Chapter 2 - Direct Costs Flashcards
What is a standard costing system?
Standard costing system calculates the expected costs of a product. It then monitors and controls the performance by comparing actually costs with standard costs.
What is a budgetary control system?
It involves agreeing financial plans for all areas of an organisation that coordinates activities. These budgets are then used to compare the actual performance so that appropriate actions can be taken if needed
What are some advantages of standard costing.
1) to help with decision making such as pricing.
2) to help plan the future of the organisation such as resources for future production.
3) to help monitor and control costs such as variances.
What are the three types of standards?
1) Ideal/Current standard - no allowance for inefficiency of labour or material wastage.
2) Attainable/Normal standard - allows for a small amount of wastage and inefficiency.
3) Basic/Target standard - is an historical standard that allows comparisons to be carried out over long periods of time
What is Strategic Management?
Concerned with long term planning and decision making.
Applies to ideal and attainable standards.
What is Operational Management?
Concerned with the day to day activities within an organisation.
Applies to attainable standards and actual results
What is exception reporting/tolerance levels/control limits?
The practice of reporting only the information which is significant. For example: only reporting variances that are over the agreed tolerance level (500 adv or 500 fav)
Give 2 examples of short term changes in variances
1) a price variance due to a change in suppliers because the original supplier has no stock.
2) a machine has temporarily broken and therefore causing excess wastage of material.
Give 2 examples of long term changes in variances
1) wages have increased and therefore the labour rate standard will need to be amended to prevent future variances
2) general price increases for material will need to be included in standard to prevent future variances. This usually occurs annually due to inflation etc.
Examples of direct costs?
Direct labour
Direct materials
Direct expenses
Examples of indirect costs?
Variable overheads
Fixed overheads
What are the 2 causes of direct material variances?
1) material usage
2) material price per unit
What are the 2 causes of direct labour variances?
1) Labour efficiency
2) labour rate per hour
What’s the calculation for Total Direct Material Variance?
The STANDARD cost of materials for the actual production level
Minus
The ACTUAL cost of materials for the actual production level
What is the calculation for Direct Material Usage Variance? (Top)
The STANDARD quantity of material for actual production at standard price
Minus
The ACTUAL quantity of material at a standard price
What is the calculation for Direct Material Price Variance? (Bottom)
The STANDARD cost of actual quantity of material used
Minus
The ACTUAL cost of the actual quantity of material used.
What does PAUS mean?
Price variances are based on
Actual quantities, but
Usage variances are based on
Standard prices
What’s the calculation for Total Direct Labour Variance?
The STANDARD cost of labour for the actual production level
Minus
The ACTUAL cost of labour for the actual production level
What’s he calculation for Direct Labour Efficiency Variance? (Top)
The STANDARD labour hours for actual production at standard rate
Minus
The ACTUAL labour hours used at standard rate
What’s the calculation for Direct Labour Rate Variance? (Bottom)
The STANDARD cost of the actual labour hours used
Minus
The ACTUAL cost of the actual labour hours used
What is meant by idle time?
Employees being paid but not actually working on production. For example: machines being serviced but employees are still paid
What is the calculation for Direct Labour Idle Time Variance?
Actual PRODUCTIVE labour hours used at standard rate
Minus
TOTAL actual labour hours used at standard rate
What is the calculation for Labour Efficiency Variance when there is idle time included?
Standard labour hours for actual production at standard rate
Minus
Actual PRODUCTIVE labour hours used at standard rate
What is the calculation for Direct Material Price Variance based on the quantity of materials bought?
The STANDARD cost of the actual quantity of materials bought
Minus
The ACTUAL cost of the actual quantity of materials bought
Reconciliation of standard and actual costs
Standard cost
+ adverse variance
- favourable variances
= Actual cost
Why use a standard costing system(SCS) ?
An effective SCS will be able to provide cheap and accurate information in almost real time which leads to quick actions being made.
Disadvantages of a standard costing system (scs)?
- May reveal hidden inefficiencies
- increase cost consciousness of the workforce if monitoring costs
- exception reporting -> results only reported when they’re outside a predetermined range set by managers
What type of management is the link between ideal and attainable standards??
Operational or strategic management and why?
Strategic management -
Concerned with long term planning and decision making
What type of management is the link between attainable and basic standards?
Operational or strategic management and why?
Operational management -
Focuses on the day to day activities taking place with the organisation
An advantage and disadvantage for ideal standards
Advantage - continuous improvements in work methods
Disadvantage - not ideal for planning purposes as results are inaccurate. Resources (materials and labour hours) are under-estimated to prevent wastage or inefficiency.
An advantage and disadvantage for attainable standards
Advantage - more realistic for a business. Includes favourable and adverse variances which may occur during production
Disadvantage - can be time consuming as different managers/employees may argue from their own perspective
An advantage and disadvantage for basic standards
Advantage - comparing data is useful if it’s based on the trend in variances
Disadvantage - historical standard and therefore out of date
What is standard costing?
The cost of each component of a product so that a total cost can be calculated for that product.
What is responsibility accounting?
Where managers are held responsible for performance of specific parts of the organisation.
Example: production managers are responsible for material usage variances such as wastage or rejects
What is exception reporting?
A technique where results are reported when they are outside a predetermined range so action can be taken.
What’s the purpose of reconciling standard and actual costs?
So see if the variances are accurate or not. This will not guarantee the variances are correct
