7. Standard Costing and Variances

Question 1

What are the 4 uses of standard costing?

Answer 1

1. Producing budgets
2. Compare with actuals (control technique)
3. Motivate staff
4. Value inventories in the P&L and SFP

Question 2

How can we identify the standard quantity needed?

Answer 2

1. Use past experience
2. Look at detailed product spec
3. Discuss with experts in each department

Question 3

How can we identify the standard price?

Answer 3

1. Look at current prices
2. Consider expected future price changes
3. Availability of discounts
4. Range of suppliers available

Question 4

What are the 4 different cost standards?

Answer 4

1. Basic standard
2. Current standard
3. Attainable standard
4. Ideal standard

Question 5

What is the equation for sales volume variance?

Answer 5

(Actual Sales - Budgeted Sales)*(Standard profit or contribution)

Question 6

What is the equation for sales price variance?

Answer 6

Actual revenue - expected revenue at level of sales

Question 7

What is the equation for total materials variance?

Answer 7

(Actual Production x standard cost) - actual cost

Question 8

What is the equation for materials price variance?

Answer 8

(Actual purchases x standard cost) - actual cost

Question 9

What is the equation for materials usage variance?

Answer 9

(Actual production x standard kg) - actual usage

x standard cost per kg

Question 10

What is the equation for total labour variance?

Answer 10

(Actual production x standard cost) - actual cost

Question 11

What is the equation for labour rate variance?

Answer 11

(Actual hrs paid for x standard cost) - actual cost

Question 12

What is the equation for cost of idle time?

Answer 12

(Hrs paid for - hrs worked) x standard cost

Question 13

What is the equation for labour efficiency variance?

Answer 13

(Actual production x standard hrs) - hrs worked

x standard cost per hr

Question 14

What is the equation for total variable overhead variance?

Answer 14

(Actual production x standard cost) - actual cost

Question 15

What is the equation for variable overhead expenditure variance?

Answer 15

(Actual hours worked x standard cost) - actual cost

Question 16

What is the equation for variable overhead efficiency variance?

Answer 16

(Actual production x standard hrs) - actual hrs worked

x standard cost

Question 17

What is the equation for total fixed overhead variance?

Answer 17

(Actual production x standard fixed cost per unit) - actual cost

Question 18

What is the equation for fixed overhead expenditure variance?

Answer 18

Total budgeted fixed overheads - actual cost

Question 19

What is the equation for fixed overhead volume variance?

Answer 19

(Actual production - budgeted production) * standard cost

–> positive is favourable

Question 20

What is the equation for fixed overhead capacity variance?

Answer 20

(Hours worked - budgeted hours) x standard cost

Question 21

What is the equation for fixed overhead efficiency variance?

Answer 21

(Actual production x standard hrs) - actual hrs

x standard cost

Question 22

What are the possible causes of a favourable sales price variance?

Answer 22

Higher inflation, market shortages, higher quality

Question 23

What are the possible causes of a favourable sales volume variance?

Answer 23

Increased economic activity, lower prices, successful advertising

Question 24

What are the possible causes of a favourable materials price variance?

Answer 24

Cheaper suppliers, bulk discounts, drop in prices, reduction in quality

Question 25

What are the possible causes of a favourable materials usage variance?

Answer 25

Higher quality materials, greater efficiency, lower quality thresholds, errors in allocation

Question 26

What are the possible causes of a favourable labour rate variance?

Answer 26

Using lower grade staff, poor economic conditions

Question 27

What are the possible causes of a favourable labour efficiency variance?

Answer 27

Higher motivation, better equipment or materials, errors on time sheets

Question 28

What are the possible causes of a favourable variable overhead expenditure variance?

Answer 28

Unanticipated economies of scale, lower prices

Question 29

What are the possible causes of a favourable variable overhead efficiency variance?

Answer 29

Higher motivation, better equipment or materials, errors on time sheets

Question 30

What are the possible causes of a favourable fixed overhead expenditure variance?

Answer 30

Lower price rises, negotiating savings

Question 31

What are the possible causes of a favourable fixed volume expenditure variance?

Answer 31

Increased production

Question 32

What is the equation for ABC fixed overhead efficiency variance?

Answer 32

(Expected runs for actual production) - actual production runs
x standard cost per run

Question 33

What is the equation for ABC fixed overhead expenditure variance?

Answer 33

(Actual production runs x standard cost) - actual cost

Question 34

What fixed cost variances are applicable when reconciling budgets and actual results in marginal costing?

Answer 34

Only the fixed overhead expenditure variance

Question 35

What sales volume variances are applicable when reconciling budgets and actual results in marginal costing?

Answer 35

Standard contribution variance

Question 36

What are the criticisms of using standard costing in the modern business environment?

Answer 36

1. Fast changing customer needs require flexibility
2. Not suitable for JIT where high quality is required
3. Total Quality Management calls for continuous improvement, which needs ever evolving standards
4. Attainable standards would need to allow for wastage/idle time and is at odds with quality principles
5. Labour is now a much smaller portion and tends to be fixed in the short term