Lecture 7 - Standard costing and variance analysis

Question 1

What is the definition of a standard cost?

Answer 1

A pre-determined or target cost that should be incurred under efficient operating conditions

On a per-unit basis

Question 2

A standard costing system is a technique which establishes….

Answer 2

-Predetermined estimates of the costs of products and services and compares them with actual costs incurred

Question 3

The difference between the standard costs and the actual costs is known as the …

Answer 3

Variance

Question 4

What is the purpose of standard costing systems?

Answer 4

• To provide a prediction of future costs that can be used for decision-making.
• To provide a challenging target that individuals are motivated to achieve.
• To assist in setting budgets and evaluating performance.

Question 5

What is a Basic standard?

Answer 5

A standard that is to be used over a long period from which a current standard can be developed

-They do not change and are static, providing a base against which to measure action

Question 6

What is an ideal standard?

Answer 6

Standards which can be attained under the most
favourable conditions, with no allowance for normal
losses, waste, inefficiencies, delays and machine
down time.

-Won’t be sustained for a long period of time

Question 7

What is an attainable standard?

Answer 7

A standard which can be attained if a standard
unit of work is carried out efficiently, a machine properly operated or material properly used.

-Difficult to achieve but still possible

Question 8

What are the two approaches used to set standard costs?

Answer 8

1. Past historical records - Used to estimate labour and material usage
2. Engineering studies - A detailed study of each operation undertaken

Question 9

The standard costs for each operation calculation =

Answer 9

The quantity standard X The price standard

Question 10

Direct material standard calculation =

Answer 10

Standard quantity X standard price per unit of materials

Question 11

Direct labour calculation =

Answer 11

Standard labour hours [x] the standard hourly rate

Question 12

Variable overhead calculation =

Answer 12

Standard hours (labour or machine) [x] standard rate per hour

Question 13

Benefits of standard costing systems:

Answer 13

• Helps to pinpoint waste/Problems
• Makes managers more cost conscious
• Acts as a guide to areas where improvements in the area of operations can be made

Question 14

Criticisms of standard costing systems:

Answer 14

• Provides static standards
• Creates internal competition
• No consideration for quality
• Does not consider overproduction

Question 15

What is a cost variance?

Answer 15

The difference between budgeted, planned or standard cost and the actual cost incurred

Question 16

What is variance analysis?

Answer 16

Offer explanation as to the sources of the variances observed. This focuses managerial attention easily to where it should.

Question 17

Formula for usage variance =

Answer 17

(Standard quantity - Actual quantity) X Standard Price

Question 18

Formula for Price variance =

Answer 18

(Standard Price - Actual Price) X Actual Quantity

Question 19

Reasons for usage variance:

Answer 19

• Pilferage
• Efficiency of machinery
• Efficiency of material use
• Quality of material

Question 20

Reasons for price variance:

Answer 20

• Effect of inflation
• Efficiency of purchase department
• Size of discounts received

Question 21

Total labour variance calculation (Rate variance) =

Answer 21

(Standard rate per hour - Actual rate per hour) X Total actual hours for actual production

Question 22

Reasons for Total Labour variance (Rate) =

Answer 22

• Pay award
• Pay grade of labour
• Effect of overtime
• Effect of bonus scheme

Question 23

Total Labour rate calculation (Efficiency variance) =

Answer 23

(Total standard hours for actual production - Total actual hours for actual production) x Standard rate per labour hour

Question 24

Possible reasons for efficiency variance:

Answer 24

• Effect of labour turnover
• Level/Quality of supervision
• Level of training/Grade of labour
• Work methods/Quality of machinery

Question 25

Total labour variance is calculated by….

Answer 25

Labour rate variance + labour efficiency variance

Question 26

Overhead variances are calculated by….

Answer 26

Variable overhead expenditure variance + variable

overhead efficiency variance

Question 27

Variable Overhead Expenditure Variance is calculated =

Answer 27

(OAR x AH) - AVO
OAR = Std. overhead absorption rate per hour
AH = Actual hours worked
AVO = Total actual variable overheads

Question 28

Reasons for overhead expenditure variance:

Answer 28

• Price of individual cost of items change

- Inefficiently use individual variable overhead items

Question 29

Variable Overhead Efficiency Variance Calculation =

Answer 29

(SH - AH)OAR

SH = Standard hours for actual production
AH = Actual hours worked
OAR= Standard overhead absorption rate

Question 30

material usage, labour efficiency and variable overhead efficiency variances can be formulated as:

Answer 30

(SQ – AQ) x SP

SQ: the standard quantity of resources consumed for
the actual production
AQ: the actual quantity of resources consumed
SP: the standard price per unit of the resource

Question 31

Material price, wage rate and variable overhead expenditure variances can be formulated as:

Answer 31

(SP – AP) x AQ

SP: the standard price per unit of a resource
AP: the actual price per unit of resource
AQ: the actual quantity of resources
acquired/used