Budgeting, Standard Costing, Variances and Decision Making
What the domain tests
Budgeting questions test functional budgets, cash budgets and flexed budgets. Standard costing questions test variance calculation and interpretation. Decision-making questions test relevant costing, contribution and limiting factors.
Core rules
- A cash budget includes receipts and payments only; depreciation is excluded. A flexed budget is adjusted to actual output for variable costs.
- Standard costing variances: material price = (standard price - actual price) x actual quantity; material usage = (standard quantity for actual output - actual quantity) x standard price. Labour rate and efficiency follow the same logic. Fixed overhead expenditure and volume variances are separate.
- Adverse means actual profit is lower than standard; favourable means higher.
- Decision making uses relevant costs: future, incremental cash flows. Sunk costs, committed fixed costs and apportioned overheads are usually irrelevant. With a limiting factor, rank by contribution per unit of the scarce resource.
Worked example
Standard: 3 kg at 10 per kg = 30 per unit. Actual output 1,000 units; actual material 3,200 kg costing 33,600. Price variance = (3,200 x 10) - 33,600 = 32,000 - 33,600 = 1,600 adverse. Usage variance = (3,000 - 3,200) x 10 = 2,000 adverse. Total material variance = 3,600 adverse.
Traps
Do not calculate price variance on standard quantity. Do not use actual output for the standard quantity in a usage variance. Do not include sunk costs in a special-order decision. Check adverse and favourable signs.