Standard Costing and Variances

Question 1

Standard Cost Card - Variable Production Cost

Answer 1

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.

Question 2

Stanards vs Budgets

Answer 2

A standard s the expected cost for one unit.

A budget is the expected cost for all units.

Question 3

Standard Costs & uses

Answer 3

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

Question 4

Static budget

Answer 4

Prepared for the planned level of activity.

Planning purposes.

Inadequate for understanding how well we have controlled costs.

Question 5

Differing actual to planned activity

Answer 5

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.

Question 6

Flexed budget

Answer 6

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.

Question 7

Flexed budget → Actual

Answer 7

Like-for-like comparison.

Nonsensical comparison.

Have to FLEX our original budget.

Question 8

Variances

Answer 8

Difference between what was actually achieved (costs or output) and the standard (costs or output) based on the actual (The Flexed Budget).

Question 9

Standard Cost Variances

Answer 9

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.

Question 10

Unfavourable variance

Answer 10

Point to cases of problems and directions for improvement.

Trigger investigations in departments having responsibility for incurring the costs.

Question 11

Variance analysis cycle

Answer 11

Prepare standard cost card → Analyse variances → Identify questions → Receive explanations → Take corrective actions → Conduct next periods operations → Prepare standard cost card

Repeat

Question 12

Standard Cost Variances (types)

Answer 12

Price variance and quantity variance.

Question 13

Price Variance

Answer 13

Difference between the actual price and the standard price.

Price variance computed on the entire quantity purchased

Question 14

Quantity Variance

Answer 14

Difference between the actual quantity and the standard quantity.

Computed only on the quantity used.

Question 15

Standard price

Answer 15

Amount that should have been paid for the resources acquired.

Question 16

Actual Quantity x Actual price

Answer 16

what we actually paid for our goods

Question 17

Actual Quantity x Standard Price

Answer 17

What we should have paid for our goods

Question 18

Standard Quantity x Standard price

Answer 18

What we should have purchased and paid for

Question 19

Standard Quantity

Answer 19

Quantity allowed for the actual good output

Question 20

General model for variance analysis

Answer 20

(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

Question 21

Actual Price AP

Answer 21

Total cost of material £/amount of material lbs

Question 22

Material Price variance MPV

Answer 22

AQ(AP-SP)

Question 23

Favourable

Answer 23

Negative

Question 24

Unfavourable

Answer 24

Positive

Question 25

MQV Material Quantity Variance

Answer 25

SP(AQ-SQ)

Question 26

Material variances - amount purchased more then used, compared with buying amount that was used

Answer 26

Price variance increase as quantity purchased increases.

Quantity variance unchanged because actual and standard quantities are unchanged.

Question 27

Isolation of material variances

Answer 27

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.

Question 28

Responsibility for Material Variances

Answer 28

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.

Question 29

Actual Rate

Answer 29

Total cost of labour £/direct labour hours

Question 30

Labour Rate Variance LRV

Answer 30

LRV=AH(AR - SR)

Question 31

Labour efficiency variance LEV

Answer 31

LEV=SR(AH - SH)

Question 32

Labour variances summary

Answer 32

(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)

Question 33

Labour Rate Variance (examine)

Answer 33

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.

Question 34

Unfavourable Labour Efficiency Variable

Answer 34

• Poorly trained workers
• Poor supervision of workers
• Poor quality materials
• Poorly maintained equipment

Question 35

Responsibility for labour variances

Answer 35

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.

Question 36

Actual rate of variable manufacturing overhead rate

Answer 36

AR=£ spent on variable manufacturing overhead/hours worked to make units

Question 37

Spending variance for variable manufacturing overhead (SV)

Answer 37

SV=AH(AR - SR)

Question 38

Efficiency variance for variable manufacturing overhead (EV)

Answer 38

EV=SR(AH - SH)

Question 39

Variable manufacturing overhead variances

Answer 39

(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)

Question 40

Variable manufacturing overhead variances

Answer 40

If variable overhead is applied on the basis of direct labour hours, the labour efficiency and variable overhead efficiency variances will move in tandem.

Question 41

Variance analysis and management by exception

Answer 41

What variances to investigate?

Larger variances, in £ amount or as % of the standard, are investigated first.

Question 42

Advantages of Standard Costs

Answer 42

• Possible reductions in production costs
• Management by exception
• Better info for planning and decision making
• Improved cost control and performance evaluation

Question 43

Potential problems of standard costs

Answer 43

• 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