Accounting for Control Flashcards
What are the key points about standard costs?
- 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
What is management by exception?
- 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
Who sets standard costs?
•Accountants, engineers, personnel administrators,
and production managers (multi-discipline)
• They combine efforts to set standards based on experience and expectations
What are the different types of standards?
- Practical standards
- Ideal standards
- Basic standard
what are practical standards?
- Standards are set at levels that are currently attainable with reasonable and efficient effort
- most recommended
- Challenging and achievable so motivating
What are ideal standards?
- Standards that can be achieved in perfect conditions e.g. no food waster, no sick leave from employees
- unattainable and discourage most employees
What are basic standards?
- Don’t change year on year
* Not appropriate if you want to improve yearly
What standards are set for direct materials standards?
- Price standards-final, delivered cost of materials, net of discounts
- Quantity standards-Use product design specifications
What standards are set for direct labour standards?
- Rate standards-Use wage surveys and labour contracts
* Time standards- Use time and motion studies for each labour operation
What standards are set for variable overhead standards?
•Rate standards-The rate is the variable portion of the POHR
•Activity standards-activity is the base used to calculate
the POHR
What is a standard cost card?
- Standard cost card for unit of product will have a list of ‘ingredients’ Dir. materials, labour , VOH
- determines the standard cost per unit
What is the difference between a standard and a budget?
- A standard is the expected cost for one unit.
* A budget is the expected cost for all units.
What is a standard cost variance?
• the amount by which an actual cost differs from the standard cost
What is an unfavourable vs favourable standard cost variance?
- unfavourable- the actual cost exceeds the standard cost
* favourable-the actual cost does not exceed the standard cost
What are the stages in the variance analysis cycle?
• Prepare standard cost performance report • Analyse variances • Identify questions • Receive explanations • take corrective actions • Conduct next period's operations Repeat
What are the two types of standard cost variances?
• Price variance- difference between the actual price and the standard price
• Quantity variance-difference between the actual
quantity and the standard quantity
What is the calculation of price variance?
Actual quantity(Actual price - standard price) AQ(AP-SP)
What is the calculation of quantity variance?
Standard price(Actual quantity - standard quantity) SP(AQ - SQ)
What is standard quantity?
quantity allowed for the actual good output e.g. 1.5kg per product (standard) and they produced 1000
What is standard price?
The amount that should have been paid for the resources acquired
How are the variances computed if the amount purchased differs from the amount used?
- The price variance is computed on the entire quantity purchased
- The quantity variance is computed only on the quantity used
Give reasons for possible favourable or unfavourable variance?
- 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
What are quantiy and and price variance called for direct labour?
Price- rate variance RV= AH(AR - SR)
Quantity- labour efficiency variance LEV = SR(AH - SH)
What are the reasons for an unfavourable labour efficiency variance?
• Poorly trained workers • Poor supervision • Poor quality materials • Poorly maintained equipment • insufficient demand for the output of the factory
how can materials variance be used to evaluate managers?
Price variance- evaluate purchasing manager
Quantity variance-evaluate production manager
When there is insufficient demand for the output of
the factory what can a manager do?
- Accept an unfavourable labour efficiency variance
* Build stocks
What are quantiy and and price variance called for Variable MOH?
Price- spending variance SV=AH(AR - SR)
Quantity- efficiency variance EV = SR(AH - SH)
What happens when variable overhead is applied on the
basis of direct labour hours?
the labour efficiency and variable overhead efficiency variances will move in tandem
What are possible reasons for an unfavourable labour rate?
■ 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.
