Standard Costing

Question 1

What is performance measurement?

Answer 1

The monitoring of budgets or targets against actual results

Question 2

What is standard costing?

Answer 2

This is a technique which establishes predetermined estimates of the cost of products and services. It is heavily used in budget setting.

Question 3

What are the three types of standard?

Answer 3

Attainable standards
- These are based on efficient, but not perfect operating conditions

• Allowances are made for normal material losses, material breakdowns,etc
• Good for motivation as provide a realistic but challenging target

Current standards
- These are based on current working conditions

-Useful when conditions are abnormal

• Staff may feel unchallenged to improve on current output

Ideal standards
- These are based on perfect operating conditions with no wastage scrap or breakdowns

• this standard is impossible to achieve. This could lead to staff filling demotivated.

Question 4

What are the three types of budgets?

Answer 4

Fixed
This is prepared before the beginning of a budget period for a single level of activity. For example, 1000 pencils.

Flexible
This is prepared before the beginning of a budget period and is prepared for a number of levels of activity. It requires an analysis of costs between fixed and variable elements.

Flexed
This is prepared at the end of a budget period. It takes the original fixed budget and changes the volume of activity to meet to meet actual volumes. This allows like for like comparison between actual and budget.