7- Standard costing and variance analysis Flashcards
What is standard costing?
A control technique that establishes predetermined estimates of costs and compares these with actual costs as incurred
What is the difference between standard and actual costs?
The variance
What are the 3 components used to calculate standard cost?
Expectations of:
- Efficiency levels in the use of materials and labour
- Price of material, labour and expenses
- Budgeted overhead costs and activity levels
What are 2 similarities between budgets and standards?
- Future perspective
- Both used for control purposes
What are 2 differences between budgets and standards?
- Budgets show total aggregate costs, prepared for all functions
- Standards show resources used for a single task
What is variance analysis?
The evaluation of performance by means of variances, whose timely reporting should maximise the opportunity for managerial action
What is the difference between favourable and adverse variance?
When actual results are better than expected, they’re favourable; when they’re worse they’re adverse
What are the 3 main groups of variances?
- Variable cost variances
- Fixed overhead variances
- Sales variances
What is the formula for material price variance?
AQ(SP-AP)
What is the formula for material quantity variance?
SP(SQ-AQ)
How are price and quantity variance calculated when material used differs from material bought?
- Price variance is computed on the quantity purchased
- Quantity variance is computed on the quantity used for production
What is the formula for labour rate variance?
AH(SR-AR)
What is the formula for labour efficiency variance?
SR(SH-AH)
What are the 2 components of labour efficiency ratio?
- Efficiency variance
- Idle time variance
What is the formula for expenditure variance?
Expected- Actual overhead
