Accounting for Control

Question 1

What are the key points about standard costs?

Answer 1

• Based on carefully predetermined amounts
• Used for planning labour, material and overhead requirements e.g. standard time for workers
• The expected level of performance
• Benchmarks for measuring performance

Question 2

What is management by exception?

Answer 2

• Comparison of planned and actual performance (standard costs to actual costs)
• Directs attention to where it is most needed
• Managers focus on quantities and costs that exceed standards

Question 3

Who sets standard costs?

Answer 3

•Accountants, engineers, personnel administrators,
and production managers (multi-discipline)
• They combine efforts to set standards based on experience and expectations

Question 4

What are the different types of standards?

Answer 4

• Practical standards
• Ideal standards
• Basic standard

Question 5

what are practical standards?

Answer 5

• Standards are set at levels that are currently attainable with reasonable and efficient effort
• most recommended
• Challenging and achievable so motivating

Question 6

What are ideal standards?

Answer 6

• Standards that can be achieved in perfect conditions e.g. no food waster, no sick leave from employees
• unattainable and discourage most employees

Question 7

What are basic standards?

Answer 7

• Don’t change year on year

* Not appropriate if you want to improve yearly

Question 8

What standards are set for direct materials standards?

Answer 8

• Price standards-final, delivered cost of materials, net of discounts
• Quantity standards-Use product design specifications

Question 9

What standards are set for direct labour standards?

Answer 9

• Rate standards-Use wage surveys and labour contracts

* Time standards- Use time and motion studies for each labour operation

Question 10

What standards are set for variable overhead standards?

Answer 10

•Rate standards-The rate is the variable portion of the POHR
•Activity standards-activity is the base used to calculate
the POHR

Question 11

What is a standard cost card?

Answer 11

• Standard cost card for unit of product will have a list of ‘ingredients’ Dir. materials, labour , VOH
• determines the standard cost per unit

Question 12

What is the difference between a standard and a budget?

Answer 12

• A standard is the expected cost for one unit.

* A budget is the expected cost for all units.

Question 13

What is a standard cost variance?

Answer 13

• the amount by which an actual cost differs from the standard cost

Question 14

What is an unfavourable vs favourable standard cost variance?

Answer 14

• unfavourable- the actual cost exceeds the standard cost

* favourable-the actual cost does not exceed the standard cost

Question 15

What are the stages in the variance analysis cycle?

Answer 15

• Prepare standard cost performance report
• Analyse variances
• Identify questions
• Receive explanations
• take corrective actions
• Conduct next period's operations
Repeat

Question 16

What are the two types of standard cost variances?

Answer 16

• Price variance- difference between the actual price and the standard price
• Quantity variance-difference between the actual
quantity and the standard quantity

Question 17

What is the calculation of price variance?

Answer 17

Actual quantity(Actual price - standard price)
AQ(AP-SP)

Question 18

What is the calculation of quantity variance?

Answer 18

Standard price(Actual quantity - standard quantity)
SP(AQ - SQ)

Question 19

What is standard quantity?

Answer 19

quantity allowed for the actual good output e.g. 1.5kg per product (standard) and they produced 1000

Question 20

What is standard price?

Answer 20

The amount that should have been paid for the resources acquired

Question 21

How are the variances computed if the amount purchased differs from the amount used?

Answer 21

• The price variance is computed on the entire quantity purchased
• The quantity variance is computed only on the quantity used

Question 22

Give reasons for possible favourable or unfavourable variance?

Answer 22

• Unfavourable- e.g. workers careless with materials so wastage or workers off sick. high skilled workers paid for low skilled tasks
• favourable-less workers off sick than planned

Question 23

What are quantiy and and price variance called for direct labour?

Answer 23

Price- rate variance RV= AH(AR - SR)

Quantity- labour efficiency variance LEV = SR(AH - SH)

Question 24

What are the reasons for an unfavourable labour efficiency variance?

Answer 24

• Poorly trained workers
• Poor supervision
• Poor quality materials
• Poorly maintained equipment
•  insufficient demand for the output of
the factory

Question 25

how can materials variance be used to evaluate managers?

Answer 25

Price variance- evaluate purchasing manager

Quantity variance-evaluate production manager

Question 26

When there is insufficient demand for the output of

the factory what can a manager do?

Answer 26

• Accept an unfavourable labour efficiency variance

* Build stocks

Question 27

What are quantiy and and price variance called for Variable MOH?

Answer 27

Price- spending variance SV=AH(AR - SR)

Quantity- efficiency variance EV = SR(AH - SH)

Question 28

What happens when variable overhead is applied on the

basis of direct labour hours?

Answer 28

the labour efficiency and variable overhead efficiency variances will move in tandem

Question 29

What are possible reasons for an unfavourable labour rate?

Answer 29

■ Poor performance by the human resources department.
■ Using a higher grade of worker than planned.
■ Change in labour market conditions between the time budget was set and the actual event.