Sales Guides: Management Accounting Formulas

Showing posts with label Management Accounting Formulas. Show all posts

Monday, 29 February 2016

Machine Absorption Rate Formula

Machine Absorption Rate Formula = Production Overhead x 100

Budgeted Machine Hrs

Machine hour labour rate is calculated by dividing production overhead with budgeted machine hours.

Machine Absorption Rate Formula Example

Production Overheads= 450,000

Machine Hours= 15,000

Solution

= $ 450,000 (production overhead)/ 10,000 Total Machine Hours

= $ 150,000/ 1,000

= $ 10 (Machine Absorption Rate)

Labour Absorption Rate Formula

Labour Hour Absorption Rate Formula = Production Overhead x 100

Budgeted Labour Hrs

Labour absorption rate is calculated by dividing the production overhead with budgeted labour hours.

Labour Absorption Rate Formula Example

Overheads Expenditure = $300,000

Budgeted Labour Hours = 20,000

Calculated Labour absorption rate?

Solution

= $ 300,000 (production overhead)/ 10,000 Total Labour Hours

= $ 300,000/ 20,000

= $ 15 (labour absorption Rate)

Product Absorption Rate Formula

Product Absorption Rate Formula = Production Overhead x 100

Budgeted Production (units)

Product absorption rate is calculated by dividing production overhead with number of budgeted units.

Product Absorption Rate Formula Example

Overhead Expenditure = $ 400,000

Budgeted Production = 20,000

What would be product absorption rate?

Solution

Absorption Rate (Labour Hr) = Production overhead/Total units Produced

= $ 400,000 (production overhead)/ 20,000 Total Products

= $ 400,000/ 20,000

= $ 20 (product absorption Rate)

Tuesday, 9 February 2016

Variable Overhead Expenditure Variance Formula

Variable overhead expenditure has been shown below. This formula has been explained with an example.

Actual Variable Overhead x (Actual Hr - Standard Rate per Hr)

Variable Overhead Expenditure Formula Example

Total Actual Hours = 200,000

Actual Rate Per Hr = 12

Standard Rate per Hr= $ 7

Solution

Actual Hours X (Actual Rate - Standard Rate)

= 200,000 x (12 - 7)

= 200,000 x -5

=-1000,000

Significance of Variable Overhead Expenditure

Variable overheads variance is calculated to control the variable overheads expenditure. Reasons for adverse variance may be investigated and appropriate corrective actions may be taken for improving the situation (controlling the actual rate).

it is pertinent to mention that sometime rise in rate is beyond control i.e rise due to inflation in the country, but some costs can be controlled by placing appropriate control like factory lightening.

Favorable or adverse Variable overhead Expenditure

Favorable variable overhead results in when actual overhead rate is less than expected overhead expenditure rate. it is very logical (you are incurring expenditure at lower rate than expectation) Adverse Variable overheads expenditure results in, when actual expenditure rate is more than standard expenditure rate.

Actual Rate > Standard Rate = Adverse Variable Overheads Expenditure

Actual Rate < Standard Rate = Favorable variable Overhead Expenditure

Reasons for favorable overheads expenditure variance

One of the fundamental reasons for favorable overheads expenditure variance is more effective controls over utilization of resources. Other reason of favorable overheads expenditure variance may be rates selection or application, it is important to note that Rates calculation is a complex procedure, and therefore there is possibility of inaccurate selection/application of rates.

Reasons for adverse overhead Expenditure Variance

Reasons for adverse overhead expenditure variance include the poor or inefficient utilization of resources due to ineffective controls. Other reason of adverse overheads expenditure may be the wrong calculation application of rates (actual or standard). it is important to note that overheads rate calculation involves some easy mathematics but complex procedures.

Other Name of Variable Overhead Expenditure

Other name of variable overhead expenditure is variable overheads spending expenditure. Variable overheads expenditure variance and variable overhead spending may be used interchangeably.

