Standard Costing

Question 1

What does standard costing offer?

Answer 1

A way to analyse performance in as much detail as required.

Question 2

What is standard costing investigating?

Answer 2

Specific factors that caused actual results to differ from planned/budgeted results

Question 3

What is standard costing?

Answer 3

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.

Question 4

What is variance analysis

Answer 4

The process of analyzing in detail the reason for actual performance differing from planned performance

Question 5

Why is standard costing systems widely used?

Answer 5

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.

Question 6

Difference between standards and budgets

Answer 6

Budget is usually a total concept

Standard usually refer to individual cost object/units.

Question 7

Standard example

Answer 7

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

Question 8

Is it possible to determine standard cost for anything other than input cost?

Answer 8

Yes, it can be determined for sales as well as non-manufacturing costs.

Question 9

What happens to closing inventory in standard costing?

Answer 9

The closing inventory of finished goods will be valued at the end of each reporting period at the standard cost per unit.

Question 10

What should the organization take into account in setting PRICE standards?

Answer 10

Supplier’s quotations
Price seasonality
Volume discounts available
Market prices

Question 11

What should the organization take into account in setting QUANTITY standards?

Answer 11

Quality of material & labour
Wastage expected
Time and motion studies
Learning curve effects
Skill levels of staff
Idle time expected

Question 12

What 2 approaches can be used to determine standards?

Answer 12

Use of historic records

Engineering studies

Question 13

What is disadvantages of using historic records?

Answer 13

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.

Question 14

What is engineering studies?

Answer 14

Time-and-motion studies.
Business process re-engineering.

It includes a detailed study of each operation,
careful specifications are created for each cost item.

Question 15

Can a combination of historic and engineering be used?

Answer 15

Yes, and adjust for any factors that may need to be taken into account

Question 16

What do the organization need to decide when setting standards?

Answer 16

How lenient or strict they would like to be.

For example, they can set ideal, basic or achievable standards.

Question 17

What is ideal standards?

Answer 17

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)

Question 18

What is basic standards?

Answer 18

Basic, but should not be too slack as it may fail to motivate employees

Question 19

What is achievable standards?

Answer 19

Standards that are not too slack, but which represent normal working conditions and allow for certain level of expected spoilage & inefficiency

Question 20

What is a static budget variance?

Answer 20

A comparison of the static budget profit with the actual profit at the end of the period

Question 21

How do we determine which part of the variance is as a result of change in production levels?

Answer 21

The original budget has to be adjusted to reflect actual level of production

Question 22

What is a flexed budget?

Answer 22

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

Question 23

Can fixed overheads variances use basic formulas?

Answer 23

No, it is inherently different in nature to variable cost

Question 24

What is the calculation for non-manufacturing fixed overheads?

Answer 24

Difference between budgeted expense and actual expense - This is a price variance

Question 25

What is the price for fixed manufacturing using a variable costing system?

Answer 25

The same as the static budget price

Question 26

What is the quantity variance for fixed manufacturing overheads in an absorption costing system?

Answer 26

It is calculated as the difference between the static budget and the flexed budget

Question 27

What is sales mix, sales quantity, direct material mix and direct materials yield?

Answer 27

This is variances calculated where multiple products are sold and multiple direct materials are input