Chapter 4 Flashcards
What is standard costing?
A management accounting tool that assigns expected costs to products/services, helping control costs by comparing actual results with standards.
Name and explain the 3 types of standards
Current standards - reflect an organisation’s current operating conditions
Ideal standards - perfect operating conditions
Basic standards - formulated on factors that remain unchanged for long periods
What is a standard cost?
The anticipated cost to produce a unit of product or deliver a service.
What’s the primary purpose of standard costing?
To identify variances between standard and actual costs so that you can take corrective action to improve.
What are the 4 principles of standard costing?
Standard costing
Variance analysis
Continuous improvement
Cost control and performance evaluation
Explain variance analysis (a standard costing principle)
Process of analyzing the difference between actual costs and standard costs.
Explain continous improvement (a standard costing principle)
A culture promoted by standard costing, stemming from the use of corrective measures, with the goal of aligning actual costs to standard costs over time.
Explain cost control and performance evaluation (a standard costing principle)
SC provides a target against which actual costs from departments can be monitored, enabling performance evaluation. It also helps monitor costs, identify areas of improvement and make data driven decisions.
What are 4 factors needed to establish standard costs?
Direct materials - expected cost of materials needed to produce products/render services.
Direct labour - expected cost of labour to produce a single unit of product.
Variable overheads - indirect production expenses that change with a productions output.
Fixed overheads - indirect production expenses that don’t change with a productions output.
What is the formula for direct material standard cost?
Standard price per unit x Standard quantity per unit
What is the formula for direct labour standard cost?
Standard rate per hour x standard hours per unit
What is the formula for variable overhead standard cost per unit?
Predetermined variable overhead rate x quantity of activity base per unit
What is the predetermined variable overhead rate formula?
Total estimated variable costs / activity level (e.g total units, total labour hours)
What is the fixed overhead standard cost formula?
Total estimated fixed overheads / total estimated number of units to be produced
Remember: A specification for allowance in labour means …
ADD, don’t subtract