Variable Overhead Expenditure Formula Practice Question

Company Actual Expenditure = 200,000

Actual Rate = 10$

Standard Rate = $ 8

Variable Overheads Expenditure Variance Formula
Variable Overhead Efficiency Variance Formula
Fixed Overhead Expenditure Formula
Fixed Overhead Efficiency Variance Formula
Fixed Overhead Volume Variance Formula
Fixed Overhead Capacity Variance Formula

Variable Overhead Efficiency Variance Formula

Variable overheads efficiency variance formula has been shown below. Variable overheads efficiency variance formula has been explained with an example.

Variable overhead efficiency = Standard Rate x (Standard Hr-Actual Hr)

it is important to note that variable overhead efficiency variance focuses on the production timing (time taken in production against time expected to be taken).

Variable Overhead Efficiency Variance Example

Standard rate = $ 12

Standard Hr = 10 Hr per unit

Unit produced= 20,000

Actual Hr = 210,000

Solution

Standard hour = units produced x Hr taken per unit

=20,000 x 10

=200,000 Hr

Variable overhead efficiency = Standard Rate x (Standard Hour-Actual Hour)

= 12 x (200,000-210,000)

= 12 x -10,000

=-120,000 (adverse Variable overhead efficiency variance).

Favorable and adverse Variable Overhead Efficiency Variance

When actual hour taken in the process of production are less than standard hour, then it is a favorable situation and technically called favorable efficiency variance. On other hand, when actual hour taken in the process of production are more than standard hour, then this is adverse efficiency variance case.

Reasons of Favorable Variable Overheads Efficiency Variance

First reason of favorable efficiency reason may be use of modern technology. Similarly skilled labour may be other important reasons for favorable efficiency variance. Training of employee may also result in favorable efficiency variance due to improvement in efficiency of indirect labour.

Skilled labour, trained employees and improved quality material shall reduce the production timing (efficiency). when such time saving is reflected in standard rate , it is called Favorable Variable overhead efficiency variance.

Reasons for Adverse Variable Overhead Efficiency Variance

Reasons for adverse efficiency variance include the use of unskilled labour. Other reason for adverse variable efficiency variance may be use of outdated or old production method. Use of low quality material may also result in negative variable efficiency variance.

unskilled labour is supposed to take more time and thus actual hour of production are expected to increase , similarly old methods of production would also consume more time in production. poor quality material is not easy to handle during the production.

Limitation of Variable overhead Efficiency

Variable overhead are first accumulated and then divided by the appropriate hour (labour hour or machine hours). It is pertinent to mention that using one standard hour bases does not reflect the variable overheads, because variable overhead are independent of labour or machine hours.

Fixed Overheads Total Variance Formula

Fixed overhead total variance formula has been shown below; this formula has been explained with an example.

Fixed Overhead Total Variance =FOH (Standard) – FOH incurred

FOH - Fixed Overheads

In simplest term Fixed overhead total variance is a comparison between expected fixed overhead and actual fixed overhead at particular level of activity (production). This concept has been explained with an easy example below

Fixed Overheads Total Variance Formula Example

Unit Produced by Company= 20,000

Absorption Rate = $ 5 per unit

Actual Fixed overheads = 130,000

Solution

Absorbed = unit produced x Rate

= 20,000 x $ 5

= $ 100,000

Fixed Overhead Total Variance = Fixed overhead incurred – FOH Absorbed

=100,000-130,000

=30,000 (Fixed overhead total variance)

Fixed overhead variance amounting 30,000/- is favorable.

Favorable and Adverse Total Fixed overhead Variance

When fixed overhead incurred are more than absorbed fixed overhead expenditure, then variance is known as adverse fixed overhead variance. When actual incurred fixed overhead are lower than absorbed overhead, then variance is known as favorable fixed overhead variance.

Fixed Overhead Capacity Variance Formula

Fixed Overhead Capacity Variance Formula has been shown below. The concept of fixed overhead capacity variance has been clarified with an example.

Fixed overhead capacity = standard rate x (budgeted hours - actual Hours)

Fixed overhead capacity primarily shows about the utilization of available resources. In simplest term it is comparison between budgeted or available resources utilized resources. It is important to remember that actual hour in this case can never exceed the budgeted over.

