 Hello and welcome to this session in which we would learn how to approach how to solve a CPA exam simulation The first thing I always say when you are looking at a CPA exam simulation is ask yourself What type of a simulation am I dealing with and by inspecting visually the simulation? I see I'm gonna have to input I have to input some numbers and Answering the questions favorable unfavorable. That's the type of simulation. What is the topic cover even without reading anything? Variance is very common topic on the BEC section of the exam and it's gonna be on the BAR section on the far and in the Advanced specialization 2024 so I'm dealing with variances. That's the topic. Well The next thing I want to know is do I have one particular question? I don't have one particular question notice They're asking you to compute my selling price variance sales volume variance direct labor rate variance at this point Once you figure this out, you should be breathing very well. You can say, okay, great. I am familiar with these topics I know my variances. I studied with far hat. I studied with my I studied with my CPA review course bring it on Let's do this before we proceed any further. I have a public announcement about my company far hat lectures.com Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker Roger Wiley Gleam miles my accounting courses are aligned with your accounting courses broken down by chapter and topics My resources consist of lectures multiple choice questions through false questions as well as exercises Go ahead start your free trial today. Now. You are giving one exhibit The standard versus the actual cost good I may need this for later and you are giving other information which is Actual unit produce and sold for the quarter with 9,500 with the profit per unit 588 budgeted was 460 each unit was sold for 21 dollars with the budgeted selling price of 20 So you want to look at these information real quick and you know what you have you have the Standard cost and you have additional information. Let's move on a Manufacturing company is reviewing its result for the quarter and the June 30th year for the company uses standard cost based on past performance and Expectation for each quarter to monitor So let's read real quick what we are being asked to do most likely You know what you are being asked to do at this point a manufacturing this a manufacturing company is reviewing its results for the quarter And the June 30th year for the company uses the standard cost Based on past performance and expectation for each quarter to monitor performance and analyze variances That's fine. They've been using this for a while. So Variance is make sense to them at the end at the end of each quarter variances are identified and investigated further very common Practical thing and the reward and very common topic tested on the CPA exam For column B We want to know what's the variance? What's the number and whether that variance was favorable or unfavorable? Looking at the first variance selling price variance. Well, I Saw some information about the selling price here and it says each unit was sold for 21 with the budgeted selling price of 20 Stop right there. I Sold each unit for 21 and I budgeted to sell it for 20 before I do any computation I have a favorable selling price variance. Why because I sold each unit for a dollar more So I know it's it's a favorable How much is the amount? What's the favorable amount? Well, I Need to know how many units I actually sold how many units I actually sold. Well, I Sold, let's see actual unit actual unit produce and sold for the quarter world 9500 I budgeted 10,000 with the profit of 588. Well, I sold notice how much unit I sold I sold 9000 I sold 9500 therefore my favorable variance is one unit one dollar times 9500 selling price variance 9500 and it's favorable The second question I'm being asked is sales volume various for operating income What is sales volume variance? It means That I sell more Volume more or less than I budgeted. Well, let's see Actual unit produce and sold for the quarter were 9500 budgeted 10,000 right there. I budgeted to sell 10,000. I sold 9500 immediately It's gonna be unfavorable variance. Why because I sold less than what I Planned what my budget is what my budgeted stated so 500 unit 500 unit less and How much did I? How much did I sell it? What was my profit because sales volume for operating income? How much was my profit per unit? How much was my profit per unit budgeted profit? Let's see the actual contribution margin was seven dot seven dollars and forty-eight cents the budgeted contribution margin per unit was $10 $6 and 10 cent assume the contribution margin is equivalent to operating margin. Well, it means I sold 500 unit less And the budgeted contribution margin was 610 Therefore, it's unfavorable for that amount, which is I take 500 units times 6.1 and That's gonna give me 3050 and that's unfavorable. Now. Don't put negative. Don't put negative. Why because the unfavorable Unfavorable is indicating it's negative So sometimes they tell you to put favorable or unfavorable negative, but here it's telling you don't do it There's no negative number The next variance we're gonna look at is the direct labor rate variance Again, what is the direct labor rate variance that I pay more or less for my labor? In other words that I pay them more per hour or less per hour Well, when I want to compute this ratio and this this variance I need to know what was my actual cost and what was my standard labor well My standard labor I wanted to pay $10 per hour right here from the standard versus actual cost I actually paid 1050 immediately. I'm gonna say I have an unfavorable variance. Why unfavorable? I paid more than what I wanted to pay 50 cent more now Now we know it's unfavorable. The question is how much we need to know how much Unfavorable, okay. Well to know how much we have to take 50 cent, 50 cent times how many hours we work. We actually work 