Chapter 2 - Direct Costs

Question 1

What is a standard costing system?

Answer 1

Standard costing system calculates the expected costs of a product. It then monitors and controls the performance by comparing actually costs with standard costs.

Question 2

What is a budgetary control system?

Answer 2

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

Question 3

What are some advantages of standard costing.

Answer 3

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.

Question 4

What are the three types of standards?

Answer 4

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

Question 5

What is Strategic Management?

Answer 5

Concerned with long term planning and decision making.

Applies to ideal and attainable standards.

Question 6

What is Operational Management?

Answer 6

Concerned with the day to day activities within an organisation.

Applies to attainable standards and actual results

Question 7

What is exception reporting/tolerance levels/control limits?

Answer 7

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)

Question 8

Give 2 examples of short term changes in variances

Answer 8

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.

Question 9

Give 2 examples of long term changes in variances

Answer 9

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.

Question 10

Examples of direct costs?

Answer 10

Direct labour
Direct materials
Direct expenses

Question 11

Examples of indirect costs?

Answer 11

Variable overheads

Fixed overheads

Question 12

What are the 2 causes of direct material variances?

Answer 12

1) material usage

2) material price per unit

Question 13

What are the 2 causes of direct labour variances?

Answer 13

1) Labour efficiency

2) labour rate per hour

Question 14

What’s the calculation for Total Direct Material Variance?

Answer 14

The STANDARD cost of materials for the actual production level

Minus

The ACTUAL cost of materials for the actual production level

Question 15

What is the calculation for Direct Material Usage Variance? (Top)

Answer 15

The STANDARD quantity of material for actual production at standard price

Minus

The ACTUAL quantity of material at a standard price

Question 16

What is the calculation for Direct Material Price Variance? (Bottom)

Answer 16

The STANDARD cost of actual quantity of material used

Minus

The ACTUAL cost of the actual quantity of material used.

Question 17

What does PAUS mean?

Answer 17

Price variances are based on
Actual quantities, but
Usage variances are based on
Standard prices

Question 18

What’s the calculation for Total Direct Labour Variance?

Answer 18

The STANDARD cost of labour for the actual production level

Minus

The ACTUAL cost of labour for the actual production level

Question 19

What’s he calculation for Direct Labour Efficiency Variance? (Top)

Answer 19

The STANDARD labour hours for actual production at standard rate

Minus

The ACTUAL labour hours used at standard rate

Question 20

What’s the calculation for Direct Labour Rate Variance? (Bottom)

Answer 20

The STANDARD cost of the actual labour hours used

Minus

The ACTUAL cost of the actual labour hours used

Question 21

What is meant by idle time?

Answer 21

Employees being paid but not actually working on production. For example: machines being serviced but employees are still paid

Question 22

What is the calculation for Direct Labour Idle Time Variance?

Answer 22

Actual PRODUCTIVE labour hours used at standard rate

Minus

TOTAL actual labour hours used at standard rate

Question 23

What is the calculation for Labour Efficiency Variance when there is idle time included?

Answer 23

Standard labour hours for actual production at standard rate

Minus

Actual PRODUCTIVE labour hours used at standard rate

Question 24

What is the calculation for Direct Material Price Variance based on the quantity of materials bought?

Answer 24

The STANDARD cost of the actual quantity of materials bought

Minus

The ACTUAL cost of the actual quantity of materials bought

Question 25

Reconciliation of standard and actual costs

Answer 25

Standard cost
+ adverse variance
- favourable variances
= Actual cost

Question 26

Why use a standard costing system(SCS) ?

Answer 26

An effective SCS will be able to provide cheap and accurate information in almost real time which leads to quick actions being made.

Question 27

Disadvantages of a standard costing system (scs)?

Answer 27

• 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

Question 28

What type of management is the link between ideal and attainable standards??

Operational or strategic management and why?

Answer 28

Strategic management -

Concerned with long term planning and decision making

Question 29

What type of management is the link between attainable and basic standards?

Operational or strategic management and why?

Answer 29

Operational management -

Focuses on the day to day activities taking place with the organisation

Question 30

An advantage and disadvantage for ideal standards

Answer 30

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.

Question 31

An advantage and disadvantage for attainable standards

Answer 31

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

Question 32

An advantage and disadvantage for basic standards

Answer 32

Advantage - comparing data is useful if it’s based on the trend in variances

Disadvantage - historical standard and therefore out of date

Question 33

What is standard costing?

Answer 33

The cost of each component of a product so that a total cost can be calculated for that product.

Question 34

What is responsibility accounting?

Answer 34

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

Question 35

What is exception reporting?

Answer 35

A technique where results are reported when they are outside a predetermined range so action can be taken.

Question 36

What’s the purpose of reconciling standard and actual costs?

Answer 36

So see if the variances are accurate or not. This will not guarantee the variances are correct