Chapter 3&4 (BA 212)

BA 212
CHAPTER 3
Demand
Theory
LAW OF DEMAND
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3
Favorable/
Unfavorable
Variance
✘ Standard cost – actual cost
- for materials, labor and overhead, separately
or jointly.
✘ Favorable variances are credit balances which:
- indicate costs were less than expected.
- are reductions of cost of goods sold (possibly
some also allocated to inventory)
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Unfavorable variances are credit balances which:
- indicate costs were higher than expected.
- are increase of costs of goods sold i.e., expenses
(possibly some also allocated to inventory
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Total Material Variances
• Actual cost – • Material price • Material usage
standard cost variance variance
= act qty * std pr – = (std qty * std pr) –

= (act qty x act pr)
act qty * act pr (act qty * std pr)
– (std qty *std pr)
= (standard price – =(std qty – act qty) *
= mat.price actual price )* actual standard price
variance = mat. quantity
Usage variance = quantity *
=price * actual standard price
quantity
7
Disposition of Production Cost
Variances
• Amount by which goods produced in an accounting period have been
“miscosted”.
•Alternative disposition of variances:

- proportionately between EOP inventory and COGS.
- best matching
•Debit or credit the expense cost of goods sold.

* Expediency – if amounts that should have been allocated to inventory
are material, then this approach is not in compliance with GAAP.
• Keep in an overhead clearning account.

- not GAAP should be zeroed out at year-end.
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Variations in Standard Costs
• In a standard costs system some or all elements of costs are carried
in an inventory account at standard.
• A variance account is generated at the point that an element of

cost is shifted from actual to standard.
- material can be shifted from actual to standard when
received, when issued from Materials inventory or not at all.
- some companies use standard cost only for material or only
for direct labor.
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Uses of Standards
• Control
- starting point for measuring performance, compare actual costs with
standards.
•Decision making
- pricing & alternative choice decisions.
• More rational costs

- identical costs for same products (e.g., different production levels in month
•Recordkeeping savings
- eliminates need to cost each requisition or batch
- standards changed infrequently (say,once every six months or a year)
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Variable Costing System
•Up to now full or adsorption cost system
- variable and fixed production costs are assigned to product.
- required by GAAP and tax regulations.
• Variable costing system

- useful for management decision making.
- only variable production costs are included in inventory.
• Fixed costs are treated as period costs.

- fixed costs = cost if maintaining capacity
- sometimes mistakenly referred to as direct costing system
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Advantages of Variable Costing
• Simplifies accounting: no determination of overhead for fixed
overhead.
- Overhead variance is a pure spending variance.
- caused by actual overhead differing from costs based on a
flexible budget.
- variances caused by volume differences are not reflected in
variances.
- avoids confusion from overhead volume variance
- management better focuses on differences arising from
production cost variances other than volume.
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Management Control Allowed by Variable
Costing
• Variable costs on cost-per-unit basis.
•Fixed cost on a total
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Costing
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Costing
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Costing
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Costing
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Costing
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Costing
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BA 212
CHAPTER 4
Demand
Estimation
Demand Estimation by Using Regression
Analysis
Regression Analysis a statistical method used to establish a
relationship between a variable
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Analysis
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Note: The statistical procedure in
solving Multiple Regression Problems
can be very complicated. Fortunately
there are many computer software’s
available to achieve our objective.
i.e., TSP (Time-Series Processor) or

SPSS can be used to solve problems.
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Analysis
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Analysis
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Analysis
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Analysis
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Analysis
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Analysis
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Analysis
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Analysis
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Analysis
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Analysis
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Analysis
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CASE
Analysis
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Analysis
37
Analysis
38
The END….
Thank You

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BA 212

= act qty * std pr – = (std qty * std pr) –

•Alternative disposition of variances:

•Debit or credit the expense cost of goods sold.

• Keep in an overhead clearning account.

• A variance account is generated at the point that an element of

• More rational costs

• Variable costing system

• Fixed costs are treated as period costs.

•Fixed cost on a total

•Fixed cost on a total

•Fixed cost on a total

•Fixed cost on a total

•Fixed cost on a total

•Fixed cost on a total

•Fixed cost on a total

i.e., TSP (Time-Series Processor) or

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