Standard Costing Flashcards
What does standard costing offer?
A way to analyse performance in as much detail as required.
What is standard costing investigating?
Specific factors that caused actual results to differ from planned/budgeted results
What is standard costing?
It is an effective performance management and budgetary control technique.
It is also a tool for inventory valuation.
And it provides valuable info for management decision making and internal control.
What is variance analysis
The process of analyzing in detail the reason for actual performance differing from planned performance
Why is standard costing systems widely used?
Because they:
Provide a prediction of future costs and revenues that can be used for planning.
Provide info for performance evaluation.
Assist in the identification of problem areas.
Provide info for inventory valuation purposes.
Provide inputs into the budgeting process.
Difference between standards and budgets
Budget is usually a total concept
Standard usually refer to individual cost object/units.
Standard example
Standard labour cost of 1 unit of product X = R100
Can be broken down further into price and quantity:
Labourers are expecting to be paid R25 per hour.
This R25 is referred to as the price standard.
From this we can see each unit of X takes:
4 hours to complete (100/25)
This 4 is referred to as the quantity/volume standard.
The standard cost (100) is therefor a product of standard price (25) multiplied by standard quantity (4).
The same can be applied to all input costs:
Labour, materials, variable & fixed manufacturing overheads
Is it possible to determine standard cost for anything other than input cost?
Yes, it can be determined for sales as well as non-manufacturing costs.
What happens to closing inventory in standard costing?
The closing inventory of finished goods will be valued at the end of each reporting period at the standard cost per unit.
What should the organization take into account in setting PRICE standards?
Supplier’s quotations
Price seasonality
Volume discounts available
Market prices
What should the organization take into account in setting QUANTITY standards?
Quality of material & labour Wastage expected Time and motion studies Learning curve effects Skill levels of staff Idle time expected
What 2 approaches can be used to determine standards?
Use of historic records
Engineering studies
What is disadvantages of using historic records?
Have been affected by efficiencies or inefficiencies experienced in the past.
Can promote the use of averages, resulting in midway between good and bad performances rather than striving for best practices.
Do not reflect subsequent changes in the organization or its environment.
What is engineering studies?
Time-and-motion studies.
Business process re-engineering.
It includes a detailed study of each operation,
careful specifications are created for each cost item.
Can a combination of historic and engineering be used?
Yes, and adjust for any factors that may need to be taken into account
What do the organization need to decide when setting standards?
How lenient or strict they would like to be.
For example, they can set ideal, basic or achievable standards.
What is ideal standards?
Standards that represent perfect working conditions with no allowance of spoilage or inefficiency.
(May be seen as unattainable and result in demotivating employees if they believe bonuses are based on budgets impossible to achieve)
What is basic standards?
Basic, but should not be too slack as it may fail to motivate employees
What is achievable standards?
Standards that are not too slack, but which represent normal working conditions and allow for certain level of expected spoilage & inefficiency
What is a static budget variance?
A comparison of the static budget profit with the actual profit at the end of the period
How do we determine which part of the variance is as a result of change in production levels?
The original budget has to be adjusted to reflect actual level of production
What is a flexed budget?
Original budget adjusted for actual production levels
NOTE: although it depicts actual activity levels, the input cost will still be based on standard costs per unit
Can fixed overheads variances use basic formulas?
No, it is inherently different in nature to variable cost
What is the calculation for non-manufacturing fixed overheads?
Difference between budgeted expense and actual expense - This is a price variance
What is the price for fixed manufacturing using a variable costing system?
The same as the static budget price
What is the quantity variance for fixed manufacturing overheads in an absorption costing system?
It is calculated as the difference between the static budget and the flexed budget
What is sales mix, sales quantity, direct material mix and direct materials yield?
This is variances calculated where multiple products are sold and multiple direct materials are input
