Standard costing Flashcards
What is a standard cost?
Planned or target cost of production
How are standard costs different rom budgeted costs?
Budgeted costs relate to business as a whole
Standard costs relate to individual cost units
What do you compare when using standard costing?
Standard (planned costs) with actual costs
What is the difference between standard cost and actual costs called?
Variance
What is variance analysis?
investigating any variances
What does it mean for the business plans if actual costs are very different standard costs?
Production process is not going to plan
What does identifying variances allow managers to do?
Alerts managers to problems allowing corrective action to take place
What are the purposes of standard costing?
Anticipating production costs (help budgets or cost specific jobs)
Selling prices (for special orders)
Controlling costs (target that if missed is investigated)
Encourages efficiency (reduces waste maximises profitability)
What is an example of the standard cost for purchasing?
Cost of goods/ materials
What is an example of the standard cost for marketing?
Selling price
Level of demand
What is an example of the standard cost for human resources?
Cost of wages
Availability of labour
What are some examples of what could be standard costed from operations?
Machine time
Reliability
Quality of materials
What is the standard in the context of sales?
target price and volume set allowing sales revenue to be calculated
What is the standard in the context of costs?
target price and volume of materials is et then standard cost of materials can be calculated
What 3 main areas of the business can variances be calculated for? (standard costing)
Materials
Labour
Sales
What 2 ways can can variances be expressed? (standard costing)
Favourable
Adverse
What are favourable variances? (standard costing)
actual cost is better then the standard leading to better predicted profits (good for business)
What are adverse variances? (standard costing)
actual cost worse then the standard leading to worse predicted profit (bad for business)
Why will business investigate variances?
Replicate favourable variances
Remove adverse variances
What could lead to variances when standard costing?
Errors
What could errors be caused by in standard costing?
Using incorrect data
Setting unrealistic targets
Managers deliberately setting low standards
What is the formula for calculating the direct variance for material, labour and sales?
(SQ x SP) - (AQ x AP)
What does A,Q, S and P stand for in variance equation?
A= actual
Q= quantity
S= standard
P= price
What is a materials variance?
Difference between standard cost of materials and the actual cost of materials for actual production
What is a labour variance?
difference between standard cost of labour and the actual cost of labour for actual production
What is a sales variance?
difference between standard sales revenue and actual sales revenue
What are the 2 types of sub variance for materials?
Materials price variance
Materials usage variance
What are the 2 types of sub variance for labour?
Labour rate variance
Labour efficiency variance
What are the 2 types of sub variance for sales?
Sales price variance
Sales volume variance
What is the formula for calculating: materials price variance, labour variance rate and sales price variance?
AQ x (SP-AP)
What is the formula for calculating: materials usage variance, labour efficiency variance and sales volume variance?
SP x (SQ-AQ)
What is the link for materials price variance and materials usage variance?
Cheaper materials may mean lower quality, favourable materials price variance but adverse materials usage variance as more may be needed or wasted
What is the link for labour rate variance and labour efficiency variance?
Lower wage rate or skill of employee may result in favourable labour rate but adverse labour efficiency (less skilled or de-motivated)
What is the link for sales price variance and sales volume variance?
Lower selling price may mean more sales resulting in adverse sales price but favourable sales volume
What are examples of favourable sub-variances for direct material price?
Deflation- general or specific to material purchased
Supplier reducing price
Use of lower quality materials or cheaper alternatives
Increase in quantity purchased so better trade discount
Increase in pound value against other currency (importing less expensive)
What are examples of favourable sub-variances for direct material usage?
Use of better quality materials
Use of high skilled/ motivated workers
Use off state of art capital equipment
Increased training of workers
What are examples of adverse sub-variances for direct material price?
Inflation- general or specific to good purchased
Supplier increasing price
Use of better quality more expensive alternative
Decrease in quantity purchased (loss of trade discount)
Decrease in value of pound against other currency (importing more expensive)
What are examples of adverse sub-variances for direct material usage?
Use of poorer materials
Use of less skilled/ poorly motivated workers
Use of poor equipment
Theft of materials
Deterioration of materials
Materials might be wasted due to machine malfunction
What are examples of favourable sub-variances for direct labour rate?
Use of lower- payed workers/ skilled workers
Wage deflation
Reduction in overtime or premium rates paid
Workers receiving productivity bonus
What are examples of adverse sub-variances for direct labour rate?
Higher skill/ pay workers
Wage inflation
Increase in overtime or premium rates paid
Workers receiving a pay rise or worker shortage (trade union action)
What are examples of favourable sub-variances for direct labour efficiency?
Use of workers with higher skills
Workers using better machinery
Good working conditions
High staff morale/ motivation
Good quality control
Productivity bonus
Increased training
What are examples of adverse sub-variances for direct labour efficiency?
