Financial Management 310 (FBS310)
Contents
LA 1: Chapter 12 + 13 : Standard Costing ........................................................................ 3
1. Introduction ................................................................................................................. 3
2. Management by exception....................................................................................... 3
3. Setting standard costs ................................................................................................ 3
4. Standard cost card ..................................................................................................... 4
5. Rejects .......................................................................................................................... 5
6. Budget.......................................................................................................................... 6
7. Sales Variances ........................................................................................................... 8
8. Direct Material Variances ......................................................................................... 10
9. direct labour and variable overhead variance ..................................................... 12
10. Fixed Manufacturing overhead variances ........................................................... 13
11. Variance analysis .................................................................................................... 14
12. Reconciliation .......................................................................................................... 15
LA 2: Chapter 9: Activity based costing ......................................................................... 16
1. Introduction ............................................................................................................... 16
2. Cost classification...................................................................................................... 16
3. Activity based Costing .............................................................................................. 16
4. Traditional costing ..................................................................................................... 17
5. designing ABC system............................................................................................... 17
LA 3: Chapter 8: Performance measurement and reporting on segments ................. 23
1. Introduction ............................................................................................................... 23
2. Decentralization in organisations ............................................................................. 23
3. Segment reporting/ profitability analysis ................................................................. 23
4. Hindrances to proper cost assignment ................................................................... 24
5. Rate of return for measuring managerial performance ........................................ 24
6. Example ..................................................................................................................... 25
7. Residual income ........................................................................................................ 26
LA 4: Chapter 10: Relevant costing................................................................................. 27
1. Cost concepts for decision making ......................................................................... 27
2. keep/ replace old equipment ................................................................................. 27
3. Product lines .............................................................................................................. 27
4. Make or buy decision ............................................................................................... 28
, 5. Special orders ............................................................................................................ 29
6. Utilization of constrained resources ......................................................................... 30
7. Joint product costs/ Contribution approach.......................................................... 32
LA 5: Chapter 15: Pricing and company transfers ......................................................... 33
1. Economist’s approach – cost plus pricicng ............................................................ 33
3. Absorption costing approach .................................................................................. 33
4. Target costing ............................................................................................................ 34
5. Service companies ................................................................................................... 34
6. Revenue and yield management ........................................................................... 34
7. Transfer pricing .......................................................................................................... 34
LA 6: Chapter 18: Inventory Management..................................................................... 37
1. Optimizing Inventory ................................................................................................. 37
2. Just-in-time/ economic order quantity.................................................................... 37
3. Reducing Inventory: JIT ............................................................................................. 37
4. Inventory control/ enterprise resource planning .................................................... 38
5. Cost of quality model ............................................................................................... 38
8. Total quality management....................................................................................... 38
9. Six sigma ..................................................................................................................... 38
10. Lean production...................................................................................................... 39
11. Example ................................................................................................................... 39
,LA 1: Chapter 12 + 13 : Standard Costing
1. INTRODUCTION
Performance → Provides feedback concerning what works
measurement → Help motivate people to sustain efforts
Standard → Used to control prices/ quantities of inputs
costs
2. MANAGEMENT BY EXCEPTION
Definition → Actual results compared to standards
→ Significant differences brought to attention of management
Standard → Benchmark/ norm for measuring performance
→ Pre-determined detailed estimates of cost of producing
products
→ Expected cost of one unit
→ = standard quantity x standard price
Budget → Expected cost for all units
Variance → Difference between actual results and what should have
occurred
→ Deviation from standard
Standard → Actual cost being different than standard (expected cost)
cost due to
variance − Price variance
− Quantity variance
Variance
analysis
cycle
3. SETTING STANDARD COSTS
Appropriate → Uniform products
with → Made in repetitive process
→ High volumes
Standards Ideal Standards
→ Allow for no interruptions
→ Require peak efficiency all times
, → Discourage diligent workers
→ Variances have little meaning as it is expected
Practical standards
→ Allow interruptions/ normal losses/ employee breaks
→ Can be attained through reasonable/ highly efficient efforts
→ Can signal abnormal conditions
→ Used in forecasting cash flows/ planning inventories
Setting → Standard cost = Quantity x Price
Standards − Direct Materials
− Direct Labour
− Variable Overheads
− Fixed Overheads
Direct Standard price per unit
Materials → Purchase price
Standards → + allowances for quality/ quantity
→ + shipping/ receiving/ handling costs
→ - discount
Standard quantity per unit
→ Materials required in bill of materials
→ + allowance for waste/ spoilage
− Materials that have perished before usage
− Materials wasted as normal part of process
→ + allowance for rejects
− Materials contained in units that are defective
Direct Standard rate per hour
Labour → Basic wage per hour
Standards → + labour costs by employer only (employment taxes)
→ + Fringe benefits
Standard hours per unit
→ Basic labour time per unit
→ + allowance for breaks/ personal needs
→ + allowance for clean-up/ machine downtime
→ + allowance for rejects
Variable Standard rate per hour
MO → Variable portion of predetermined overhead rate
Standards
Standard hours per unit
→ Hours base used (machine-hours/ direct labour-hours)
4. STANDARD COST CARD
Direct → manufactures cleaning solvent sold in 500ml bottles
Material → only ingredient is a raw material called Echol.
→ To manufacture - uses 10 contract workers who receives
weekly wage
→ Echol is purchased in 15-liter containers at a cost of R115 per
container.
