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P > 11. Standard Costing and Variance analysis > Flashcards

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
Q

Variance and variance analysis

A

Difference between planned, budgeted or standard cost and actual cost incurred

  • Evaluation of performances through variation for managerial action
26
Q

What are the three main groups of variances

A

Variable cost variances
Fixed production overhead variances
Sales variances

27
Q

What is the general approach to calculae variane

A

Budgeted outcome - actual outcome = variance

28
Q

How to work out material price variance

A

Actual purchase should cost - actual purchase cost = difference

Difference valued at the standard cost per kg

variance

29
Q

Under marginal costing how do you find out fixed overhead variance

A

Fixed overhead variance is difference between budgeted and actual fixed over head costs

30
Q

How are fixed overhead variances in absorption costing

A

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
Q

How to work out sales volume variance

A

Budget sales - actual sales

32
Q

What is operating statement

A

A report for management prepared on regular basis showing actual costs and revenues
comparing actual and budget to show variance

33
Q

What is difference in MC adn absoprtion

A

In MC - value at standard contribution

In absorption - value at standard profit

34
Q

What are the categories of causes of variance

A
  • Controllable expediture
  • Uncontrollable
  • Inaccurate standard
  • Inaccurate measurement of actuals
35
Q

What are reasons for favourable and adverse variance in material price

A

Favourable
Unforeseen discounts
greater care in purchasing
change in material standard

Adverse
Price increase
careless purchasing
change in material standard

36
Q

What are reasons for favourable and adverse variance in material usage

A

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
Q

What are reasons for favourable and adverse variance in labour rate

A

Favourable
Use of workers pay rate lower than standard

Adverse
Worker pay rates higher than standard - wage increase ,higher grade of labour

38
Q

What are reasons for favourable and adverse variance in idle time

A

Favourable
Less than budgeted

Adverse
Machine breakdown
Illness or injury
non availability of material

39
Q

What are reasons for favourable and adverse variance in labour efficiency

A

Favourable
Output produced quickly then expected

Adverse
output lower than standard- lack of training, bad materials

40
Q

What are reasons for favourable and adverse variance in fixed overhead volume

A

Favourable
Production or level of activity greater than budgeted

Adverse
Production or activity less than budgeted

40
Q

What are reasons for favourable and adverse variance in fixed overhead expenditure

A

Favourable
Savings- more economical use of service

Adverse
Excessive or change in use of service

41
Q

How to work out sales volume profit variance

A

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
Q

How to work out sales volume contribution variance

A

(Budgeted sales -
Actual sales)*contribution

P (12 decks)

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