Standard Costing

Question 0

Uses of standard costing

Answer 0

Act as a control device (variance analysis)

Value inventory and cost production

Assist in setting budgets and evaluating managerial performance

Enable the principle of management by exception (focus on tasks which require attention)

Provide prediction of future costs for use in decision-making situations

Motivate staff and management by providing challenging targets

Provide guidance on possible ways of improving efficiency

Question 1

What is a standard cost?

Answer 1

Standard: Predetermined unit cost for inventory, valuation, budgeting and control

Standard costs: Predetermined costs that should be incurred under normal efficient operating conditions

Standard costs consists of 2 parts:

1. Physical measurement
2. Financial measurement

Standard costing: a control technique that reports variances by comparing actual costs to pre-set standards

Question 2

Types of performance standard

Standards can be established in 4 ways…

Answer 2

1. Ideal standards
   •maximum efficiency & no hold ups
2. Attainable standards
   •sets a challenging but achievable levels
3. Current standards
   •what employees are currently achieving
4. Basic cost standards
   •long-term / remain unchanged for years

Question 3

McDonaldization

Answer 3

Assisting the use of standard costing in service industries

1. Calculability
   •content identical and standardized
   •human element eliminated as far as possible
2. Control
   •reducing human influence by automation
3. Efficiency
   •ensure customers get exactly what they want as quickly as possible
4. Predictability
   • same service in any outlet

Question 4

Budgets (quantitative monetary plan for future period)

VS

D Standard (predetermined quantity target which can be achieved in certain conditions

Answer 4

SIMILARITIES
•forecast
•used for control purposes

Question 5

Production volume ratio

Answer 5

Capacity ratio x Efficiency ratio