9. Standard Costing & Variance Analysis

Question 1

What is standard costing?

Answer 1

The establishment of predetermined estimates of the costs of products or services (‘standard costs’, to be recorded in a standard cost card).

Question 2

Define standard cost

Answer 2

A standard cost per unit is the expected, or normal, cost per unit, based on expectations for:
* The usage of resources
* The price per unit of resources

i.e. the budgeted cost per unit

Question 3

Outline the advantages (6) and disadvantages (2) of standard costing

Answer 3

Question 4

What is variance analysis?

Answer 4

The process by which the total difference between standard and actual results is analysed

Question 5

In variance analysis, what terms are used to describe when actual results are better or worse than expected results? What value of varaince will each situtation take

Answer 5

• When actual results are better than expected results, we have a favourable variance (F) - variance is positive
• When actual results are worse than expected results, we have an adverse variance (A) - variance is negative

Question 6

In order to complete variance analysis, how must we adjust our fixed budget?

Answer 6

In order to make meaningful comparisons between our original fixed budget (produced at the start of the period) and our actual results, the budget will need to be flexed to the actual activity level - prepare a flexed budget from the fixed budget

Question 7

What are types of detailed variance analyses used to explain variations in an organisations profit from budget to actual that we will look at? (12)

Answer 7

1. Sales volume variance
2. Sales price variance
3. Total material variance
4. Materials usage variance
5. Materials price variance
6. Total labour variance
7. Labour efficiency variance
8. Labour rate variance
9. Total variable overhead variance
10. Variable overhead efficiency variance
11. Variable overhead expenditure variance
12. Fixed overhead expenditure variance

Question 8

What are the variances associated with sales?

Answer 8

• Sales volume variance
• Sales price variance

Question 9

Define sale volume variance. Give the equation to calculate it and what this variance tells us?

Answer 9

The sales volume variance is the difference between the actual number of units sold and the budgeted quantity, valued at the standard contribution per unit.

In other words, it measures the increase or decrease in contribution as a result of the sales volume being higher or lower than budgeted.

Question 10

What is important to remember about the value used as price per unit when calculating sale volume variance?

Answer 10

We use standard contribution - i.e. budgeted contribution

Question 11

Outline the possible causes for sale volume variance to be favourable (4) and possible causes for it to be adverse (3)

Answer 11

Possible causes if favourable:
* Efficient sales force
* Successful advertising campaign
* Potential market was larger than expected
* Original budgeted sales were very conservative

Possible causes if adverse:
* Demotivated sales force
* Competitor increased advertising effort
* Original budgeted sales were too optimistic

Question 12

Define sale price variance. Give the equation to calculate it and what this variance tells us?

Answer 12

The sales price variance explains the difference between the actual revenue earned and the flexed budgeted revenue

Question 13

Outline the possible causes for sale price variance to be favourable (3) and possible causes for it to be adverse (3)

Answer 13

Possible causes if favourable:
* Supply shortages meant customers prepared to pay higher prices
* Quantity discounts given to customers were lower than expected
* Original standard selling price set too low

Possible causes if adverse:
* Supply surplus meant customers wished to pay lower price
* Quantity discounts given to customers were higher than expected
* Original standard selling price set too high

Question 14

What are the variances associated with materials?

Answer 14

• Total material variance
• Materials usage variance
• Materials price variance

Question 15

Define total material variance. Give the equation to calculate it and what this variance tells us?

Answer 15

A measure of the difference between the standard material cost of the output produced and the actual material cost incurred

Question 16

Define material usage variance. Give the equation to calculate it and what this variance tells us?

Answer 16

A measure of the difference between the standard quantity of materials that should have been used for the number of units actually produced, and the actual quantity of materials used, valued at the standard price per unit of material - difference between how much material should have been used and how much material was used, valued at standard price.

Question 17

Outline the possible causes for material usage variance to be favourable (3) and possible causes for it to be adverse (5)

Answer 17

Possible causes if favourable:
* Material used of higher quality than standard
* More effective use made of material
* Errors in allocating material to jobs

Possible causes if adverse:
* Defective material
* Excessive waste
* Theft
* Stricter quality control
* Errors in allocating material to jobs

Question 18

Define material price variance. Give the equation to calculate it and what this variance tells us?

Answer 18

A measure of the difference between the standard cost and the actual cost for the actual quantity of material used or purchased - difference between what the material did cost and what it should have cost.

Question 20

Outline the possible causes for material price variance to be favourable (3) and possible causes for it to be adverse (3)

Answer 20

Possible causes if favourable:
* Unforeseen discounts received
* More care taken in purchasing
* Material standard price set too high

Possible causes if adverse:
* Price increase in the market
* Careless purchasing
* Material standard price set too low

Question 21

How do the three variances for materials relate?

