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Greetings sir, hope you are in good health.
I had some questions.
24.9
Task 2:
Why is the first blank not : ACTUAL and the second blank STANDARD ? Shouldn’t the difference be between the actual and the flexed cost at same quantity, and we see if the second blank would have been standard – it would match the ongoing description “for the actual number of hours paid for”.Task 3:
I feel there is an error here. It should be the “direct material PRICE variance ( and not total variance) is $3,000 A. Otherwise explain how it is calculated with total variance.24.10
Task 4
Although I got the answer right, I just want to understand why there is the calculation of the fixed expenditure variance within standard marginal costing. Isn’t it a fact that the budgeted fixed cost is not calculated on early on (turning it thus to flexed and then finding out the over and under cost) but rather the actual fixed overhead is used directly at the end of the marginal profit statement to find the real profit. So if budgeted fixed overheads is not needed at all in the profit statement, then why do we even need expenditure variance ? Or do you mean to explain that even though budgeted fixed overheads is not used in the workings, it was planned and budgeted in the start of the period, and will be referenced in other paper work even though not existing in the marginal profit statement ?Thankyou.
Task 2:
This is a badly ordered question. There should be a comma after the second ‘cost’ and then the first two words could be either way round (it is the difference between the standard cost for the for the actual number and the actual cost for the actual number).
(This confusion cannot happen in the real exam because all exam questions have been pre-tested which means that confusion in the wording will have already been discovered and the wording amended to remove the problem.)
Task 3:
The BPP answer is correct. The actual cost was $96,000. The total material variance was $3,000 and therefore the standard cost of the 3,000 units produced is $93,000. Therefore the standard cost per unit is $93,000 / 3,000 = $31. (How much of the total variance is due to the usage variance and how much is due to the expenditure variance is not relevant.)
Task 4:
The budgeted fixed cost is included in the budgeted profit statement. It is subtracted from the budgeted contribution so as to arrive at the budgeted profit.
If the actual fixed costs are different from the budgeted fixed costs, then it will result in a different profit.Task 3:
Ok sir, I understood.
Wanted some clarification:
Aq x Ap = Actual cost
Aq x Sp = Flexed cost
Sq x Sp = Standard costPlease confirm my understanding is correct.
Task 4:
What you have explained – would it not be for budgeted profit statement following the absorption costing method. On the other hand, here it mentions Emerald uses marginal costing instead of absorption costing. And in marginal costing, budgeted fixed overhead should not exist in the format as it is marginal costing we are talking about…Unless there is a random question giving us the budgeted profit and to get to budgeted contribution for our working we add back budgeted fixed overheads, but by default it should not be existing in format.
Please educate elaborately if can be.
Task 4:
Ok sir, perhaps I understood. I overlooked the word ‘budgeted’ . Why would one make a budgeted profit statement ? I was replying to you under the assumption there is only one real profit statement being done at the end of the accounting period, and therefore only actual fixed overheads are required under the marginal costing profit statement, that would be applied at the end of its working.
Also, the question does not mention ‘budgeted’ profit statement. So why do we assume that.
Please educate more on the budgeted profit statements. Is it a part and parcel of every company who have prepared budgets to keep a budgeted profit statement prepared which they would later have to reconcile in the operating statement with the variances to reach the actual profit statement ?
Task 3: Using your ‘formulae’ (and I hate using formulae!) Sq x Sp = Originally budgeted cost.
The other two are correct.Task 4: There is always a fixed overhead expenditure variance whether using marginal or absorption costing The whole purpose of variance analysis is to be able to explain why the actual profit is different from the budgeted profit. With marginal costing there is only the expenditure variance whereas with absorption costing there is the expenditure variance and the volume variance (which can be analysed into the efficiency and capacity variances). I do explain this in my lectures on variance analysis.
Task 3: I got the “standard cost” phrase for sq x sp from your answer to me:
“The actual cost was $96,000. The total material variance was $3,000 and therefore <<the standard cost of the 3,000 units produced is $93,000.>> Therefore the standard cost per unit is $93,000 / 3,000 = $31.”
When we subtract the Actual cost with the $3000 Total variance, we reach the sq x sp section, indeed. So that is how I assumed that section to mean standard cost.
So is it both the originally budgeted cost / standard cost ? Or only the former ? If only the former, why then did you use the phrase “standard cost” earlier to describe this section ?
Task 4:
Is a budgeted profit statement calculated using absorption costing method; and after that for the actual profit statement, either the absorption or marginal method adopted ?
I say this – because if the marginal costing method could also be used in the budgeted profit statement – then according to your earlier lecture on marginal costing – the actual fixed overheads are used directly after the contribution to get the net profit; and hence actual fixed overheads being present both in the budgeted and actual profit statement – the need for the expenditure variance would not arise.
Please clear this confusion.
Was the format you were showing for both the absorption costing and marginal costing in the lectures, was it for the actual profit statement or the budgeted profit statement ?
In other words, what does a budgeted profit statement contain ? What is its format ? Does it follow any method (absorption/ marginal) or it has its own unique method/format ?
Task 3: You did not get it from my answer!!
The actual total cost of the actual units produced is $96,000.
The standard cost of the actual units produced is $93,000.(The standard units are the budgeted units, which is of no relevance. You are confusing it maybe with the standard kgs of material, but that is not relevant in this question).
Task 4:
When calculating the budget profit we subtract the budget fixed overheads from the budget contribution.
When calculating the actual profit we subtract the actual fixed overheads from the actual contribution.Even if everything else was as per the budget, if the actual fixed overheads are different from the budgeted fixed overheads then the actual profit will be different from the budget profit.
Again, please rewatch my lectures on variances. I do the example for both absorption and for marginal costing and explain the reason for the difference in the treatment of the fixed overhead variances.
I show the format of the marginal and the absorption profit statements in my lectures (although obviously, as I explain, you cannot be expected to produce a full profit statement in the exam).
Task 3:
1) Is the Flexed Cost then called the Standard Cost ?
2) How does subtracting the actual total cost of the actual units (aq x ap) produced which is $96,000, with the total variance, which is $3000 (A), lead to the standard cost of the actual units (aq x sp) produced which is $93,000 ?
The summing of the price variance and material usage leads to the total variance. If the distance between the Aq x Ap (the Actual Cost) and the Aq x Sp (The Flexed/Standard Cost ?) is the price variance; and then the distance between the Aq x Sp (the Flexed/ Standard Cost ?) and the Sq x Sp (Budgeted Cost) is the usage variance. Then shouldn’t it follow the distance between the AqxAp (the Actual Cost) and the Sq x Sp (the Budgeted Cost) is the Total variance ?
Aq x Ap = Actual Cost
^…..^
|……|
|……|
T ….Price variance
O…..|
T……|
A …..v
L ….Aq x Sp = Flexed Cost
V …..^
A ….. |
R……|
I…..Usage Variance
A ….. |
N……|
C….. |
E……|
|…… |
|…… |
v……v
….Sq x Sp = Budgeted CostIn other words, subtracting or adding the total variance with the Actual cost should lead to the original budgeted cost; and not the flexed cost/ standard cost for the actual quantity.
1. The flexed cost is the standard cost for the actual production.
2. The cost variances explain the difference between the actual cost and the standard cost of the actual production.
The cost variances and the sales variance together explain the difference between the actual profit and the budget profit.You must watch my free lectures on variance from the start again, because all you are having me do is repeating what I explain in my lectures 🙂
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