Standard Costing Flashcards
Process costing: General notes
Normal losses
- Normal losses: Are inherent in production process and cannot be eliminated. Costs should be borne by good of production
- Scrap value: Sale proceeds from normal losses is a normal income, therefore the cost of production is reduced by this amount
Abnormal losses
- Abnormal losses should not be assigned to good production. Record separately and record as period cost
- Scrap value: Should be offset against cost of abnormal loss
- Net loss should be recorded separately and treated as a period cost
- This helps so that attention can be drawn to the abnormality and corrective action be put in place to ensure that this does not take place in the future
Partially completed units= Equivalent units (Performed separately for each cost component)
Material price variance
Favorable:
- Purchase of materials of lower quality than standard, reflected in adverse material usage variance
- Better price negotiations by procurement staff
- Implementation of better procurement practices
- Purchase discounts on larger orders
Adverse:
- Overall hike in market price of materials
- Purchase of materials of higher quality than standard (reflected in material usage)
- Increase in bargaining power of suppliers
- Loss of purchase discounts due to smaller order sizes
- Inefficient buying by procurement staff
Material usage variance
Favorable:
- Efficient utilization of materials
- Purchase of materials of a higher quality than standard
- Greater use of skilled labor
- Training and development of workforce to improve productivity
- Use and improvement of automated manufactured tools and processes
Adverse:
- Indicates higher consumption of material during period as compared to standard usage
- Purchase of materials of lower quality than standard
- Use of unskilled labour
- Increase in material wastage due to depreciation of PPE
Labor rate variance
Favorable:
- Hiring unskilled or semi skilled laborers
- Decrease in overall wage rates in market due to increase in supply of labor caused by e.g immigrants
- Inappropriately high setting of standard cost of direct labor which may be due to inaccurate planning
Adverse:
- Increase in national minimum wage
- Hiring more skilled laborers than anticipated in standard
- Inefficient hiring by HR department
- Effective negotiations by labor unions
Labor efficiency variance
Favorable:
- Hiring more higher skilled labor
- Training of work force in improvement production techniques and methodology
- Use of better quality RM which are easier to handle
- Higher learning curve than anticipated to standard
Adverse:
- Hiring lower skilled labor than standard
- Lower learning curve achieved during period than anticipated standard
- Decrease in staff motivation and morale
- Idle time incurred during the period caused by disruption or storage of activities
Variable OH expenditure variance
Favorable:
- Economies of scale (Increase in order size of indirect material leading to bulk discounts on purchase)
- A decrease in general price level of indirect suppliers
- More efficient cost control
- Planning error
Adverse:
- A rise in national minimum wage rate leading to higher cost of indirect labor
- A decrease in level of activity not fully offset by a decrease in OH
- Inefficient cost control (not optimizing batch production) therefore higher setup cost
- Planning error (budgeting activities)
Variable OH efficiency variance
Favorable:
- Use of RM easier to work with
- Employment of a higher skilled labor or improvement of skills of existing workforce through training and development leading to improved productivity
- Installation of more efficient manufacturing asset
- Planning error
Adverse:
- Use of cheaper RM which is harder to work with
- Inefficient production caused by employment of lower skilled labor
- Decline in productivity of manufacturing equipment due to W+T
- Planning error
Fixed OH expenditure variance
Favorable:
- Planned business expansion which was anticipated to cause a stepped increase in FOH not being undertaken during the period
- Cost rationalization measures carried out during period aimed at reducing FOH by eliminating inefficiencies
- Planning inaccuracies
Adverse:
- Expansion of business undertaken during period which was not taken into consideration in budget setting process (Stepped increase in FOH)
- Inefficient FOH management
- Planning errors (increase in insurance premiums)
Sales price variance
Favorable:
- Decrease in competitors in market
- Improved product differentiation and market segmentation
- Better promotion and aggressive sales campaign
Adverse:
- Increase in competition in the market
- Decrease in demand for products
- Reduction in price enforced by regulatory authority
- Sold below selling price
- Only x sold in comparison to y budgeted sales
- Exchange rate fluctuations
- Current economic recession
Sales volume variance
Favorable:
- Concentration of sales and marketing efforts towards selling the more profitable products
- Increase in the demand for higher margin products
- Increase in supply of more profitable products due to addition to production capacity
- Decrease in demand or supply of less profitable products
Adverse:
- Demand for more profitable products being lower than anticipated
- Decrease in production of high margin products due to supply side limiting factors
- Not focusing on products with high margins
- Increase in demand or supply of less profitable products
Accounting treatment of variances and accounting issues arising from the variances
- IAS 2 permits use of standard costing for inventory valuation so long as standards represent actual and are up to date
- Standards should take into account normal levels of activity
- If above is done, a calculated variance should represent an abnormal loss
- IAS 2 requires that all abnormal losses should be expensed in P/L
- Discussion of asset vs. expense
- Usage variances are normally representative of abnormal loss because they are wasted
- Abnormal losses are disclosed above GP% line
- There will not be an impact on closing inventory as still value at standard cost
Reasons for abnormal losses
- Insufficient inspection of RM at time of purchase resulting in sub-par materials being used
- Incorrect mixing of a batch
- Malfunction in….
- Inexperienced staff
- Stoppage in process due to machine break down
- Not enough x applied
Market size variance
(Actual industry sales-Budgeted volume)budgeted market share%budgeted avrg contribution p/u
budgeted market share %=budgeted sales/budgeted industry volume
Market share variance
(Actual market share %-Budgeted market share%)actual industry sales volumebudgeted average contrib p/u
Standard costing critical evaluation
-Incorrectly based on the FY2018 standards
-Price being set is a future price, the standards should be updated to reflect the
realities of the most recent environment, which could include inflation, exchange rate
fluctuations, new suppliers
-The fixed manufacturing overhead should be adjusted with the depreciation of any
new machines purchased
- For the short term, Co price should also include the opportunity cost
-Want to set a lower price to enable it to
penetrate the retail segment, especially given the competition
Short term decision:
-Cost schedule should exclude the fixed manufacturing overheads that are
currently included.
-Need to set a price that covers all committed costs, including fixed manufacturing overheads.
Long term decision:
-An allocation of committed non-manufacturing costs needs to be included. All committed costs (both variable and fixed
-Adopt a premium pricing strategy and not merely cover their production costs.
