Transcript Standard costing

Standard Costs
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Budget for a single unit
Each unit has standards for:Quantity & Price/
Rate
Distinguishing between Standards and Budgets
Both standards and budgets are predetermined
costs, and both contribute to management planning
and control.
There is a difference:
A standard is a unit amount.
A budget is a total amount
Types of standards
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3.
Ideal standards (perfection standards): developed under the
assumption that no obstacles to the production process will be
encountered.
Attainable Standards: developed under the assumption that there will
be occasional problems in the production process.
Current standards: are based on the current level of performance,
which may be inappropriate for the future, no incentive for workers
Standard costing system
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The management evaluates the performance
of a company by comparing it with some
predetermined measures
Therefore, it can be used as a process of
measuring and correcting actual performance
to ensure that the plans are properly set and
implemented
Benefits of Standard Costs
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Valuation of stock
– Assigning the standard cost to the actual output
Planning
– Use the current standards to estimate future sales volume and future costs
Controlling
– Evaluating performance by determining how efficiently the current operations
are being carried out
Motivation
– Notify the staff of the management’s expectations
Setting of selling price
Benefits of Standard Costs
Helps managers:
 In budget preparation
 Target levels of performance
 Identify performance standards
 Set sales prices
 Decrease accounting costs
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Copyright (c) 2009
Prentice Hall. All
rights reserved.
Responsibility Accounting and
Variances
1. Managers should be held responsible only
for costs they can control.
2. This is also true in the area of variance
analysis.
3. A purchasing agent may be held
responsible for direct material price
variances, but certainly not direct material
quantity (usage) variances.
Variance analysis
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A variance is the difference between the
standards and the actual performance
When the actual results are better than the
expected results, there will be a favourable
variance (F)
If the actual results are worse than the
expected results, there will be an adverse
variance (A)
Materials cost variance
Material Price variance
Material Usage variance
Labour cost variance
Labour rate
variance
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Labour Efficiency
variance
Cost variance
•Cost variance = Price variance + Quantity variance
Cost variance is the difference between the standard cost and the
Actual cost
•Price variance = (standard price – actual price)*Actual quantity
A price variance reflects the extent of the profit change
resulting from the change in activity level
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•Quantity variance = (standard quantity – actual quantity)*
standard cost
A quantity variance reflects the extent of the profit change
resulting from the change in activity level
Three types of cost variance
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Material cost variance
Labour cost variance
Variable overheads variance
Material cost variance
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Material price variance
= (standard price – actual price)*actual quantity
MPV=(SP-AP)AM
SP= standard price per unit of direct material.
AP = actual price per unit of material
AM = actual quantity of material purchased
Material usage variance
= (Standard materials – actual materials)* standard price
= (Standard quantity of materials for actual production – actual quantity of materials
production) * standard price
MUV=(SM-AM)SP
SM= Standard quantity of materials
Total Material cost varince=MPV+MUV
Causes of Material Variances
Materials price variance – factors that affect the price paid for raw
materials include the availability of quantity and cash discounts, the quality of
the materials requested, and the delivery method used. To the extent that
these factors are considered in setting the price standard, the purchasing
department is responsible
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Materials usage variance – if the variance is due to inexperienced workers,
faulty machinery, or carelessness, the production department is responsible.
Labour cost variance
Labour rate variance
= (standard rate – actual rate)*actual hours
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LRV=(SR-AR)AH
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Labour efficiency variance
= (standard Hours – actual Hours)*standard Rate
= Standard hours for actual production – actual hours used) * standard rate
 LEV=(SH-AH)SP
 Total Lobour cost variance=LRV +LEV
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AH = actual number of hours worked.
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SH = standard number of hours worked.
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SR = standard labor wage rate.
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Causes of Labor Variances
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Labor rate variance – usually results from two factors: (1)
paying workers higher wages than expected, and (2)
misallocation of workers. The manager who authorized the
wage increase is responsible for the higher wages. The
production department generally is responsible variances
resulting from misallocation of the workforce.
Labor efficiency variances - relates to the efficiency
of workers. The cause of a quantity variance generally can be
traced to the production department.