Fixed Overhead Capacity Variance Formula Example

Budgeted Production = 1800 Units

Actual production = 1200 Units

Budgeted Hour = 8 Per Unit

Actual Production Hrs = 12000

Standard absorption Rate= 12

Calculated fixed capacity variance?

Solution

Budgeted Production hours = 1800 x 8= 14400

Fixed overhead capacity =Standard Rate x (Budgeted Hours - Actual Hours)

= $ 12 x (14400-12000)

= $ 12 – 2400

= 28800 (Adverse)

Favorable and Adverse Fixed capacity Variance

More working hours are recommended (favorable), because more working hours will result in over absorption of overhead (cost saving). On other hand less working hour is not recommended or adverse situation for the company, because it means under absorption of overheads (increase in production cost).

Significance of Fixed overhead Capacity Variance

Fixed overhead capacity variance provides useful information about the idle capacity (resources not utilized). This information can be used for future resource planning and budgeting. It is important to remember that idle resource or capacity means that company is paying for no work.

Monday, 8 February 2016

Sales Quantity Variance Formula

Sales Quantity Variance Formula has been shown below. Sales Quantity formula has been explained with an example.

Sales Quantity Variance= Standard Price x (Budgeted Quantity – Actual Quantity)

Sales Quantity variance shows the difference between expected quantity and actual quantity sold and such difference is reflected in standard price.

Sales Quantity Variance Formula Example

Sales Quantity= 70,000

Budgeted Sales (Quantity) = 60,000

Standard Price = 18

Solution

Sales Quantity Variance= Standard Price x (Budgeted Quantity – Actual Quantity)

= 18 x (60,000-70,000)

=18 x 10,000

= 180,000

It is important to note that sales quantity variance may be valued at standard profit or marginal profit.

Significance of Sales Quantity Variance

Sales volume and profitability has close relationship, therefore sales volume variance provides useful is a tool for management to take appropriate action for low volume of sales. (Adverse Sales Quantity Variance)

Favorable and Adverse Sales Quantity Variance

When actual sales volume is more than expected volume, then this is favorable quantity variance. When the actual sales volume is lower than standard volume of sales, then this is adverse sales quantity variance.

Reasons for Favorable Sales Quantity Variance

Reasons for favorable sales quantity variances include low sales price, seasonal demand, and change in weather condition or disaster (selling ships in flood), positive customer response to new features of product or improved quality of product.

Reasons for adverse Sales Quantity Variance

Reasons for adverse sales quantity variance includes high sales price, seasonal demand, low production due to natural disaster, entry of new competitor in the market, bad news about product in the market.

Other name of Sales Quantity Variance

Other name of sales quantity variance is sales volume variance.

Sales Quantity Variance Formula Practice Question

Sales Quantity of Material X = 80,000

Budgeted Sales of Material X (Quantity) = 70,000

Standard Price of Material X = 20

Sales Price Variance Formula

Sales price variance formula has been given below. Sale price variance formula has been explained with an example

Actual Quantity Sold x (Actual price – Standard Price)

Difference between the actual and standard price of the quantity sold is technically known as sales price variance. Sales price variance reflects, when actual sales price differ from the standard price.

Sales Price Variance Formula Example

Quantity of material Sold = 1500

Standard Price of material = 15

Actual Price = 10

Solution

Actual Quantity Sold x (Actual Price – Standard Price)

= 1500 x (10-15)

= 1500 x -5

= -7500(Sales price variance)

Significance of Sales price Variance

Sales price variance shows the changes in revenue due to the variation of actual sales price. These sales price variation may be investigated (especially reduce in price).

Favorable and Adverse Sales Price Variance

If actual price is more than standard price, then it is favorable situation for the organization (favorable sales price variance). When the actual price is lower than standard price, then it is adverse situation for company.

Reasons for favorable Sales Price Variance

Reasons for improved or increased sales prices are inflation in the economy, reduced competition in the market and better product responses.

Reasons for adverse Sales Price Variance

Reasons for adverse sales price variance includes deflation in the economy, high competition in the market and low customer response.

