Chapter 13 - Standard Costing And Basic Variance Flashcards
What are standard costs
Stanley costs as a system of accounting based on predetermined costs and revenue per unit which are used as a benchmark to assess actual performance and therefore provide useful feedback information to management
Uses of standard costing
Inventory valuation
As a basis for pricing decision
Budget preparation
Budgetary controls
Performance measurement
Motivating staff using standard as targets
Limitations of standard costing
Accurate preparation of standards can be difficult
It may be necessary to use different standards for different purposes
Less useful if not mass produced of standard units
Traditional standards are based on companies own costs a more modern approach is benchmarking where the practice of all the organisations are taking into account
The use of standard costing can lead to an over emphasis on quantitative measures of performance at the expense of qualitative measures e.g. customer satisfaction employee morale
Types of standards
Ideal standard-calculated assuming that perfect conditions apply e.g. 100% efficiency from men and from machines
Basic standard-this is a long run underlying average standard and is only really used in very stable situations where there are unlikely to be fluctuations in prices/rates et cetera
Expected standard-this is a standard expected to apply to a specific budget period and Is based on normal efficient operation conditions. This is used for variance analysis routine reporting however it may be too easy to be used as a target
Current standard-this is the current attainable standard which reflects conditions actually are playing in the period under review this should be useful performance appraisal but the calculation of a current standard can be complicated and time-consuming
Variance analysis for the favourable/adverse position for materials for flexed budget
Expenditure variance - this looks at how much materials we actually bought and working out how much we should have paid based on the kg bought x standard cost. The actual amount paid vs expected is the expenditure variance
Materials usage variance - how many kg of materials did we actually use and how many did we flexed to use (total units x kg per unit) x the difference in kg by the standard cost for materials and this is the materials usage variance
Variance analysis for the favourable/adverse position for labour for flexed budget
Expenditure variance - how much did we actually pay. For example we paid £224,515 for 45,400 hours however if hour rate is £5 we should have paid £227,000
Idle time variance - actual hours paid vs hours worked, the difference is the idle hours x hourly rate gives this variance
Efficiency variance - how many hours actually worked (not paid) and the total units produced x time per unit to give the total standard hours, the difference x by hour rate to give this variance
Variance analysis for the favourable/adverse position for variable overheads for flexed budget
Expenditure variance - (assume hours worked and not paid) take actual hours worked (under labour) and x by variable overheads per hour cost (standard) and compare against the actual total overheads
Efficiency variance - actual hours worked under labour vs standard hours (under flexed) which is units produced x hours per unit to give total hours, this position x by the variable cost per unit to get the variance
Variance analysis for the favourable/adverse position for fixed overheads for flexed budget
Expenditure variance- what is the actual total fixed overheads versus the budgeted fix overheads. This number shouldn’t change so whatever is the answer is the variance
Volume variance-what was the actual production in units versus budgeted production in units. The difference is to be multiplied by the fixed overheads per units in the standard cost card and this is the variance
Variance analysis for the favourable/adverse position for sales for flexed budget
Sales volume variance-compare the actual sales in units to the budgeted sales in units and multiply by the profit per unit
Sales price - Actual sales x sales price vs the actual sales @ total actual total, difference is variance
What is an operating statement
An operating statement is a small statements provided to management explaining the variances to the flex budget. You start a budget profit and add and subtract the sales variances and then finally all the cost variances (fix overheads variable overhead labour and material variances) which gives a final profit which should be the same as the profits within the actual section of the flex budget
The difference between marginal and absorption costing in regards to profits
They will give different profit numbers based on the inventory. If no change an inventory then profits are same
