standard costing

Question 1

what are overhead costs?

Answer 1

indirect or overhead costs cannot be traced directly to a cost object as they are common to several cost objects

Question 2

fixed overheads under marginal costing

Answer 2

when using marginal costing we treat the fixed cost a period expense, therefore we are only concerned with the difference in the expected expenditure (budgeted) and the actual expenditure (known as the fixed overhead expenditure variance)

Question 3

what is the fixed overhead expenditure variance?

Answer 3

the difference in the expected expenditure (budgeted) and the actual expenditure

Question 4

formula for the fixed overhead expenditure variance

Answer 4

= expected expenditure - actual expenditure

Question 5

standard absorption costing

Answer 5

• fixed overhead should be allocated to products and included in closing inventory valuations
• standard absorption costing systems should use predetermined fixed overhead rates, often based on standard hrs

Question 6

how to calculate predetermined overhead rate (POHR)?

Answer 6

POHR = (annual budgeted fixed overheads) / (annual budgeted activity)

POHR gets applied to each unit of output

Question 7

how to calculate overhead applied?

Answer 7

overhead applied = POHR x actual activity

Question 8

how do you calculate total fixed overhead variance?

Answer 8

total fixed overhead variance = overhead applied - actual expenditure

the difference between what we incurred and what the accounts are showing (i.e. what have we absorbed)

Question 9

why does expenditure variance happen?

Answer 9

the actual expenditure is different to the budgeted expenditure

Question 10

why does volume variance happen?

Answer 10

actual production is different to budgeted production

Question 11

how do you calculate volume variance?

Answer 11

= budgeted volume at standard absorption rate per unit - actual volume at standard absorption rate per unit

or

= (budgeted output x POHR) - (actual output x POHR)

Question 12

what is the difference between standard variable and standard absorption costing?

Answer 12

variable costing:
- variable overhead variances calculated
- fixed manufacturing o/h not allocated to products - charged as an expense in period incurred
- fixed o/h expenditure variance calculated

absorption costing:
- variable o/h variances calculated
- fixed o/h allocated to products using predetermined overhead rate
- total fixed o/h and expenditure and volume variances calculated

Question 13

how do you calculate the total variable overhead variance?

Answer 13

= standard cost of production - actual cost of production

Question 14

formula for the variable overhead expenditure/capacity variance

Answer 14

= AH (SR - AR)

• AH = actual hours
• SR = standard rate
• AR = actual rate

OR

= what it should have cost (AH x SR) - what it did cost (AH x AR)

Question 15

formula for the variable overhead efficiency variance

Answer 15

= SR (SH - AH)

SR = standard rate
SH = standard hours
AH = actual hours

OR

= what it should’ve used (SR x SH) - what it did use (SR x AH)

Question 16

what are the volume variances?

Answer 16

• volume capacity variance
• volume efficiency variance

Question 17

formula for the volume variance

Answer 17

= budgeted volume at standard absorption rate per unit - actual volume at standard absorption rate per unit

= (budgeted output x POHR) - (actual output x POHR)

Question 18

why do we have volume variances?

Answer 18

why was our actual production different than budgeted?
- was it because our labour force worked at a different level of efficiency than expected (volume efficiency variance)
OR
- is it because we have under or over used our capacity? (volume capacity variance)

Question 19

when does volume efficiency occur?

Answer 19

when the actual number of hours taken to produce the actual output differs from the standard number of hours

Question 20

volume efficiency formula

Answer 20

= SR (SH - AH)

favourable variance = where it takes less hours to produce the output than it should have done

Question 21

volume capacity variance formula

Answer 21

= SR (BH - AH)

SR = standard rate
BR = budgeted hours
AH = actual hours

Question 22

why may favourable/adverse variances occur for fixed overhead expenditure variance?

Answer 22

favourable = costs incurred are less than expected (e.g. saving on heating in summer)

adverse = costs incurred are greater than expected (increase in the cost of power)

Question 23

why may favourable/adverse variances occur for fixed overhead volume variance?

Answer 23

favourable = production has been greater than budgeted

adverse = production is less than budgeted

Question 24

why may favourable/adverse variances occur for fixed overhead volume efficiency variance?

Answer 24

favourable = it took less hours to produce units than anticipated

adverse = it took more hours to produce units than anticipated

Question 25

why may favourable/adverse variances occur for fixed overhead volume capacity variance?

Answer 25

favourable = more hours are being worked in total than anticipated (labour working overtime)

adverse = less hours are being worked in total than anticipated (machine breakdown, strikes, labour shortages)

Question 26

criticisms of standard costing

Answer 26

• reactive system = information could be too late
• standards can become obsolete quickly and system can be expensive to maintain
• too much emphasis placed on meeting standards which can divert attention from other important issues e.g. quality

Question 27

what is variance analysis?

Answer 27

identifies and understands the difference between planned (i.e. standard or budgeted) and actual performance. it enables accountability and cost control as:
- detailed analysis of variances can be reported
- responsible managers can investigate and identify reasons
- remedial action or change standard

Question 28

what are planning variances?

Answer 28

variances can arise from changes in factors EXTERNAL to the business, which may not have been known or acknowledged by standard-setters at the time of planning, these are known as PLANNING VARIANCES

“a classification of variances caused by EX-ANTE budget allowances being changed to an ex-posy basis. also known as a revision variance”

• considers the extent to which the “original” standard needs to be adjusted to reflect current reality

Question 29

planning price variance formula

Answer 29

= AQ (SP - RSP)

AQ = actual quantity
SP = standard price
RSP = revised standard price (instead of using the original standard cost, we use the revised price)

we are comparing the original price to the revised price

Question 30

operational price variance formula

Answer 30

= AQ (RSP - AP)

AP = actual cost per kg for example

Question 31

planning efficiency variance (labour rate planning) formula

Answer 31

we are comparing the original quantity to the revised quantity:

= AR (SR - RSR)
or
= original should use - revised should use

Question 32

operational efficiency variance (labour rate operational) formula

Answer 32

= SR (RSH- AH)
or
= revised should have used - did use

Question 33

benefits of calculation of planning and operating variances

Answer 33

• less likely to demotivate as uncontrollable element is shown separately
• can lead to better acceptance of the system
• can promote better planning