11. Standard Costing and Variance analysis Flashcards

1
Q

Define standard cost

A

The planned unit cost of a product, component or service

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2
Q

What is meant by standard hour

A

The amount of work achievable at standard efficiency levels in an hour

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3
Q

What is the purpose of standards

A
  • To set budgets
  • Prediction for decision making and resorce allocation
  • Control mechanism: variance analysis
  • Performance evaluation
  • Inventory valuation
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4
Q

What is meant by management by exception

A

In variance analysis - where focus is on activities which require attention and ignoring those which appear to be conforming to expectations

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5
Q

When is standard costing mainly used

A
  • When there is a degree of repition in production
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6
Q

What are the bases/levels at which standards are set at

A
  1. Ideal standard
  2. Attainable standard
  3. Current standard
  4. Basic historic standard
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7
Q

Ideal standard

A

Assumes optimum level of efficiency

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8
Q

Attainable standard

A

Makes an allowance for normal inefficiecies but also includes improvement

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9
Q

Current standard

A

Based on current efficiency levels and achievements

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10
Q

Basic/Historic standard

A

Not updated regularly to show changes over long term

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11
Q

What are the criticisms of standard costing

A
  • Standard costing works best in stable environment
  • Regular revisions are neeeded for standard costing
  • Standard costing is less useful in customised product environment
  • Standard costing is potentially misleading when JIT is used - focus on wrong issues and negatvie behaviour
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12
Q

What is JIT

A

Just in time system - objective is to produce products as they are required by a customer rather than for stock

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13
Q

Which two costing systems comply with standard cost

A

Marginal - total variance

Absorption costing - fixed OAR per unit

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14
Q

What are considerations when setting standards relating to direct material

A
  • Purchase contracts agreed
  • Pricing discussion with regular suppliers
  • Forecast and movement of prices
  • Bulk purchase discounts
  • Material quality
  • Anticipated inflation
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15
Q

What are considerations when setting standards regarding direct labour

A
  • Agreements of pay rises/bonuses
  • Experience of staff
  • HR department
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16
Q

How does price inflation cause difficulties in setting realistic standard price

A
  • If current price was used in standard: reported price variance would become adverse as prices go up
  • If estimated average price were used: price variance would be favourable in first half and adverse in second half assuming price goes up gradually
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17
Q

Why is standard costing still useful in times of inflation

A
  • Usage and efficiciency variances will still be meaningful
  • Inflation is measurable - effects can be removed
  • Standard costss can be revised
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18
Q

What are perforformance standards

A

Material usage efficiciency standards

Labour efficiciency standards

19
Q

What are the challenges in seeeting standards in service industries

A
  • Difficult to establish a measurable cost unit
  • Cost units will be hetergenous
  • Human influence is big in quality and output of resource
20
Q

How can service industry challenges of setting standards be overcome

A
  • Establish measurable cost unit
  • Reduce heterogenity of services
  • Reduce element of human influence
21
Q

McDonaldization

A

Term coined by George Ritzer
- Application of standard costing for planning and control

22
Q

What are the four dimensions of McDonaldization

A
  1. Calculability: standardised and measurable content
  2. Control: sequence of simplified, predetermined tasks
  3. Efficiency: cheap to produce and quick to deliver
  4. Predictability: same in every outlet
23
Q

What are criticisms of macdonaldization

A
  • Quantity and quality will be predictable but quality will never be amazing
  • Standardisation and division of tasks is not motivating for employees
  • Interaction with unskilled staff does not improve customer experience
24
Q

What are considerations of standard setting for public services

A
  • Can be challenging as there is a need for maximising efficiency and reducing waste
  • However the main objective is not profit maximisation
  • There is no easy to track tangible output
25
Variance and variance analysis
Difference between planned, budgeted or standard cost and actual cost incurred - Evaluation of performances through variation for managerial action
26
What are the three main groups of variances
Variable cost variances Fixed production overhead variances Sales variances
27
What is the general approach to calculae variane
Budgeted outcome - actual outcome = variance
28
How to work out material price variance
Actual purchase should cost - actual purchase cost = difference Difference valued at the standard cost per kg variance
29
Under marginal costing how do you find out fixed overhead variance
Fixed overhead variance is difference between budgeted and actual fixed over head costs
30
How are fixed overhead variances in absorption costing
Fixed overhead variance is subdivided into two 1. Expenditure variance: budget expenditure - actual expendityre 2. Volume variance: Budget volume - actual volume = difference valued at OAR per unit
31
How to work out sales volume variance
Budget sales - actual sales
32
What is operating statement
A report for management prepared on regular basis showing actual costs and revenues comparing actual and budget to show variance
33
What is difference in MC adn absoprtion
In MC - value at standard contribution In absorption - value at standard profit
34
What are the categories of causes of variance
- Controllable expediture - Uncontrollable - Inaccurate standard - Inaccurate measurement of actuals
35
What are reasons for favourable and adverse variance in material price
Favourable Unforeseen discounts greater care in purchasing change in material standard Adverse Price increase careless purchasing change in material standard
36
What are reasons for favourable and adverse variance in material usage
Favourable: Material used of higher quality than standard More efficient use of material Errors in allocating materials Adverse Defective material Excessive waste/theft Stricter quality control
37
What are reasons for favourable and adverse variance in labour rate
Favourable Use of workers pay rate lower than standard Adverse Worker pay rates higher than standard - wage increase ,higher grade of labour
38
What are reasons for favourable and adverse variance in idle time
Favourable Less than budgeted Adverse Machine breakdown Illness or injury non availability of material
39
What are reasons for favourable and adverse variance in labour efficiency
Favourable Output produced quickly then expected Adverse output lower than standard- lack of training, bad materials
40
What are reasons for favourable and adverse variance in fixed overhead volume
Favourable Production or level of activity greater than budgeted Adverse Production or activity less than budgeted
40
What are reasons for favourable and adverse variance in fixed overhead expenditure
Favourable Savings- more economical use of service Adverse Excessive or change in use of service
41
How to work out sales volume profit variance
Difference between budgeted sales volume and actual sales volume values at standard profit margin per unit (in absorption) or at standard contribution (in marginal)
42
How to work out sales volume contribution variance
(Budgeted sales - Actual sales)*contribution