Lecture 7 - Standard costing and variance analysis Flashcards
What is the definition of a standard cost?
A pre-determined or target cost that should be incurred under efficient operating conditions
On a per-unit basis
A standard costing system is a technique which establishes….
-Predetermined estimates of the costs of products and services and compares them with actual costs incurred
The difference between the standard costs and the actual costs is known as the …
Variance
What is the purpose of standard costing systems?
- 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.
What is a Basic standard?
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
What is an ideal standard?
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
What is an attainable standard?
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
What are the two approaches used to set standard costs?
- Past historical records - Used to estimate labour and material usage
- Engineering studies - A detailed study of each operation undertaken
The standard costs for each operation calculation =
The quantity standard X The price standard
Direct material standard calculation =
Standard quantity X standard price per unit of materials
Direct labour calculation =
Standard labour hours [x] the standard hourly rate
Variable overhead calculation =
Standard hours (labour or machine) [x] standard rate per hour
Benefits of standard costing systems:
- 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
Criticisms of standard costing systems:
- Provides static standards
- Creates internal competition
- No consideration for quality
- Does not consider overproduction
What is a cost variance?
The difference between budgeted, planned or standard cost and the actual cost incurred
What is variance analysis?
Offer explanation as to the sources of the variances observed. This focuses managerial attention easily to where it should.
Formula for usage variance =
(Standard quantity - Actual quantity) X Standard Price
Formula for Price variance =
(Standard Price - Actual Price) X Actual Quantity
Reasons for usage variance:
- Pilferage
- Efficiency of machinery
- Efficiency of material use
- Quality of material
Reasons for price variance:
- Effect of inflation
- Efficiency of purchase department
- Size of discounts received
Total labour variance calculation (Rate variance) =
(Standard rate per hour - Actual rate per hour) X Total actual hours for actual production
Reasons for Total Labour variance (Rate) =
- Pay award
- Pay grade of labour
- Effect of overtime
- Effect of bonus scheme
Total Labour rate calculation (Efficiency variance) =
(Total standard hours for actual production - Total actual hours for actual production) x Standard rate per labour hour
Possible reasons for efficiency variance:
- Effect of labour turnover
- Level/Quality of supervision
- Level of training/Grade of labour
- Work methods/Quality of machinery
Total labour variance is calculated by….
Labour rate variance + labour efficiency variance
Overhead variances are calculated by….
Variable overhead expenditure variance + variable
overhead efficiency variance
Variable Overhead Expenditure Variance is calculated =
(OAR x AH) - AVO
OAR = Std. overhead absorption rate per hour
AH = Actual hours worked
AVO = Total actual variable overheads
Reasons for overhead expenditure variance:
- Price of individual cost of items change
- Inefficiently use individual variable overhead items
Variable Overhead Efficiency Variance Calculation =
(SH - AH)OAR
SH = Standard hours for actual production AH = Actual hours worked OAR= Standard overhead absorption rate
material usage, labour efficiency and variable overhead efficiency variances can be formulated as:
(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
Material price, wage rate and variable overhead expenditure variances can be formulated as:
(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