Use of lower skill workers
Using poor machinery
Poor working conditions
Poor moral/ motivation
Poor quality control
Reduced material quality
What is flexing? (Standard costing)
Flexing is when you use the actual production/ value to calculate standard costs
Calculate all material and labour sub-variances? (Flexing required)- calculator needed
Standard=
Direct materials 12m @3.45 per m
Direct labour 3.5hr @£9.6 per hr
Actual=
Direct material 8240 £27604
Direct labour 2420 £23958
Production 680 units
Material price variance= 27604/ 8240= 3.35 (flexing); 8240x(3.45-3.35)= 824 favourable
Material usage variance= 680x12= 8160 (flexing as using actual to find predicted); 3.45x(8160-8240)= 276 adverse
Labour rate variance= 23958/2420=9.9 (flexing); 2420 x(9.6-9.9)= 726 adverse
Labour efficiency variance= 680x3.5= 2380 (flexing); 9.6 x(2380-2420)= 384 adverse
Will you have to use flexing for sales variances?
No
Wha are the reasons for sales variances?
Competitors actions- new advertising campaign
Sudden changes in consumer tastes - health scares
Government policy - VAT change
Changes in quality of product
Changes in marketing technique
What might cause favourable sales price sub variances?
Increase in price to compensate for increased costs
Increase in price after use of penetration (marginal costing)
Rivals leaving the market allowing prices to be raised
What might cause adverse sales price sub variances?
Reduction in selling for bulk sales
Reduction in price- attract new customers (marginal costing to penetrate new market and sell stock quickly)
New competitors in the market causing prices to be lower
What is it important to remember when labelling sales variances as adverse or favourable?
With the other variances negative usually meant adverse but with the main sales variance a negative would mean sales have increased which is favourable
What might cause favourable sales volume sub-variances?
More aggressive marketing strategy
Increased seasonal sales
Favourable changes in state of economy (rise in consumer demand)
Less competition in sector; fewer sales by competition, higher market share
Change in consumer taste
What might cause adverse sales volume sub variances?
Less aggressive marketing strategy
Decrease in seasonal sales
Unfavourable changes in state of economy (fall in consumer demand)
More competition in sector- More sales to competition, more aggressive marketing by competitor, Lower market share
Change in consumer taste
Defective product
What is the context for a reconciliation statement for standard costing?
Explain why actual results are different from the standard or budgeted figures
How do you do a cost reconciliation statement for standard costing?
F=Use flexing to find standard cost with actual production and then work out variances and take away favourable from adverse and this will be the difference in cost
What are the steps to creating a profit reconciliation statement? (standard costing)
- calculate the budgeted profit for the budgeted number of goods sold
- Calculate contribution lost on number of goods not sold
- Subtract the lost contribution from budgeted profit
- Calculate variances for labour and materials
- Calculate sales price variance
- Add up variances and work out if favourable or adverse
- take away ADV or add FAV from forecast profit
What are the advantages of standard costing?
Management control
Management by exception
Staff motivation
Business planning
Setting prices
Why is management control an advantage of standard costing?
can identify areas of weakness and inefficient practice
Why is management by exception an advantage of standard costing?
investigating variances only if they are exceptional allows some tolerance in control system with variances being acceptable if they don’t exceed certain limits
Why is staff motivation an advantage of standard costing?
staff are consulted and given responsibility for meeting their own cost, volume and price targets they may take more pride in their work and have increased job satisfaction where targets are met
Why is business planning an advantage of standard costing?
predetermined standards can be used to calculate the quantity of resources needed in next budget period with regular updates to improve accuracy
Why is setting prices an advantage of standard costing?
Standard cost represent best estimate of cost to make a product allowing orders to be more reliable
What are the limitations of standard costing?
Cost of implementation
“modern” management
Unforeseen consequences
Service industries
Inaccurate standards
Volatile markets
Management skill
Why is cost of implementation a limitation of standard costing?
Large amount of information needed which can be time consuming and expensive
Why is unforeseen consequences a limitation of standard costing?
likely to encourage staff to strive for favourable variances even if it harms businesses overall objectives
Why is service industries a limitation of standard costing?
In some service sector businesses staff performance indicators cannot be quantified and do not necessarily relate to cost
Why is inaccurate standard a limitation of standard costing?
if standard is poorly set it may result in a standard that is not realistic meaning prices may be set too high or low
Why is volatile markets a limitation of standard costing?
standards need regular reviews to ensure they are up to date if in a volatile market this will need to be done more regularly
Why is management skill a limitation of standard costing?
if there is a problem it is up to the skill of management to interpret and determine the most appropriate cause of action
