Summary Management accounting third year

STANDARD COSTING
Standard Costs are predetermined costs; target costs should be incurred under efficient
operating conditions.
NOT THE SAME AS BUDGETED COSTS. Budget: entire activity; provides cost expectation for
the total activity Standard: per unit; provides cost expectations per unit of activity


1. INTRODUCTION
IAS 2: where standard approximates actual and standards are regularly revised, standard
costing can be used for inventory valuation
Applied to manufacturing activities (not non-manufacturing)
Repetitive operations (cannot be applied to non-repetitive activities) & input can be specified
Compare total actual costs with total standard costs for each operation
Manager of responsibility centre answerable for variances (favourable (F) or adverse (A))
REASONS for variances: specific to question


2. ESTABLISHING COST STANDARDS (Quantity & Price)
Can use:

Past historical records (danger = including past inefficiencies) – promotes use of averages
Based on Engineering Studies – time and motion studies

1. Direct material

Quantity necessary for each operation
Bill of materials (records material quantity standards)
Standard prices obtained from purchasing department

2. Direct Labour

Most efficient production methods standardized
Estimate no. of hours required by average worker to complete job (unavoidable delays included)

3. Overheads

Same as establishing predetermined overhead rates (separate for fixed and variable)
Unitize fixed overheads for inventory valuation purposes
Rates x standard hours
Standard cost card (quantity of each unit of input used to produce 1 unit of output)




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,4. Standard hours

Not possible to add production of different items together because not homogenous :.
Calculate amount of time!



3. PURPOSES OF STANDARD COSTING (5) → inputs to budgeting process
Decision making: prediction of future target costs preferable to adjusted past
costs (incl. inefficiencies) + internal control
Motivation: challenging target
Assists in setting budgets + evaluating managerial performance
Control device: highlights activities do not conform to plan
Simplifies profit measurement + inventory valuation: easier to trace costs (conversion to
actual cost by writing off all variances)


4. VARIANCE ANALYSIS (in RANDS) → analyse reason for actual performance differing from
planned
performance and taking corrective action

1. Material Variances

2 factors: price paid & quantity used (standard vs. actual)

a) Material price variance (inflation; imports – currency fluctuations)

Compare standard price per unit with actual price per unit
Multiplied by:
o Inventory recorded at standard cost: quantity of materials purchased
o Inventory recorded at actual cost: quantity of materials issued to production

b) Materials usage variance (ALWAYS in monetary terms)

Compare standard quantity with actual quantity used
Standard quantity: std usage per unit x actual units
Remove price effect :. Multiply by standard material price




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, Reasons for usage variance
o Careless handling
o Inferior quality materials
o Pilferage
o Changes in production methods
o Losses due to perishable inventory

c) Total material variance

Difference between standard material cost & actual cost
Price variance + usage variance


2. Labour Variances

2 factors: price paid for labour (rate) & quantity of labour used (hours)

a) Wage rate variance

Compare standard price per hour with actual price paid per hour
Multiply by actual no. of hours worked
Least subject to control (usually due to wage rate stds not kept in line with changes in
actual wage rates)

b) Labour efficiency variance

Compare standard hours should be used with hours actually used
Multiply by standard wage rate per hour
Normally controllable
Reasons for variance:
o Inferior quality materials
o Different grades of labour + experience; capacity (overworked); industrial action;
o Failure to maintain machinery
o New tools + equipment/machinery
o Changes in production process

c) Total labour variance

Difference between standard labour cost for actual production and actual labour cost


3. Variable Overhead Variances (vary with direct labour or MH then price + quantity variance)

a) Total variable overhead variance




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, Difference between std variable overheads charged to production and actual variable
overheads incurred

b) Variable overhead expenditure variance

Flex the budget!
Diff between budgeted flexed V OH for actual direct labour hours and actual V OH costs
incurred
For actual V OH costs incurred: total usually given in Q (use that!)
Reasons:
o Prices of individual items changed
o Waste or inefficiency

c) Variable overhead efficiency variance

Diff between (Actual hours/MH x Std price / hour) and (Std hours for output x Std price / hour)
Linked to labour efficiency (if varies with labour hours)


4. Fixed Overhead Expenditure / Spending Variance

A) Variable Costing System

Overheads not unitized and allocated to products
Total F OH charged as an expense
Fixed overhead expenditure variance:
o Diff between budgeted F OH and Actual F OH spending
o Reasons: changes in salaries paid; additional supervisors; inflation

B) Absorption Costing System

Overheads allocated to products :. Additional fixed overhead variance
Fixed overhead volume variance:
o Predetermined fixed OH rate determined: divide annual budgeted fixed OH by budgeted
annual level of activity = rate per unit
o Diff between actual & budgeted production multiplied by std fixed OH rate per unit
Over/under- recovery = total fixed OH variance


5. Sales Variances

Calculated in terms of profit or contribution margins rather than sales values (more meaningful)
Note difference between Variable Costing System (contribution margin) &
Absorption Costing System (profit margin)




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