Sales Price Variance Formula Practice Question

Quantity of material Sold = 1800

Standard Price of material = 16

Actual Price = 13

Wednesday, 3 February 2016

Average Stock Level Formula

Average stock level formula has shown below. Average stock level formula has been explained with an example.

Average Stock Level= Minimum level + (Reorder level/2)

Average Stock Level Formula Example

Minimum level Requirement= 40,000

Re order level or Point = 30,000

Calculate Average Stock Level?

Solution

Average Stock Level = Minimum level + (Reorder level/2)

= 40,000 + (30,000/2)

= 55,000 (Average Stock Level)

Advantage of Average Stock Level

Average Stock level offers a balanced solution, and therefore is preferred by many organizations. Average stock level is above the minimum level and below the maximum level.

Average Stock Level Formula
Maximum Stock Level Formula
Minimum Stock Level formula
Re Order Level Formula

Material Usage Variance Formula

Material usage variance formula is given below. Material usage variance formula can be explained with an example.

Material usage Variance = Standard Price x (Standard Quantity- Actual Quantity).

Material Usage Variance Formula Example

Quantity Consumed (Actual) = 12000 kg

Standard Price (Per unit) = $ 10

Units produced by Company=2000

Standard usage per unit = 8 kg

Actual Price of Material = 70,000

Calculate Material Price Variance

Solution

Standard consumption = Units produced x standard usage per unit

=2000 x 8

=16,000 kg

Material usage Variance = Standard Price x (Standard Quantity- Actual Quantity).

$ 10 x (16000-12000)

= $ 8 x 4000

= $32,000 (material usage variance)

Material Usage Variance Calculation

Material usage variance is primarily a difference between standard quantity of material (should have been used) and actual quantity of material and such difference is measured at standard cost. Material usage variance may be favorable or adverse. Adverse material usage variance suggests that more material used than expectation, where favorable material usage variance suggest that less material consumed than standard.

Significance of Material usage Variance

Material usage variance provides useful information about the usage of material in the production process. Such information can be used to take appropriate decision for improving the material usage during the production process.

Reasons for adverse material usage variance

Reasons for adverse material usage variance includes use of unskilled labour, old or outdated production techniques, and using low quality material. These factor or reasons would increase the material usage quantity and hence result in adverse material usage variance.

Reasons for favorable Material usage variance

Reasons for favorable material usage variance include using skilled labour, new or modern technology and using premium quality material. These factors will lower the material consumption and thus would result in favorable material usage variance.

Other name of material usage Variance

Other name of material usage variance is material quantity variance. Because this variance is related to consumption of material, therefore words like usage or quantity are used to describe this variance. (Material usage or material quantity variance)

Other Related Formulas

Material Price Variance Formula
Labour Efficiency Variance Formula
Labour Rate Variance Formula
Material Price Variance Formula

Material Price Variance Formula

Material Price Variance Formula is given below. The material price variance concept has been explained with example.

Material Price Variance = Actual quantity x (Standard price- Actual Price).

Material Price Variance Formula Example

Actual Quantity of Material Consumed = 7000 kg

Standard Price per unit of Material = $ 7

Actual Price or cost incurred on Material = 63,000

Calculate Material Price Variance

Solution

Actual Price = 63,000/7 = 9

Material Price Variance = Actual quantity x (Standard price- Actual Price).

Material Price Variance = 7000 (7 – 9)

=7000 (-2)

=-14,000 (Adverse Material Price Variance)

Material Price variance can be calculated as difference between standard price and actual price. This Price difference is multiplied of actual quantity consumed during the production. There are two possible situation, one standard price is high than actual price, this is favorable situation, and second situation is standard price is low than actual price, this is adverse situation.

Reasons for Favorable Material Price Variance

Reasons for favorable material price variance includes deflation in the economy, using low quality material, discount offered on bulk purchases, review of supply chain for lowering the costs, high competition in the supply market , and the low demand of material in the market.

Reasons for Adverse Material Price Variance

Reasons for adverse material price variance include inflation in the economy, rise in the demand of material in the market, withdrawal of major competitor from the market, artificial shortage of material, real shortages due to natural disasters.

