Standard Costing and Variance Analysis

Question 1

What is a Standard Cost?

Answer 1

The planned unit cost of a product, component or service.

Question 2

What are the 5 purposes of Standards?

Answer 2

1. Prediction of costs and times for decision making
2. Setting budgets
3. Controlling costs and revenues- variance analysis is control technique.
4. Performance evaluation- make use of standards as motivators
5. Inventory valuation- less consuming that other methods

Question 3

What are the four bases of Standards?

Answer 3

1. Ideal standards - assumes optimal level of efficiency.
2. Attainable standard - makes allowance for normal inefficiencies
3. Current standards - based on current efficiency levels and achievements
4. Basic Standards - not updated regularly

Question 4

When is Standard Costing used?

Answer 4

Has the greatest benefit if there is a degree of repetition in the production process. Therefore suited to mass production and repetitive assembly work. Can also be used per task by service organisations if there is a similarity of tasks.

Question 5

What are 5 criticisms of standards?

Answer 5

1. Always works best in a stable environment, modern business is very fast changing.
2. Regular revisions to standard are required. Process is expensive and time consuming.
3. Meeting the standard should not necessarily be accepted as satisfactory if further improvements could be made.
4. Techniques associated with standard costing are less useful in a modern environment of customised products.
5. Standard costing is potentially misleading when JIT is used.

Question 6

What are some things to consider when setting standard costs for Direct Materials?

Answer 6

• Pricing contracts already agreed
• Pricing discussions with regular suppliers
• Quotations and estimates from potential suppliers
• Forecast movement of prices
• Availability of bulk purchase discounts
• Material quality required
• Anticipated inflation

Question 7

What are some things to consider when setting standard costs for Direct Labour Rates?

Answer 7

• Agreements on pay rises/bonuses
• Experience of staff
• HR Department discussions and payroll

Question 8

What are the 3 steps to set standard costs for service industries?

Answer 8

1.) Establish a measurable cost unit (cost-per passenger-mile)
2. ) Attempt to reduce the heterogeneity of services
3.) Reduce the element of human influence

Question 9

What are the 4 causes of Variances?

Answer 9

1.) Controllable expenditure is different from budgeted expenditure.
2.) Uncontrollable expenditure is different from budgeted expenditure
3.) Inaccurate standard due to poor planning or use of unrealistic standards
4.) Inaccurate measurement of actuals.