Part B Variance analysis is the quantitative investigation of the difference between actual and planned behavior. (Drury, C., 2012) It is used to maintain business control. Firstly, this essay will make an analysis that the reason of variance of sales, materials, labor and overhead separately, and the second part is the interrelationship between these variances. 1. Sales Variance Sales volume variance is the difference between the budgeted and standard quantity multiplied by standard margin. (Collier, P.M, 2006) The variance is unfavourable because there are 200 units budgeted have not been sold out. When the variance is favourable which means there is a short supply of stock before the end of this period. Sales price variance is the difference …show more content…
(Collier, P.M., 2006) The advantages of ABC are; 1. Extend the concept of cost behavior. ABC uses cost driver to interpret the cost behavior and classify costs as short-term variable cost, long-term variable cost and fixed cost. 2. Increase accuracy in the product cost calculating. While using ABC, direct materials and direct labors can be classified into products, manufacturing overhead will be classified into the homogeneous cost pool. Then, apportioned the manufacturing overhead into products according to reasonable distribution cost standard. The standard of cost allocation becomes more direct and specific, leading to many traditional uncontrollable indirect cost changes into controllable direct cost. And this provides more accurate information to cost control. 3. It helps manager to make decisions. ABC provides more real and plentiful measuring information which helps manager to make decision with relevant cost. (Drury, C., …show more content…
Hannah make the decision, the comparison between ABC and traditional method is very important. First of all. ABC is the best setting with no asymmetric information not like the traditional method. (Mishra, B. and Vaysman, I, 2001) Cost under a ABC approach are classified as different activities. However, indirect overhead under a traditional method is distributed to cost object according to some percentage. (Collier, 2006) ABC uses company’s actual reachable level as standard, so that this standard is reachable and stable. While the traditional method uses the optimal cost as standard, which does not consider the actual low rate or technical fault or many other reasons. Then talk about the incentive system. As the standard of ABC is reachable, it is more possible to get an award and will encourage the employee. However, the standard of traditional method is optimal cost which means unreachable, manager need to continue to eliminate the waste in order to achieve near-optimal level as a performance standard. ABC compares to the traditional method is more suitable to these companies that have a large percent of indirect overhead, various products, and complex production and operation activities. There is affection in part a while using ABC method. As ABC classified the cost as different activities and it is more accurate than using traditional method. This leading to the calculated product cost more
How might it overcome these problems? The ABC system divides the overheads resources by seven different types instead of two: direct labor support, machine operation, set up hours, production order activity and administrative overhead... ... middle of paper ... ... rs OH = 27.56 x .310 = 8.54 Materials Dollars OH = .097 x 6.44 = 0.62 Total Cost (per 100 parts) $22.85 ABC METHOD Total Cost
[5] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 17, Standard costing and variance analysis, p. 425-436
We will calculate the costs of the Geoffrey doll, the specialty branded doll #106 and the cradles using the cost study conclusions given. Quantity Variance (QV) = (SQ-AQ) SP = (24,900 – 24,000) 30.72 = $27,648. Total Variance = PV-QV = 48720-27648 = $21,072 From these calculations we can determine that G.G. Toys had a favorable price variance even though they sold fewer units than they had forecasted.
The presentation of the material is in dollars only. Overhead is applied to products as a percent of direct labor dollar cost. Factory profit for each year is found by subtracting direct material, direct labor, and direct overhead costs from total sales. The overhead percentage is calculated at the same time budgeting and is applied as a single overhead pool throughout each model year. The consulting company used 435% of direct labor costs in 1987 for their study; the budgeted was actually 437% (OH/DL=107,954/24,682). A similar percentage applies in the following year (109890/25294=434.5%). However in the next two years, after the outsourcing of oil pans and mufflers was enacted, the allocation of overhead in...
…the increased variability in the order process (i) requires each facility to increase the safety stock in order to maintain a given service level, (ii) leads to increased costs due to overstocking throughout the system, and (iii) can lead to an inefficient use of resources, such as labor and transportation…
Variance analysis is largely used by the management to ascertain the strengths and weaknesses of internal
If done right, I believe that all of the costs can be allocated to each of the three products through both direct and overhead costs. The only direct costs that are being included currently are labor and manufacturing costs. I broke up overhead into overhead based off direct labor and overhead based on units sold.
Do a further analysis of production costs to improve efficiencies. If all else fails, either increase prices to the point where the contribution margin is positive, or drop the customer. 3. What is the difference between a'smart' and a Managerial Implications and Analysis Limitations Managerial Implications: What are the benefits of Moving from a traditional cost accounting system to ABC can reveal hidden costs and hidden profits on the basis of the identified activities (i.e. customers, orders, etc. ). Treating overhead costs as "fixed" can cause an unfair and highly misleading distribution of overhead costs, which are in fact variable.
During this project, I am going to mention the details of TOYOTA production process system which was developed more than 40 years ago by Taiichi Ohno, the president of Toyota Motor company at that time. The production system that Toyota company uses now and before is relevant to the concept of the process costing system which is currently used in all department of the company.
Cost allocation is the process of identifying, aggregating, and assigning of cost to various separate activities. There is no overly precise method of charging cost to objects, hence resulting to approximate methods being used to do so. Amongst the approximation basis used includes square footage, headcount, cost of assets employed, and electricity usage amongst others. The main aim of cost allocation is to spread cost in the fairest possible method and also to impact the behavior pattern of the cost.
Others feel that ABC would be more widespread in industry if it were marketed better by the cost accounting profession itself [1]. As the dust has settled, ABC has turned out to be less a revolutionary technique than a useful refinement to proven systems. The costs of products and services must be accurate, or management can be misled. Decisions... ...
Besides, an organisation can adopt a technique of activity-based costing (ABC) as an approach to support its sustainability objectives. ABC system is a technique of assigning overhead costs to products and services by identifying the cost drivers. ABC technique will first identify each activity cost that is involved in the process of production, then assign the cost to each product and service on the basis of each activity consumption in the production of each product and service (Drury, 2012, p. 253). ABC system is an effective method to account for costs of products and services. This is because ABC system allocates indirect costs based on a cause-and-effect relationship (Drury, 2012, p. 269). ABC system allocates overhead costs to cost
In this report I analyze the merits and demerits of each of the method. The method we select cannot be changed easily in the future. Hence the method we choose will have long lasting impact on our company
The second way is to achieve low direct and indirect operating costs is gained by offering high volumes of standard products and offering basic no-frills products. Production costs are kept low by using less parts and using standard components. Limiting the number of models produced to ensure larger producti...
Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.