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Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Various cost-behavior patterns. (CPA, adapted).
The vertical axes of the graphs below represent total cost, and the horizontal axes represent units produced during a calendar year. In each case, the zero point of dollars and production is at the intersection of the two axes.
Select the graph that matches the numbered
which graph best fits the situation or item described. The graphs may be used more than once.
- Annual
depreciation of equipment, where the amount of depreciation charged is computed by the machine-hours method. - Electricity bill—a flat fixed charge, plus a variable cost after a certain number of kilowatt-hours are used, in which the quantity of kilowatt-hours used varies proportionately with quantity of units produced.
- City water bill, which is computed as follows:
First 1,000,000 gallons or less $1,000 flat fee
Next 10,000 gallons $0.003 per gallon used
Next 10,000 gallons $0.006 per gallon used
Next 10,000 gallons $0.009 per gallon used
and so on and so on
The gallons of water used vary proportionately with the quantity of production output.
- Cost of direct materials, where direct material cost per unit produced decreases with each pound of material used (for example, if 1 pound is used, the cost is $10; if 2 pounds are used, the cost is $19.98; if
3 pounds are used, the cost is $29.94), with a minimum cost per unit of $9.20.
- Annual depreciation of equipment, where the amount is computed by the straight-line method. When the depreciation schedule was prepared, it was anticipated that the obsolescence factor would be greater than the wear-and-tear factor.
- Rent on a manufacturing plant donated by the city, where the agreement calls for a fixed-fee payment unless 200,000 labor-hours are worked, in which case no rent is paid.
- Salaries of repair personnel, where one person is needed for every 1,000 machine-hours or less (that is, 0 to 1,000 hours requires one person, 1,001 to 2,000 hours requires two people, and so on).
- Cost of direct materials used (assume no quantity discounts).
- Rent on a manufacturing plant donated by the county, where the agreement calls for rent of $100,000 to be reduced by $1 for each direct manufacturing labor-hour worked in excess of 200,000 hours, but a minimum rental fee of $20,000 must be paid.
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