Answer 21

Question 22

What are the variances associated with labour?

Answer 22

• Total labour variance
• Labour efficiency variance
• Labour rate variance

Question 23

Define total labour variance. Give the equation to calculate it and what this variance tells us?

Answer 23

A measure of the difference between the standard labour cost of the output produced and the actual labour cost incurred

Question 24

Define labour efficiency variance. Give the equation to calculate it and what this variance tells us?

Answer 24

A measure of the difference between the hours that should have been worked for the number of units actually produced, and the actual number of hours worked, valued at the standard rate per hour - the difference between how many hours should have been worked and how many hours were worked, valued at standard rate.

Question 25

Outline the possible causes for labour efficiency variance to be favourable (2) and possible causes for it to be adverse (3)

Answer 25

**Possible causes if favourable:** * Output produced more quickly than expected because of work motivation, better quality of equipment or materials, or better methods * Errors in allocating time to jobs **Possible causes if adverse:** * Lost time in excess of standard allowed * Output lower than standard set because of deliberate restriction, lack of training, or substandard material used * Errors in allocating time to jobs

Question 26

Define labour rate variance. Give the equation to calculate it and what this variance tells us?

Answer 26

A measure of the difference between the standard cost and the actual cost for the actual number of hours paid for - the difference between what the actual labour used did cost and what it should have cost.

Question 27

1Outline the possible causes for labour rate variance to be favourable (2) and possible causes for it to be adverse (2)

Answer 27

**Possible causes if favourable:** * Use of apprentices or other workers at a rate of pay lower than standard **Possible causes if adverse:** * Wage rate increase * Use of higher-grade labour

Question 28

How do the three variances for labour relate?

Answer 28

Question 29

What are the variances associated with variable overhead?

Answer 29

* Total variable overhead variance * Variable overhead efficiency variance * Variable overhead expenditure variance

Question 30

Define total variable overhead variance. Give the equation to calculate it and what this variance tells us?

Answer 30

A measure of the difference between the variable production overhead that should be used for actual output and the variable production overhead actually used

Question 31

Define variable overhead efficiency variance. Give the equation to calculate it and what this variance tells us?

Answer 31

A measure of the difference between the hours that should have been worked for the number of units actually produced, and the actual number of hours worked, valued at the standard variable overhead charge per hour - the difference between how many hours should have been worked and how many hours were worked, valued at standard cost per hour.

Question 32

Define variable overhead expenditure variance. Give the equation to calculate it and what this variance tells us?

Answer 32

A measure of the difference between the standard variable overhead cost and the actual cost for the actual number of hours worked - the difference between what the hours worked cost (in variable overheads) and what they should have cost.

Question 33

How do the three variances for variable overhead relate?

Answer 33

Question 34

What are the variances associated with fixed overhead?

Answer 34

* Fixed overhead expenditure variance

Question 35

Define fixed overhead expenditure variance. Give the equation to calculate it and what this variance tells us?

Answer 35

A measure of the difference between the budgeted and actual fixed overhead expenditure in the period. Any difference between budget and actual spending must be due to higher-thanexpected or lower-than-expected spending and can have nothing to do with differences in volume of activity.

Question 36

Why is fixed overhead expenditure variance an unusual one?

Answer 36

By definition, fixed overheads should remain the same, regardless of the volume of production and sales hence any difference between budget and actual spending must be due to higher-thanexpected or lower-than-expected spending and can have nothing to do with differences in volume of activity.

Question 37

What is an operating statement?

Answer 37

A schedule that reconciles the actual profit to the original profit, with the differences explained using the variances

Question 38

Outline a pro-forma for an operating statement

Answer 38

Question 39

Outline a method for putting together an operating statement

Answer 39

1) Draw uip the pro-forma pictured 2) Determine the budgeted contribution and actual contribution and input it into the table 3) Calculate the variances as per the pro-forma and populate the table, where favourable varaiances are positive and go in the left hand coumn and adverse variances are negative and go in the right hand column 4) Up up the favourable and adverse columns and sum these totals up in the right hand column 5) Check if correct as the budgeted contribution plus the total variances should equal the actual contribution

Question 40

What is important to remember when looking at variances in isolation?

Answer 40

Individual variances should not be looked at in isolation. One variance might be interrelated with another, and much of it might have occurred only because the other, inter related, variance occurred too.

Question 41

EXAMPLES OF INTER-RELATED VARIANCES

Question 42

Outline how to approach questions that give you variations and ask for actual and budget values

Answer 42

It’s best to start by writing down the calculations for any variations you’ve been given. Then identify any variations where you know the result and all but one of the inputs – work to then find that input by re-arranging the equation and use that input in another variatiom calculation. Proceed methodically by substuting the values previosuly calcualted to arrive at the value required by the question