preparing budgets Flashcards
Standard costs The standard cost card Setting and using standards Functional budgets Preparing functional budgets Proforma layouts for functional budgets Cash budgets Capital budgets Some further budgeting questions: Adjusting budgets Changing budgetary assumptions Explaining budgets Operating statement budget
What is a standard cost?
A standard cost is a pre-determined estimate of costs set in advance to help managers make timely decisions, control budgets, and set targets.
Standard costs allow for better planning and control of business finances by providing cost estimates before actual expenses occur.
What is an ideal standard in standard costing?
An ideal standard assumes perfect operating conditions without any waste, inefficiency, or idle time, making it almost impossible to achieve.
While ideal standards can be motivating for setting high targets, they may also demotivate if they are seen as unachievable.
What is an attainable standard?
An attainable standard is a realistic target that includes allowances for normal levels of wastage and inefficiency, making it achievable but still challenging.
This standard encourages effort and improvement but requires regular monitoring to keep it challenging.
How does a basic standard differ from other standards?
A basic standard assumes no changes from when it was originally set, which can make it outdated and less relevant for current production activities.
Basic standards can lose their effectiveness quickly, especially in fast-changing production environments.
What is a current standard?
A current standard reflects present levels of efficiency and costs but provides little motivation for improvement as it only represents the status quo.
While up-to-date, current standards may lack the aspirational element needed to drive performance improvements.
Why are actual costs recorded for financial reporting, while standard costs are often used for internal planning?
Actual costs are necessary for financial reporting accuracy, while standard costs help with forward planning and decision-making, as actual costs are often unavailable until later.
Standard costs are typically set at the start of the year, which aids in pricing, inventory valuation, and other planning needs.
How are standard costs used in planning?
Standard costs are used at the start of the period to create comprehensive cost budgets, helping to increase the accuracy of financial planning.
By estimating costs early, businesses can better forecast expenses and set annual budgets.
How does standard costing aid in control?
Standard costs provide a benchmark for variance analysis, allowing management to compare actual results to expected costs and focus on performance areas needing attention.
This comparison enables more targeted management intervention where needed.
What is the purpose of a standard cost card?
A standard cost card provides a detailed breakdown of all costs for producing a single unit of a product, aiding in budgeting and cost management.
Standard cost cards can be calculated using absorption costing or marginal costing principles.
What is an advantage of using standard costs in budgeting?
Streamlined Budgeting: With a known cost per unit, it’s quicker to estimate total costs by multiplying by the expected production volume, which speeds up the budgeting process.
Pricing Support: Standard costs are set at the start of the year, so they can help in setting selling prices to make sure costs are covered.
Clear Performance Goals for Employees: By setting targets (like 2 hours of skilled labor per unit), standard costs give employees a clear benchmark to aim for. Linking rewards to these targets can also help motivate staff.
Easier Performance Monitoring: Standard costs make it simpler to spot differences in expected versus actual costs, helping managers identify areas that are over or under budget.
Simplified Inventory Valuation: Using standard costs helps avoid tracking every individual purchase cost, which is especially useful when prices fluctuate frequently.
This approach makes budgeting faster and more precise, especially for businesses with high volumes of production.
How can standard costs motivate employees?
Standards can set clear targets for employees, which, if tied to incentives, can motivate staff to meet or exceed performance expectations.
For maximum motivation, performance bonuses may be linked to meeting or beating standard targets.
Name the disadvantages of using standard costs.
Time-Intensive to Set and Update: Establishing accurate, meaningful standards requires in-depth analysis of all production costs (materials, labor, overhead), which is time-consuming.
Frequent Updates Needed: Production conditions, like cost inflation or technological changes, often fluctuate. Standards can quickly become outdated if not regularly revised.
Risk of Demotivation: If the wrong type of standard is set, it can demotivate employees. For instance, an “ideal” standard may be too difficult to meet, causing frustration rather than motivation.
Data Limitations: If the business lacks comprehensive cost data, it’s challenging to establish an accurate standard, limiting its usefulness.
Changes such as inflation or technological improvements can quickly make standards outdated.
What is the principal budget factor (PBF)?
The PBF is the primary constraint on business growth, such as sales volume, which is budgeted first and determines other functional budgets.
Identifying the PBF helps structure budgets to align with this primary limitation, ensuring efficient resource allocation.
What is a functional budget?
A functional budget is a financial plan for each department or function, such as sales, materials, or labor, aligning with the overall business goals.
Functional budgets relate to each other; for example, a production budget aligns with the sales budget to match supply with demand.
How is idle labor time accounted for in labor budgeting?
To cover idle time, total labor hours budgeted must exceed the productive hours needed to achieve target production.
For instance, if productive hours are 90, but idle time is expected at 10%, budgeted hours should be 100 (90/0.9).