Significance of Material Price Variance

Material price variance immediately reflects the price level of material consumed. Favorable material price variance reflects the low price level than expectation or standard. Adverse material price variance reflects high price level than expectations.

Adverse material price information can be used to investigate the reasons for high level of price. Thus adverse material price variance an effective tools for identifying and investigating the high price level.

Favorable material price variance may used to determine the reasons for low price level in the market. This favorable material price variance is a tool of identifying and investigating low price level.

Material Price Variance Formula Example

Quantity Consumed (Actual) = 8000 kg

Unit Standard price= $ 10

Actual Price of material = 93,000

Calculate Material Price Variance

Other Related Formulas

Material Price Variance Formula

Labour Efficiency Variance Formula

Labour Rate Variance Formula

Material Price Variance Formula

Maximum Stock Level Formula

Maximum Stock Level formula is given below. This formula has been explained with an example.

Maximum Stock level = Reorder level + reorder Quantity- (Minimum usage x Minimum lead time)

Maximum Stock Level Formula Example

Reorder level of Inventory = 20,000

Reorder Quantity (EOQ) = 15,000

Minimum usage of inventory = 5000

Minimum lead time for arrival = 2 weeks

Solution

Maximum level = Reorder level + reorder Quantity- (minimum usage x minimum lead time)

=20,000 + 15,000- (5000 x2)

=35,000-10000

=15,000

Significance of Maximum Stock Level Calculation

Holding of stock or inventory is not free; rather holding of stock requires reasonable amount of expenditure or cost. Maximum stock level is calculated for reducing holding cost of the company. Any Stock above maximum stock level is not recommended.

Reasons of Stock level above the maximum Stock level

One of the main reasons is low consumption of stock that has resulted in piling up of stock. Therefore stock level may be controlled either by reducing re order quantity or reducing the re order level.

Important factor for Maximum Stock Level Determination

Important factor for determining the maximum stock level includes the storing or holding cost, space availability, seasonal stock consumption fluctuation etc. Therefore stock level formula just provides a general guidance, therefore management decide the actual stock level on the bases above mentioned factors.

Maximum Stock Level Practice Question

Reorder level of Inventory = 30,000

Reorder Quantity (EOQ) = 6,000

Minimum usage of inventory = 4,000

Minimum lead time for arrival = 3 weeks

Calculate Maximum Stock Level?

Average Stock Level Formula
Maximum Stock Level Formula
Minimum Stock Level formula

Re Order Level Formula

Minimum Stock Level Formula

Minimum stock level formula may be calculated by the following formula. Minimum stock level formula has been explained with a simple example.

Minimum Stock Level = Reorder Level - (Average usage x average Lead Time)

Minimum Stock Level Formula Example

Re Oder level of Inventory= 70,000

Average usage per week= 10,000

Average lead time for inventory = 5 weeks

Solution

Minimum Stock Level = Reorder Level - (Average usage x average Lead Time)

= 70,000-(10,000 x 5)

=70,000-50,000

=20,000 (minimum stock level)

Significance of Minimum Stock Level

Minimum stock level is very critical level and at this level management should take appropriate actions or steps to ensure the availability of material. It is important to remember that this level is not an ordering level or re ordering level; rather this is a control or safety level.

Advantages of Minimum Stock Level Calculation

First advantage of minimum stock level is to provide management an effective control of the inventory management. Management can take appropriate steps to ensure timely availability. Minimum stock level calculation also helps in ensuring operations of the entity.

Minimum Stock Level and Inventory orders

Ideally inventory order should reach the warehouse before the inventory level touches the minimum stock level. If this is not the case, then operation of organization may be halted for shortage of inventory.

Other name of Minimum Stock Level

Other name of minimum stock level is safety stock level. It means that organization must maintain that level for safety or continuity of its operation. Minimum stock level ensures a safe environment for operations.

Minimum Stock Level Formula Question

Re Oder level of Inventory= 800,000

Average usage per week= 20,000

Average lead time for inventory = 8 weeks

Calculate the minimum stock level?

Other related Formulas

Average Stock Level Formula
Maximum Stock Level Formula
Minimum Stock Level formula
Re Order Level Formula