Standard Costing and Variances Flashcards
Standard Cost Card - Variable Production Cost
Standard cost card for one unit of product might look like this:
Columns are Inputs, Standard quantity of hours A, Standard Price or rate B £, Standard Cost per unit AxB £.
Direct materials
Direct labour
Variable manufacturing overhead
Total standard unit cost - only goes in final column.
Stanards vs Budgets
A standard s the expected cost for one unit.
A budget is the expected cost for all units.
Standard Costs & uses
Calculated standards can be used for:
-Setting budgets-standards set can be used to determine budgetary values, the budget is our plan and means of financial control.
-Performance evaluation-how did reality compare to the plan/budget, differences are known as variances
(Variances - either favourable or adverse: F or (A) or + or (-))
-For decision making-Pricing decisions
Static budget
Prepared for the planned level of activity.
Planning purposes.
Inadequate for understanding how well we have controlled costs.
Differing actual to planned activity
If actual activity is different from planned then comparing the static budgets to actual costs is misleading.
Activity level higher than expected then VC should be higher than the static budget.
Activity lower than expected then the variable costs should be lower than the static budget.
Flexed budget
Takes account of the changes in costs that should happen as activity changes.
Flexible budget therefore shows what costs we would expect for a specific level of activity.
Re-statement of the original budget based on the actual performance.
The budget we would have set had we known what was going to happen.
Flexed budget → Actual
Like-for-like comparison.
Nonsensical comparison.
Have to FLEX our original budget.
Variances
Difference between what was actually achieved (costs or output) and the standard (costs or output) based on the actual (The Flexed Budget).
Standard Cost Variances
A standard cost variance is the amount by which an actual cost differs from the standard cost.
Unfavourable - actual cost exceeds the standard cost.
Graph form -
Product cost on y axis
line of x=constant
draw y=constant lines for standard and actual cost and the difference height on the y axis is the variance.
Unfavourable variance
Point to cases of problems and directions for improvement.
Trigger investigations in departments having responsibility for incurring the costs.
Variance analysis cycle
Prepare standard cost card → Analyse variances → Identify questions → Receive explanations → Take corrective actions → Conduct next periods operations → Prepare standard cost card
Repeat
Standard Cost Variances (types)
Price variance and quantity variance.
Price Variance
Difference between the actual price and the standard price.
Price variance computed on the entire quantity purchased
Quantity Variance
Difference between the actual quantity and the standard quantity.
Computed only on the quantity used.
Standard price
Amount that should have been paid for the resources acquired.
Actual Quantity x Actual price
what we actually paid for our goods
Actual Quantity x Standard Price
What we should have paid for our goods
Standard Quantity x Standard price
What we should have purchased and paid for
Standard Quantity
Quantity allowed for the actual good output
General model for variance analysis
(Actual Quantity x Actual price) & (Actual Quantity x Standard Price) → Price variance
(Actual Quantity x Standard Price) & (Standard Quantity x Standard Price) → Quantity Variance
Prince Variance = AQ(AP - SP) Quantity Variance = SP(AQ - SQ) AQ - Actual quantity AP - actual price SP - standard price SQ - standard quantity
Actual Price AP
Total cost of material £/amount of material lbs
Material Price variance MPV
AQ(AP-SP)
Favourable
Negative
Unfavourable
Positive
MQV Material Quantity Variance
SP(AQ-SQ)
Material variances - amount purchased more then used, compared with buying amount that was used
Price variance increase as quantity purchased increases.
Quantity variance unchanged because actual and standard quantities are unchanged.
Isolation of material variances
Purchasing managers want price variance sooner so they can better identify purchasing problems.
Accountants only start computing price variance when material is purchased rather than when its used.
Responsibility for Material Variances
Cheap material so people had to use more - builders not to blame for unfavourable material quantity variance.
Used too much because of poorly trained workers and poorly maintained equipment. Poor scheduling requires rush order material at higher price, causing unfavourable price variances - purchasing manager.
Actual Rate
Total cost of labour £/direct labour hours
Labour Rate Variance LRV
LRV=AH(AR - SR)
Labour efficiency variance LEV
LEV=SR(AH - SH)
Labour variances summary
(Actual Hours x Actual Rate) & (Actual Hours x Standard Rate) → Rate Variance
Rate Variance = AH(AR - SR)
(Actual Hours x Standard Rate) & (Standard Hours x Standard Rate) → Efficiency Variance
Efficiency Variable = SR(AH - SH)
Labour Rate Variance (examine)
High skill, high rate
Low skill, low rate
Using highly paid skilled workers to perform unskilled taste results in an unfavourable rate variance.
Production managers who make work assignments are generally responsible for rate variances.
Unfavourable Labour Efficiency Variable
- Poorly trained workers
- Poor supervision of workers
- Poor quality materials
- Poorly maintained equipment
Responsibility for labour variances
Workers - not responsible for unfavourable about efficient variable. Managers purchased cheap material so it took more time to process.
Attribute labour and material variances to personnel for hiring the wrong people and training them poorly?
Managers - Used too much time because of poorly trained workers and poor supervision.
Actual rate of variable manufacturing overhead rate
AR=£ spent on variable manufacturing overhead/hours worked to make units
Spending variance for variable manufacturing overhead (SV)
SV=AH(AR - SR)
Efficiency variance for variable manufacturing overhead (EV)
EV=SR(AH - SH)
Variable manufacturing overhead variances
(Actual Hours x Actual Rate) & (Actual Hours x Standard Rate) → Spending variance
Variable overhead spending variance = AH(AR - SR)
(Actual Hours x Standard Rate) & (Standard Hours x Standard Rates) → Efficiency Variance
Variable manufacturing overhead efficiency value = SR(AH - SH)
Variable manufacturing overhead variances
If variable overhead is applied on the basis of direct labour hours, the labour efficiency and variable overhead efficiency variances will move in tandem.
Variance analysis and management by exception
What variances to investigate?
Larger variances, in £ amount or as % of the standard, are investigated first.
Advantages of Standard Costs
- Possible reductions in production costs
- Management by exception
- Better info for planning and decision making
- Improved cost control and performance evaluation
Potential problems of standard costs
- Emphasis on negative may impact morale
- Standard cost reports may not be timely
- Labour quantity standards and efficiency variances may not be appropriate
- Emphasising standards may exclude other important objectives
- Continuous improvement may be more important than meeting standards
- Favourable variances may be misinterpretted
