 Hello and welcome to this session. This is Professor Farhad and this session we're going to look at an actual CPA simulation that was released by the AI CPA. This CPA simulation is as official and as real as it gets because the AI CPA administered the CPA exam and this is a BEC simulation. As always, I would like to remind you to connect with me on LinkedIn. If you haven't done so, YouTube is where you would need to subscribe. I have 1600 plus accounting, auditing, finance and tax lectures. This is a list of all the courses that I cover. In this session, I'm going to be covering mostly managerial accounting and cost accounting concept but BEC also cover introduction to finance. On my website, you'll find additional resources such as multiple choice, through false notes, PowerPoint slides and if you're studying for your CPA 2000 plus CPA CPA questions. I'm going to go to the simulation and we're going to work the simulation together. This is the simulation that we're going to be working today. The first thing is first scan through what's required. Actually, before I even look at what's required look, I'm going to be computing the selling price variance, the sales volume variance, the direct labor rate variance, the direct labor efficiency variance. If you are ready for the exam, this should be like a site of release. Great. I like those topics because I'm ready. Before you go to the exam, you see these topics, you're like, okay, great. I'm ready to go. Now, what do I need to tell you here? For example, a simulation like this is a bonus. Why? One thing is you cannot take the BEC exam if you cannot compute those variances. That's one thing. Two, those variances are independent. If you get one of them wrong, you may get the other one right. So they're not interdependent. So two good news. One, you should be familiar with the topic. Two, each situation is independent from the other. Okay, so let's take a look at what we are giving. And this is also another opportunity for you to remind you that just studying multiple choice questions for the exam is not sufficient. And the reason is the simulation, try to test your understanding. You may get the multiple choice question correct by mistake, but when it comes to simulation, you have to understand everything about the topic that you need to understand. So a manufacturing company, first let's take a look at this. A manufacturing company is reviewing its result for the quarter ended June 30th year four. The company uses standard cost based on past performance and expectation for each quarter to monitor performance and analyze variances. This should be like basic knowledge for you to walk into the exam. At the end of each quarter, variances are identified and investigated further for each of the variances in column A. These are the variances complete the following using the information provided in the exhibit above. So they're giving us exhibit, we're going to look at them in column B compute the amount of the variance for the quarter enter all the amount as positive whole number in column C select whether it's favorable or unfavorable. So here I'm have to select whether it's favorable or unfavorable. And you get a simulation like this, you should be like, good, I'm lucky I got this simulation. This is what we are giving. We are giving standard the quarter June 30th year four, the standard amount and the actual amount just scan through them real quick. Okay, that's excellent. And we are giving also other information under other information actual unit produce and sold for the quarter worth 10,000 9,500 the budgeted worth 10,000 with the profit per unit 588 versus the profit per budget should have been 460 each unit was sold 421 with a budgeted selling price of 20. Good. That's good. That's good news. We sold for we sold it for more we budgeted for but we sold less unit. The actual contribution margin for the quarter was $7 and 48 cents. The budgeted contribution margin per unit was 610 well our contribution margin was higher. Assume the contribution margin is equivalent to operating margin standard labor hours and unit of material use and operation has been adjusted for the actual production. Okay, that's that's fair enough. I have everything that I can start the problem. Now you focus on each on each variance separately starting with the selling price variance. What is the amount of the selling price variance? First of all, before you even look at the amount, it's favorable. Why it's favorable? Just make sure you click it's favorable. Even if you don't know the amount. Why? Because if you look at this information, we were told that the budgeted selling price was 20 and we sold it for 21. What does that mean? It means we have a dollar. We have a dollar extra. We receive the dollar extra for 9500 unit. So what does that mean? It means it's favorable 9500. This is what it means because I sell that for a dollar more and I sold 9500 unit. So practically I'm done with number one. So but the first thing is I knew it's favorable because I sold it for more when I budgeted. Done. Sales volume varies for operating income. Well, before you even compute the answer, before you even compute the answer, you should be able to know whether it's favorable or unfavorable. Sales volume variance, it means that you sell more or less what you budgeted. You sold less. You were budgeted 10,000. You sold 9500. Immediately the sales volume is unfavorable because you sold 500 unit less. Now those 500 unit, they're asking us for the operating income. Well, what was the operating income? What was the operating, what was the budgeted operating income? Let's look at this. Let's look at other information. So the budgeted contribution margin was extend, but we sold 500 less. So what we need to do now for the calculator here, the first one, we didn't even use the calculator, 500 times $6.10. So it's 3,550 unfavorable. Again, and input all the answers as positive. Remember, because the variance, it doesn't matter. The unfavorable tells you whether it's favorable or unfavorable. We don't need to put it as minus. That's it. That's basically those, those are the first two questions. Now you're asked about the direct labor rate variance. Now I'm going to deviate a little bit here. I'm just going to tell you that if you want to learn about those variances, the direct labor variance, the direct efficiency variance, the material price variance, the variable overhead variance, what I suggest you do is to visit my website. So here what I'm going to do, I'm going to give you a shortcut or a hint about these questions where you could use either on the simulation or on the multiple choice. And I use this three column, I teach this and I don't, I don't, I did not invent this, but I explained in detail this three column formula, actual quantity times actual price. This is, I call this column one, then column three, I call it standard quantity times standard price. So this is, so column one is actual, column three is standard. Then in the middle I pull the actual quantity from this column and I pull the standard price from this column. Then what you would do next is if you compare, this is column two now. This is column, let me change the color and this is column two. This is column two. Now if you compare