8,000 hours So we paid 50 cents, 50 cent more for 8,000 hour. Well, that's easy. That's gonna be unfavorable Labor variance of 4,000. Here's what I want you to do. This is what I this is how I explain this When I have those variances, I have three column system 1, 3 3 column 1 to 3 actual quantity times actual price Standard quantity times the standard price So this is column 1 is the actual column column 3 is the standard column then I'll take column 2 is actual quantity times Standard price then the difference between column 1 and column 2 is the rate The difference between column 2 and column 3 rate or price Depending on I'm dealing with labor or material and the difference between column 2 and column 3 is the quantity Did I use more or less or the efficiency if we're using if we're looking at hours Here's what work really what we're computing here is the difference between 1 and 2 the rate variance and notice here When we're comparing 1 and 2 When we're comparing 1 and 2 notice the quantity actual quantity times Actual quantity is in both formula. The only difference is the actual price times the standard price So I paid more and what I what I need to do the difference between those is I take my standard price Times the actual quantity Okay, and I find out I paid a little bit more little bit more 50 cent more times the actual quantity So the answer is $4 now Direct labor efficiency variance that I use more hours or less hours again. I have to go to my standard. I used how many hours How many hours was budgeted This is the rate direct labor hour standard the standard was for this for this for this unit is 10,000 I the actual was 8,000 so guess what I used less hours So I was more efficient because I used 8,000 versus the standard 10,000 so immediately in my Output favorable here favorable and how much favorable what how much? favorable by 2,000 hours 2,000 hours. That's great. That's great. It's 2,000 hours and I was supposed to pay 10 2,000 times 10. I have it the labor efficiency ratio of 20 20,000 of 20,000 again, if you're not familiar with those variances again far hat lectures go to my lessons and you can see them Material price variance. What's that? Did I pay more for the material or less for the material? Well, how do I know this? I'm gonna go to my standard I was supposed to pay $4 per unit of material. I paid 525 so the Material price variance immediately. No, it's unfavorable. Make sure you click the unfavorable at least you'll get half of the answer Right now. How much was it unfavorable? What notice I paid? $1.25 more $1.25 more and I purchased $4,000 the actual purchase was $4,000. Okay, so $1.25 times $4,000 What $1.25? I should know this. It should be $5,000 right? $5,000 unfavorable $5,000 yes $5,000 that's easy math $5,000 always use the calculator on the exam day Now I paid a little bit more. How about the material usage variance that I use more material or less material? Well, let's see. I used Unit of material unit of material used the manufacturing. I actually used $4,000. I Budgeted the standard was $4,750. Well for one thing jump real quick and put down the material is Favorable the material is favorable make sure you check favorable and Again favorable how much? Favorable was it how much favorable was it? Well It's 750 times $4 per times the standard unit. Well, if that's the case, that's a 3,000 3,000 favorable 3,000 favorable take a look at the variable overhead spending variance. Was it favorable or not? Well, I'm giving how much I actually spend in overhead. So I'm giving the actual column Okay, and I'm told here that variable overhead. It's per direct labor hour The standard is if it's $2 per direct labor hour $2 times 10 10,000 is 20,000 now my three-way column is very beneficial here So let me show you how you would use the three-way column. So the standard is the standard Column 1 column 3 the standard is 10,000 times 2 which is the standard Variable overhead is 20,000 now one is actual the actual. I'm giving the total which is 23,440 This is the total. I'm giving 8,000 hours 8,000 hours here from the actual Actual now. I know it's easy now. I can compute what was my actual What my actual rate per hour if I take 23,400 23,400 and 40 divided it by 8,000 That's equal to 2.93 Notice here. This is the actual the actual was more. So I have an unfavorable unfavorable variance. So it says un Unfavorable material spending variance and suspending spending means what? spending means the difference let me let me pull the Pull this here Spending means the difference remember to two is 8,000 Pull the 8,000 actual quantity times the standard price of two We're looking at the difference the column to a 16,000 and we're looking at the difference between those two figures So I'm gonna take 23,400 and 40 Minus 16,000 and that's gonna give me 7,440 Again, we know that variance is unfavorable unfavorable Okay, this is the spending Now that I use more or less Well, I use less This ratio the quantity it's gonna be less because I used 8,000 versus I budget at 4,000 So this is 4,000 favorable because you could be asking the quantity the quantity is or the efficiency It's favorable or you could be asking about the total whether it's favorable or unfavorable Overall, it's unfavorable 3,440 which is I netted those two for the very for the overhead variable specifically the variable overhead spending I'm only being asked about the spending. So the spending was unfavorable 7,440 now this was an actual CPA simulation Should you panic? No Why? This is even easier than some multiple choice questions about variances as long as you know your variances You should be in good shape because each of these question is a small multiple choice However, when when it's giving any in a simulation, it looks intimidating However, if you are confident you used for hat you relied on your knowledge You kept yourself calm on the exam day. You'll be able to do it. I'm always here to help you. Good luck and stay safe