Standard costing and variance analysis

Question 1

Reconciliation statements

What are they used to show?
What is more complex when using standard costing?

Answer 1

Reconciliation statements can be used to show the differences between the standard cost of production and the actual cost.

Computing the differences for variable and fixed costs is more complex when using standard costing.

Question 2

Fixed costs – marginal costing

What are ignored under marginal costing?
What is the overhead variance?
Example?

Answer 2

Under marginal (variable) costing – fixed costs are ignored.

Therefore, where there is a difference between projected and actual fixed costs, the overhead variance is simply the difference between the two figures.
* i.e. Fixed Overhead Expenditure Variance

Question 3

Fixed costs – absorption costing

What is one advantage?
What is all cost estimates are reasonably accurate?
What if this doesn’t occur?

Answer 3

Under absorption costing – one advantage of standard absorption costing is that the cost for a unit will be a ‘full’ cost and will incorporate a portion of all the costs of production.

• If the actual production level is close to the projected level, and all cost estimates are reasonably accurate, then standard cost will be close to the actual full cost

However if this does not occur, fixed overhead variances will need to take into account:
* Production volumes and
* Overhead costs

Question 4

Fixed costs – absorption costing

As we know, the OAR is worked out before production is underway. The OAR is worked out so that…

• So, what happens if:
• Fixed overheads change?
• The measure (labour hours, machine hours) change?
• Volume of units produced / sold change?

Answer 4

As we know, the OAR is worked out before production is underway. The OAR is worked out so that, based on a measure, the total fixed overheads are covered by the volume of units expected to be made.

• So, what happens if:
• Fixed overheads change?
• The measure (labour hours, machine hours) change?
• Volume of units produced / sold change?

These changes will provide two fixed overhead variances:

• Fixed overhead expenditure variance – this is the difference in the actual amount spent on fixed overheads.
• Fixed overhead volume variance – this is the difference in the actual volume of output.

The combination of these two variances will result in an overall total fixed overhead variance.

Question 5

Fixed costs – the absorption base

Remember that fixed overheads can be apportioned uses a variety of measures. The three main ones are:

How the OAR has been worked out will change the way that the fixed overhead variances are worked out.

Answer 5

Remember that fixed overheads can be apportioned uses a variety of measures. The three main ones are:

• actual units,
• labour hours
• machine hours.

How the OAR has been worked out will change the waythat the fixed overhead variances are worked out.

Question 6

Fixed costs – sub-variances

What are the sub-divisions and what are their formulas?

Answer 6

For deeper analysis, the volume variance can also be sub-divided into efficiency variance and capacity variance.

Volume Capacity variance

• this compares the time the budgeted production should have taken with the actual hours worked.
• (actual hours taken – budgeted hours) x OAR

Volume Efficiency variance

• this compares the time the actual production should have taken with the time it actually took to make.
• (std hours for output – actual hours for output) x OAR