Standard Costing and Variance Analysis Flashcards
What is standard costing?
The practice of substituting the expected costs of manufacturing a product or delivering a service for the actual cost in the accounting records.
What are the benefits of implementing a standard costing system?
- Improved cost control
- Useful information for planning and decision making
- Greater cost control by highlighting exceptions or variances.
What is a standard cost card?
A record showing the expected cost incurred in manufacturing or delivering one unit of a product or service, detailing each component part.
What is variance analysis?
The process of comparing production costs using standard costing to the actual results at the end of a budget period.
List the four steps in the standard costing process.
- Identify the standard costs for a budget period
- Record the actual results for the same period
- Compare the actual results to the standards to identify detailed variances
- Investigate significant variances to improve future performance and standard setting.
What are the three main categories of standards in standard costing?
- Ideal standards
- Attainable standards
- Current standards.
Define ideal standards.
Standards that can only be achieved with optimal efficiency, assuming no wastage, idle time, or interruptions.
Define attainable standards.
Standards using normal operating conditions as a benchmark, recognizing some inefficiencies.
Define current standards.
Standards set using current operating conditions and prices, useful in volatile economic environments.
What is the difference between marginal and absorption costing in standard cost cards?
- Marginal costing includes only variable costs of production.
- Absorption costing includes variable costs and a proportion of fixed production overheads.
What does a favorable variance indicate?
The actual profit is greater than expected.
What does an adverse variance indicate?
The actual profit is lower than expected.
What are the two main types of sales variances?
- Sales price variance
- Sales volume variance.
Fill in the blank: Under marginal costing, fixed production costs are treated as _______.
period costs.
True or False: Current standards aim to motivate employees to improve upon current working conditions.
False.
What is the purpose of a flexed budget?
To adjust the budget based on the actual production and sales volume to ensure accurate comparisons.
What does the contribution margin represent in the budgetary control statement?
The difference between sales revenue and total variable costs.
What does the sales volume variance identify?
Difference in profit or contribution due to the difference between budgeted and actual sales volume
Which costing method uses standard contribution per unit for sales volume variance?
Marginal costing
How is the standard contribution per unit calculated?
Standard selling price minus standard variable cost per unit
What is the formula for calculating sales volume variance?
Actual units sold × Standard contribution/profit per unit -
Budgeted units sold × Standard contribution/profit per unit
What is the total material cost variance?
Difference between actual material cost incurred and standard material cost expected
What are the two components of the total material cost variance?
- Material price variance (PPV)
- Material usage variance
What does the material price variance measure?
Difference between actual cost of material purchased and expected cost
How is the material price variance calculated?
Actual quantity purchased × Actual price per metre -
Actual quantity purchased × Standard price per metre
What does the material usage variance compare?
Actual material used in production vs. standard quantity expected for production
What is the calculation for material usage variance?
Actual quantity used × Standard price per metre -
Standard quantity for actual production × Standard price per metre
What does the total labour cost variance represent?
Difference between actual labour cost incurred and standard labour cost expected
What are the two components of the total labour cost variance?
- Labour rate variance
- Labour efficiency variance
How is the labour rate variance calculated?
Actual hours worked * actual rate per hour -
Actual hours paid * standard rate per hour
What does the labour rate variance measure?
The difference between the total actual cost of labour and the expected cost based on actual hours paid
It is likely controllable by the personnel department.
How is the labour rate variance calculated?
Total actual labour cost - Total expected labour cost
Total actual labour cost = Actual hours paid × Actual rate per hour; Total expected labour cost = Actual hours paid × Standard rate per hour.
What might cause an adverse labour rate variance?
Increase in pay rate, possibly due to overtime or skilled workforce recruitment
What does the labour efficiency variance measure?
How effectively the workforce has utilized time to produce output
How is the labour efficiency variance calculated?
Actual hours worked × Standard rate per hour -
Standard hours for actual production × Standard rate per hour
What is idle time in the context of labour variances?
Periods when employees are paid but not working
What is the impact of idle time on variance calculations?
It creates an adverse variance and is designated separately before calculating efficiency variance
What is the formula for calculating the labour idle time variance?
Actual hours paid × Standard rate per hour -
Actual hours worked × Standard rate per hour
How is the variable overhead expenditure variance calculated?
Actual hours worked × Actual rate per hour - Actual hours worked × Standard rate per hour
What does the variable overhead efficiency variance measure?
The efficiency of the workforce in relation to variable overhead costs
How is the variable overhead efficiency variance calculated?
Actual hours worked × Standard overhead rate per hour -
Standard hours for actual production × Standard overhead rate per hour
What is the purpose of variance summary in financial reporting?
To reconcile budgeted contribution and actual contribution, highlighting significant variances
What is the formula for calculating variable overhead expenditure variance?
Actual hours worked * actual rate per hour -
Actual hours worked * standard rate per hour
This formula helps in assessing the difference between expected and actual variable overhead costs.
What is the purpose of the reconciliation between budgeted contribution and actual contribution?
To show each detailed variance calculated so that management can determine the most significant variances that require further investigation and corrective action.
Fill in the blank: A standard costing approach relies on a consistent and repetitive _______.
production process
What does the closing inventory adjustment represent?
Overspent inventory not accounted for in the material usage variance
What is the effect of buying more inventory than needed?
Increases actual cost compared with budgeted expectation, reducing actual contribution.
What is the purpose of variance analysis in management?
To identify deviations from standards and undertake actions to improve future performance.