Contents
LA 1: Chapter 12 + 13 : Standard Costing ........................................................................ 3
1. Introduction ................................................................................................................. 3
2. Management by exception....................................................................................... 3
3. Setting standard costs ................................................................................................ 3
4. Standard cost card ..................................................................................................... 4
5. Rejects .......................................................................................................................... 5
6. Budget.......................................................................................................................... 6
7. Sales Variances ........................................................................................................... 8
8. Direct Material Variances ......................................................................................... 10
9. direct labour and variable overhead variance ..................................................... 12
10. Fixed Manufacturing overhead variances ........................................................... 13
11. Variance analysis .................................................................................................... 14
12. Reconciliation .......................................................................................................... 15
LA 2: Chapter 9: Activity based costing ......................................................................... 16
1. Introduction ............................................................................................................... 16
2. Cost classification...................................................................................................... 16
3. Activity based Costing .............................................................................................. 16
4. Traditional costing ..................................................................................................... 17
5. designing ABC system............................................................................................... 17
LA 3: Chapter 8: Performance measurement and reporting on segments ................. 23
1. Introduction ............................................................................................................... 23
2. Decentralization in organisations ............................................................................. 23
3. Segment reporting/ profitability analysis ................................................................. 23
4. Hindrances to proper cost assignment ................................................................... 24
5. Rate of return for measuring managerial performance ........................................ 24
6. Example ..................................................................................................................... 25
7. Residual income ........................................................................................................ 26
LA 4: Chapter 10: Relevant costing................................................................................. 27
1. Cost concepts for decision making ......................................................................... 27
2. keep/ replace old equipment ................................................................................. 27
3. Product lines .............................................................................................................. 27
4. Make or buy decision ............................................................................................... 28
, 5. Special orders ............................................................................................................ 29
6. Utilization of constrained resources ......................................................................... 30
7. Joint product costs/ Contribution approach.......................................................... 32
LA 5: Chapter 15: Pricing and company transfers ......................................................... 33
1. Economist’s approach – cost plus pricicng ............................................................ 33
3. Absorption costing approach .................................................................................. 33
4. Target costing ............................................................................................................ 34
5. Service companies ................................................................................................... 34
6. Revenue and yield management ........................................................................... 34
7. Transfer pricing .......................................................................................................... 34
LA 6: Chapter 18: Inventory Management..................................................................... 37
1. Optimizing Inventory ................................................................................................. 37
2. Just-in-time/ economic order quantity.................................................................... 37
3. Reducing Inventory: JIT ............................................................................................. 37
4. Inventory control/ enterprise resource planning .................................................... 38
5. Cost of quality model ............................................................................................... 38
8. Total quality management....................................................................................... 38
9. Six sigma ..................................................................................................................... 38
10. Lean production...................................................................................................... 39
11. Example ................................................................................................................... 39
,LA 1: Chapter 12 + 13 : Standard Costing
1. INTRODUCTION
Performance → Provides feedback concerning what works
measurement → Help motivate people to sustain efforts
Standard → Used to control prices/ quantities of inputs
costs
2. MANAGEMENT BY EXCEPTION
Definition → Actual results compared to standards
→ Significant differences brought to attention of management
Standard → Benchmark/ norm for measuring performance
→ Pre-determined detailed estimates of cost of producing
products
→ Expected cost of one unit
→ = standard quantity x standard price
Budget → Expected cost for all units
Variance → Difference between actual results and what should have
occurred
→ Deviation from standard
Standard → Actual cost being different than standard (expected cost)
cost due to
variance − Price variance
− Quantity variance
Variance
analysis
cycle
3. SETTING STANDARD COSTS
Appropriate → Uniform products
with → Made in repetitive process
→ High volumes
Standards Ideal Standards
→ Allow for no interruptions
→ Require peak efficiency all times
, → Discourage diligent workers
→ Variances have little meaning as it is expected
Practical standards
→ Allow interruptions/ normal losses/ employee breaks
→ Can be attained through reasonable/ highly efficient efforts
→ Can signal abnormal conditions
→ Used in forecasting cash flows/ planning inventories
Setting → Standard cost = Quantity x Price
Standards − Direct Materials
− Direct Labour
− Variable Overheads
− Fixed Overheads
Direct Standard price per unit
Materials → Purchase price
Standards → + allowances for quality/ quantity
→ + shipping/ receiving/ handling costs
→ - discount
Standard quantity per unit
→ Materials required in bill of materials
→ + allowance for waste/ spoilage
− Materials that have perished before usage
− Materials wasted as normal part of process
→ + allowance for rejects
− Materials contained in units that are defective
Direct Standard rate per hour
Labour → Basic wage per hour
Standards → + labour costs by employer only (employment taxes)
→ + Fringe benefits
Standard hours per unit
→ Basic labour time per unit
→ + allowance for breaks/ personal needs
→ + allowance for clean-up/ machine downtime
→ + allowance for rejects
Variable Standard rate per hour
MO → Variable portion of predetermined overhead rate
Standards
Standard hours per unit
→ Hours base used (machine-hours/ direct labour-hours)
4. STANDARD COST CARD
Direct → manufactures cleaning solvent sold in 500ml bottles
Material → only ingredient is a raw material called Echol.
→ To manufacture - uses 10 contract workers who receives
weekly wage
→ Echol is purchased in 15-liter containers at a cost of R115 per
container.