column one to column two, notice, column one and column two, actual price, actual quantity and actual quantity is the same. So the only difference is the price, the actual price versus the standard price. So if you find the difference between column one and column two, that's going to give you the price or the rate variance. Well, the price is for the material, the rate is for the labor. So it's going to deal only with the price. So the only thing that's different between column one and column two is the price. If you compare column two to column three, if we compare column two and column three, notice the standard price, standard price is the same. The only thing that's different is the actual quantity and the standard quantity. So what we are looking at here is the quantity variance or the efficiency variance. And in my lecture and my on my YouTube and on my YouTube and on my website, I have plenty of explanation and exercises that's going to help you do this. I just want to go on a tangent just to tell you that I can help you tremendously if you're having problem with this. Okay. So the first thing is the direct labor rate variance. All right. Direct labor rate variance. First thing you should be able to know whether it's favorable or unfavorable before you do any computation. Why? Because if you look at the standard labor, labor rate variance, labor rate variance, we're supposed to pay 10, we pay 1050. Immediately, it's unfavorable. If you don't have time, click unfavorable here. This is half of the question is right. Now we need to know how much it's unfavorable. Well, guess what? It's 50 cent. We pay 50 pennies more than we're supposed to 50 pennies more. Now those 50 pennies, it's going to be computed by the actual direct labor because this is how much we actually spent. How much did you actually spend? 8,000. I know the answer is 4,000, but let me do the computation this way. So I paid 50 cent more. I paid, I'm going to clear the tape. That's not working. There we go. I paid 50 cent more and I worked 8,000 hours. So it's 4,000. Therefore, I'm done with this question. I'm done with this question. It's $4,000. $4,000. Now we're going to look at the direct labor efficiency variance. Again, you should be able to know whether it's favorable or unfavorable before you do any computation. Direct labor standard is 10,000. I was supposed to spend 10,000. I actually spent 8,000. Excellent. I'm favorable because I saved 2,000 direct labor hours. I paid more, but I worked less. So the direct labor variance efficiency, I saved 2,000 hours and I multiplied this by the standard price. Now if you're asking why do I multiply it by the standard, go to my explanation. I don't want to explain it now, but I don't want to deviate. I just want to show you how to solve this. I don't want to teach you how to do this in a sense of explaining. That's why I have my website and my YouTube. So I told you it's favorable and it's 20,000. That's pretty good. So the employee did a good job by saving on time. Material price variance. Well, I'm supposed to pay $4. That's my standard. I paid $5.25. Well, unfavorable. Immediately I'm going to put unfavorable. Now I need to know how much it's unfavorable. It's $1.25. I paid $1.25 more and I used actually used $4,000. $1.25 more and I used $1.25 times $4,000. I can tell you right now it's $5,000. I know the answer is $5,000. So it's $1.25 times $4,000 actual $5,000. It's unfavorable. Now I need to know material usage variance. Hopefully it's the same thing as labor. I did a good job. I did not use a lot of material. Good. I was supposed to use $4,750. I used $4,000. Excellent. Here I saved on the material. I saved 450 units. The actual material used. So I saved 750 units, which is good. Again, it seems here what's happening is we paid more, but when it comes to usage, we used less. Now we're going to multiply it by the standard price. So I'm going to take 750. I'm going to clear this. 750 times the standard price, which was $4 times 4 should be $3,000. Yes. So the material I already told you it's favorable because we used less unit. So it's favorable. And the answer is $3,000 favorable. $3,000 favorable. Now let's take a look at the variable overhead spending variance. The actual was $23,440. The direct labor hours is $2. The standard is $10,000, but they're looking for the spending variance. And this is where my three column works. So let me go ahead and plug this in my three column just to show you how this whole thing works. Let me go to my one note. So we have the actual quantity times the actual price, which is we don't know yet, but we know that the actual is $23,440. So that's $23,440. We know the actual quantity is $8,000. We know that the actual quantity is $8,000. Now we can find the actual price. Basically simple calculation. If we take $23,440 divided by $8,000, we find it's $2.93. Now the standard quantity is $10,000 times the standard price of $2. So the standard is $20,000. Now I know it's going to be unfavorable because I paid $2.93 and the standard price is $2.30, but they're not asking me, now they're asking me about the price variance. So I have to plug in the column number two, which is the actual quantity, $8,000 times the standard price of $2. That's $16,000. The difference between those two is the price variance, which is, which is what? Just pull my calculator here. Calculator. So the difference between $23,440 and $16,000 is $7,440. $7,440. Now they could also ask you what is the quantity or the efficiency variance. It's $4,000. The efficiency variance is $4,000. So you got to make sure you know your answer what they're asking you. So it's unfavorable, unfavorable because I paid more. Okay. It's simply put I paid more. I paid $2.93, but from a quantity variance, I used less. I used less because I used only eight hours. So this is favorable. Now they can ask, what is the total? The total will be the net of these two, will be $3,440 unfavorable. The difference between those two, this is the total. So they could ask you about the price, they could ask you about the quantity, which is $4,000, or they can ask you about the total. But here we're asked about the price. So you got to make sure you know what you are being asked and answer the question correctly. And this is where I can, this is where I can help you the most with these variances if you use my method, not my method. Again, it's what I teach. So it's unfavorable. What can you find this information? Again, you can find it on my YouTube or I believe it's 6,000, 6,000, 7,000. What's the difference? Sorry, before I just want to get the answer here. Where's the answer? 7,440, 7,440. So that's the answer. So what can I do? How can I help you? Well, I can help you when I, I can help you with, I can help you with explaining these ratios and not ratios, these variances and details, work an example, multiple choice. So by the time you get on the exam, this is like a drink in a cup of water. It'll be so easy for you. So go ahead, visit my website, subscribe. You're going to study for your CPA only once in your lifetime. Do it well. It's a lifetime investment. Once you have your CPA, you no longer have to do it again and again. Good luck. Farhatlectures.com is where you need to go and I'm always here to help you.