units of materials multiplied by standard cost per unit of direct material.
Material Usage Variance =
img Where AQ = Actual Quantity
SQ = Standard Quantity
SP = Standard Price per unit.
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From the given data identify the following details:
AQ = Actual Quantity = 720 units
SQ = Standard Quantity = 780 units
SP = Standard Price per unit = $ 40
Therefore,
Material Usage Variance =
img =
img img = $2,400 (F)
Favourable variance here indicates that actual quantity used was less than the standard quantity prescribed.

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Edwards and Bell market a single line of home computer, dubbed the XL-98. The master budget for the coming year contained the following items: sales revenue, $400,000; variable costs, $250,000; fixed costs, $100,000. Actual results for the year were as follows: sales revenue, $350,000; variable costs, $225,000; fixed costs, $95,000. The flexible-budget operating income for the year was $35,000. What is the total static (master) budget variance in operating profit for the period What portion of the total static (master) budget variance is attributable to actual sales volume being dif­ferent from planned sales volume What portion is due to a combination of selling price and costs (variable cost per unit and total fixed costs) being different from budgeted amounts
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This chapter deals with control systems associated with business processes, such as operating processes. Provide a definition and some examples of operating processes. In what other processes would an organization engage in the normal course of business
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The Ace Company sells a single product, at a budgeted selling price per unit of $20. Budgeted fixed manufacturing costs for the coming period are $10,000, while budgeted fixed marketing expenses for the period are $24,000. Budgeted variable costs per unit include $2 of selling expenses (commis­sion) and $4 of manufacturing costs. What is the budgeted operating income if the anticipated sales volume for the period is (a) 10,000 units, and (b) 15,000 units
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Chapman, Inc., sells a single product, Zud, which has a budgeted selling price of $24 per unit and a budgeted variable cost of $12 per unit. Budgeted fixed costs for the year amount to $45,000. Actual sales volume for the year (47,000) fell 3,000 units short of budgeted sales volume. Actual fixed costs were $46,000. With everything else held constant, what impact did the shortfall in volume have on profitability for the year
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Should the performance of a division be deemed less than satisfactory if all of its variances are "unfavorable" Explain.
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What is the difference between a master budget, pro forma budgets, and a flexible budget
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Refer to Exhibit 14.8 and the accompanying discussion in the text. Demonstrate that the purchase-price variance for PVC during October 2013 was $720U. Reference: img
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Will overtime premiums affect direct labor variances If so, which ones
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The Baldwin Company, in its master budget for 2013, predicted total sales of $160,000, variable costs of $48,000, and fixed costs of $52,000 ($24,000 manufacturing and $28,000 nonmanufacturing). Actual sales revenue for 2013 turned out to be $180,000. Actual costs were as follows: variable, $54,000, and fixed, $50,000. What was the total static budget (operatingincome) variance for 2013 Was this total variance favorable (F) or unfavorable (U)
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Which of the following should a firm use as the standard in assessing production efficiencies: standards based on ideal performance, standards based on attainable performance, or standards based on the average of recent historical performance Explain.
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Explain some of the possible causes of direct labor rate (price) and direct labor efficiency (quantity) variances. Who normally has responsibility for or influence over these variances
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Describe how a just-in-time (JIT) manufacturing system is fundamentally different from a conventional manufacturing system. List two primary financial benefits associated with a shift to JIT manufacturing. What effect does the adoption of JIT have on the design of management accounting and control systems
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Refer to Exhibit 14.8 and the accompanying discussion in the text. Demonstrate that the flexible-budget variance for PVC during October 2013 was $1,680F. Reference: img
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Explain how standard costs and flexible budgets can be used for short-term profit analysis, i.e., for financial control purposes.
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Explain the possible causes for direct materials price and direct materials usage variances. Who in the organization normally has influence over or responsibility for these variances
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Davidson Corp. produces a single product: fireproof safety deposit boxes for home use. The budget going into the current year anticipated a selling price of $55 per unit. Because of competitive pressures, the company had to cut selling prices by 10 percent during the year. Budgeted variable costs per unit are $32, and budgeted total fixed costs are $156,000 for the year. Anticipated sales volume for the year was 10,000 units. Actual sales volume was 5 percent less than budget. What was the sales price variance for the year Label this variance F (favorable) or U (unfavorable), as appropriate.
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Discuss behavioral concerns in establishing and implementing a standard cost system.
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