Static vs. Flexible Budgets
Static Budget
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Flexible Budget
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Prepared for only one
level of sales volume
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Prepared for several
different volume levels
within a relevant range
Separates fixed and
variable costs
Variance = difference between actual and budget
Favorable – actual amount increases income
Unfavorable – actual amount decreases income
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Copyright (c) 2009
Prentice Hall. All
rights reserved.
Sales variance
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Actual
contribution
Budgeted contribution
(Standard margin * Actual
Volume)
Sales margin price variance
Budgeted
contribution
(Standard margin*
Standard volume)
Sales margin volume variance
Total sales margin variance
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Sales variance
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Total sales variance
= Total budgeted sales actual-Total actual sales
TSV=SPV + SVV
1.1. Sales price variance
=(standard selling price-actual selling price)*Actual quantity of sales
2. SPV=(SSP-ASP)AQS
2. Sales volume variance
=(Standard quantity of sales – Actual quantity of sales)*Standard selling price
1.SVV= (SQS –AQS)*SSP
Fixed overhead variance
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Actual FO
Budgeted FO
FO expenditure variance/
FO spending variance
FO volume variance
Total FO variance
(under-/over- absorbed)
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Absorbed VO
(SP* standard
hours for actual
output
Fixed overhead variance
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Fixed overheads variance
= Fixed overheads absorbed – Actual fixed overheads
incurred
Fixed overheads expenditure variance
Budgeted fixed overheads – Budgeted overheads
absorbed
Fixed overheads volume variance
= Absorbed fixed overheads – Budgeted overheads
absorbed
Profit reconciliation statement
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Profit reconciliation statement
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Profit reconciliation statement is used to sum
up all variances
It can help the top management to explain the
major reasons for the difference between
budgeted and actual profits
The sales margin variance and fixed
overheads variance are different between
absorption and marginal costing system
Marginal costing
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Profit Reconciliation Statement
$
$
Budgeted profit
Sales variances
Sales margin price
8000 F
Sales margin volume 3400 A
4600 F
Materials cost variance
Materials price
480 A
Material usage
2400 F
1920 F
Labour cost variance
Labour rate
3200 A
Labour efficiency
4000 A
7200 A
Variable overhead variance
VO Expenditure
900 F
VO Efficiency
1600 A
700 A
Fixed overhead expenditure variance
400F
Actual profit
$
14000
980 A
13020
Reasons for variances
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Material price variance
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Price changes in market conditions
Change in the efficiency of purchasing dept. to
obtain good terms from suppliers
Purchase of different grades or wrong types of
materials
Reasons for variances
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Materials usage variance
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More effective use of materials/ wastage arising
from the efficient production process
Purchase of different grade or wrong types of
materials
Wastage by the staff
Change in production methods
Reasons for variances
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Labour rate variance
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Non-controllable market changes in the basic wage
rate
Use of higher/lower grade of workers
Unexpected overtime allowance paid
Reasons for variances
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Labour efficiency variance
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Purchase of different grade or wrong types of materials
Breakdown of machinery
High/low labour turnover
Changes in production method
Introduction of new machinery
Assignment wrong type of worker to work
Adequacy of supervision
Changes in working condition
Change in motivation methods
Reasons for variances
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Variable overheads expenditure variance
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It may be caused by the non-controllable change in the price
level of indirect wages or utility rates since the predetermined
rate is set
It is meaningless to interpret this kind of variance on its own.
One should look various components of the fixed overheads
Reasons for variances
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Variable overheads efficiency variance
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Both the variable overheads and direct labour cost
vary with the direct labour hours worked
Reasons for variances
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Fixed overheads expenditure
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It is meaningless to interpret this kind of variance on
its own.
It may be caused by the change in the price levels
of rent, rates and other fixed expenses
Reasons for variances
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Fixed overhead volume variance
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When the level of activity is higher than the
budgeted level, there is a favourable variance
Reasons for variances
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Sales margin price variance
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Change in the pricing strategies of the company
Response to the change of pricing policies of its
competitors
Higher profit margin with growing demand for the
product
Lower profit margin for simulating sales
Reasons for variances
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Sales margin volume variance
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Change in prices and demand
Change in the market share of its competitiors