Ch#12 Standard Costing

Question 1

What is standard Costing?

Answer 1

Standard Costing is an estimate or predeterminable cost of performing an operation or producing a good or service under normal condition.

Question 2

What is are the features of standard costing?

Answer 2

• All units of product (or service) are recorded in the cost accounts at their standard cost, and
• The value of inventory is based on standard production cost
• Differences between actual costs and standard costs are recorded as variances
• May be used with either a system of absorption costing or a system of marginal costing and form the basis of budgeting.
• A standard cost has two components: first standard and second cost.
• Standard costs of products are usually restricted to production costs only, not administration and selling and distribution overheads
• Overheads are normally absorbed into standard production cost at an absorption rate per direct labour hour, depending on company is using absorption costing

Question 3

When is Standard Costing Used?

Answer 3

• May be used when an entity produces standard units of product or service that are identical.
• It is a control technique that reports variances by comparing actual costs to pre-set standards so facilitating action through management by exception.
• It is most useful when accounting for homogenous goods produced in large numbers, when there is a degree of repetition in the production process.
• Standard costing is usually associated with standard products but can be applied to standard services too.

Question 4

How many types of standards?

Answer 4

Four types
1. Current Standards
2. Attainable Standards
3. Ideal Standards Applicable Only
4. Basic Standard

Question 5

What is Current Standards?

Answer 5

o Based on Current working conditions
o Does not provide incentive for improvement in performance.

Question 6

What is Attainable Standards?

Answer 6

o Assumes efficient and not perfect conditions.
o Allowance is made for normal material wastage and expected labour inefficiency.
o The efficiency level set in these standards is usually slightly higher than current performance.
o Some improvement in current performance will be required to achieve these standards

Question 7

Ideal Standards Applicable Only?

Answer 7

o Under Perfect conditions
o Contains no allowance for raw material wastage or labour inefficiency.
o Usually not achievable practically

Question 8

What is Basic Standard?

Answer 8

o Remains unchanged over a long period of time
o Will not motivate employees to improve their performance as they are based on achievable conditions at some time in the past.

Question 9

What is the treatment of unavoidable costs?

Answer 9

Unavoidable Cost is always made part of cost just like abnormal loss in process costing as both cannot be avoided.

they cannot be avoided due to process or system eg. process bottelneck

Question 10

What is Fixed Budger?

Answer 10

• The original budget prepared at the beginning of the period is known as fixed budget.

Question 11

What is Flexed Budget?

Answer 11

• Thus, to calculate realistic variances, we revise our budget at the year-end for the actual activity, which is termed as flexed budget.