11. Standard Costing and Variance analysis Flashcards
Define standard cost
The planned unit cost of a product, component or service
What is meant by standard hour
The amount of work achievable at standard efficiency levels in an hour
What is the purpose of standards
- To set budgets
- Prediction for decision making and resorce allocation
- Control mechanism: variance analysis
- Performance evaluation
- Inventory valuation
What is meant by management by exception
In variance analysis - where focus is on activities which require attention and ignoring those which appear to be conforming to expectations
When is standard costing mainly used
- When there is a degree of repition in production
What are the bases/levels at which standards are set at
- Ideal standard
- Attainable standard
- Current standard
- Basic historic standard
Ideal standard
Assumes optimum level of efficiency
Attainable standard
Makes an allowance for normal inefficiecies but also includes improvement
Current standard
Based on current efficiency levels and achievements
Basic/Historic standard
Not updated regularly to show changes over long term
What are the criticisms of standard costing
- 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
What is JIT
Just in time system - objective is to produce products as they are required by a customer rather than for stock
Which two costing systems comply with standard cost
Marginal - total variance
Absorption costing - fixed OAR per unit
What are considerations when setting standards relating to direct material
- Purchase contracts agreed
- Pricing discussion with regular suppliers
- Forecast and movement of prices
- Bulk purchase discounts
- Material quality
- Anticipated inflation
What are considerations when setting standards regarding direct labour
- Agreements of pay rises/bonuses
- Experience of staff
- HR department
How does price inflation cause difficulties in setting realistic standard price
- 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
Why is standard costing still useful in times of inflation
- Usage and efficiciency variances will still be meaningful
- Inflation is measurable - effects can be removed
- Standard costss can be revised
What are perforformance standards
Material usage efficiciency standards
Labour efficiciency standards
What are the challenges in seeeting standards in service industries
- Difficult to establish a measurable cost unit
- Cost units will be hetergenous
- Human influence is big in quality and output of resource
How can service industry challenges of setting standards be overcome
- Establish measurable cost unit
- Reduce heterogenity of services
- Reduce element of human influence
McDonaldization
Term coined by George Ritzer
- Application of standard costing for planning and control
What are the four dimensions of McDonaldization
- Calculability: standardised and measurable content
- Control: sequence of simplified, predetermined tasks
- Efficiency: cheap to produce and quick to deliver
- Predictability: same in every outlet
What are criticisms of macdonaldization
- 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
What are considerations of standard setting for public services
- 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
Variance and variance analysis
Difference between planned, budgeted or standard cost and actual cost incurred
- Evaluation of performances through variation for managerial action
What are the three main groups of variances
Variable cost variances
Fixed production overhead variances
Sales variances
What is the general approach to calculae variane
Budgeted outcome - actual outcome = variance
How to work out material price variance
Actual purchase should cost - actual purchase cost = difference
Difference valued at the standard cost per kg
variance
Under marginal costing how do you find out fixed overhead variance
Fixed overhead variance is difference between budgeted and actual fixed over head costs
How are fixed overhead variances in absorption costing
Fixed overhead variance is subdivided into two
- Expenditure variance: budget expenditure - actual expendityre
- Volume variance: Budget volume - actual volume = difference valued at OAR per unit
How to work out sales volume variance
Budget sales - actual sales
What is operating statement
A report for management prepared on regular basis showing actual costs and revenues
comparing actual and budget to show variance
What is difference in MC adn absoprtion
In MC - value at standard contribution
In absorption - value at standard profit
What are the categories of causes of variance
- Controllable expediture
- Uncontrollable
- Inaccurate standard
- Inaccurate measurement of actuals
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
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
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
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
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
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
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
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)
How to work out sales volume contribution variance
(Budgeted sales -
Actual sales)*contribution
