l8 : standard costing Flashcards
what are standard costs?
costs that represent “pre-set costs” per unit. total of both variable + fixed costs. essentially pre-planned costs.
what are the five key elements of a standard costing system.
- procedures for setting up & updating standards
- a recording system
- determination of unit costs
- time horizon of comparison
- procedure for investigation
explain the procedures for setting up & updating standards element in a standard costing system.
can have
- ideal standards (can be demotivating as need to meet standards, assumes perfect conditions - no material wastage etc.)
- realistic standards (gives room for breakdown, assumes operating conditions arent perfect - more achievable standards)
explain the recording system element in a standard costing system.
create gathering standards to record actual cost & revenue info. allows analysis for where things go wrong and allows for calculating differences (variances)
explain the determination of unit costs element in a standard costing system.
determine cost & quantity of what is needed in the production process (raw materials, labour, variable overheads, fixed overheads)
explain the time horizon of comparison element in a standard costing system.
used when ideal and realistic standards are compared. if done too often, can become mechnical, meaningless & box-ticking. if done too little, may miss opportunities to put things correct.
explain the procedure for investigation element in a standard costing system.
links to responsibility centres and investigating WHY there is variance (the diff between actual and expected sales & costs)
what are the five key functions of a standard costing system?
- cost estimation
- creates yardstick for measuring performance
- provides feedback
- facilitates future planning (eg. future budget)
- improves understanding of business
what is variance?
the difference in planned and actual performance
what are possible causes for variances?
- inefficiency in operation
- interdependence of dpts
- random fluctuations in price
- incorrect standards
- poor communication
what does a master budget show in terms of volume and costs?
budgeted volume @ standard costs
what does a flexed budget show in terms of volume and costs?
actual volume @ standard costs
what does an actual performance budget show in terms of volume and costs?
actual volume @ actual costs
what is sales volume variance?
calculates the difference in total profit between flexible budget and master budget.
gives the equation for sales volume variance.
SVV = (budget Q - actual Q) x standard contribution per unit
what is price variance?
calculates how much of the change in total cost is due to change in price of input
give the equation for price variance.
PV = (actual P - standard P) x actual Q
what is quantity variance?
calculates how much of the change in total cost is due to quantity of input used
give the equation for quantity variance.
QV = (actual Q - standard Q) x standard P
what are some benefits of using standard costing?
- aids management control
- can get potential explanations for variance
- “management by exception”. allows for focus on problem areas & get back on track to achieve planned performance
what are some limitations to using standard costing?
- variance analysis is only as good as standards. if standards are unrealistic, its unhelpful as cant be achieved in first place
- poor standards lead to poor planning & control
- standards need to be changed & revised when conditions change
