Management Accounting & Decisions II

N12401

Lecture 3
Standard Costing: Additional Variances
by Hung Woan-Ting

Learning Objectives
1.

To understand and be able to quantify the

analysis for fixed overhead costs

2.

To appreciate different costing principles within a

standard costing environment

3.

To appreciate how changes in anticipated

environment should be reflected in variances
analysis

0.0 Revisiting the concept

0.0 Revisiting the concept

Effective cost control Price & Quantity
Chicken roll (P*Q)
Egg (P*Q)
Cheese (P*Q)
McMuffin (P*Q)

Meal (P*Q)
Laundry (P*Q)
Care time (P*Q)
Lab test (P*Q)
Medicine (P*Q)

Engine (P*Q)
Valve (P*Q)
Fuel Tank (P*Q)
Brake (P*Q)
Headlamp (P*Q)
Wheel (P*Q)
Audio (P*Q)

Standard
Cost Card

Standard
Cost Card

Standard
Cost Card

Manufacturing costs
Cost competiveness
Assembly line defect rate

0.1 Revisiting Cost Classifications

Purpose:
Cost analysis
for better
management

Material Costs

Labour Costs

Other Manufacturing Costs

Total
Costs

PRODUCT

Non-manufacturing costs
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0.2 Cost Analysis for Management

Reflecting cost behaviour in cost analysis

The flexible budgeting approach

0.3 Cost Analysis for Management

DIRECT
LABOUR
COST
DIRECT
MATERIAL
COST

FIXED
OH
VARIABLE
OH

VARIABLE
COSTS

FIXED
COSTS
ANALYSIS

ANALYSIS

1.0 Determining Fixed MOH Variances

Example
Budgeted output 1000 units
Budgeted Fixed MOH 3500
All OHs allocated on direct labour hour basis

Std Rate

= __ per hr

Std direct labour hour = 7

Actual output 900 units. Actual Fixed MOH 2800

Actual hours worked 6100

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1.1 Expenditure Variance

Expected to be constant within the relevant range of
activities and in the short term
What happens when spending differs from plan?
Fixed MOH Expenditure Variance

Budgeted Fixed MOH Actual Fixed MOH

1.1 Expenditure Variance

Fixed MOH Expenditure Variance
= Budgeted Fixed MOH Actual Fixed MOH
= 3500 - 2800
= 700 (

Managerial
implications

??
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1.2 Volume Variance

Fixed MOH may be allocated

(absorbed) into
(external financial reporting regulation; pricing; etc.)

products

Standard costing system records (absorbs) budgeted

fixed MOH via pre-determined rate (budgeted labour
hours; machine hours; etc.)

What happens when actual volume differs from plan?

Fixed MOH Volume Variance

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1.2 Volume Variances

Fixed MOH Volume variance
= (Actual Vol.Budgeted Vol.) @ Std Rate
= (Actual Vol.*Std Rate)(Budgeted Vol.*Std Rate)
= Absorbed Fixed MOH Budgeted Fixed MOH

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1.2 Volume Variances

[Refer Slide #8]

Fixed MOH Volume variance

= Absorbed Fixed MOH Budgeted Fixed MOH
= 900units*7h*0.5p.h. 1000units*7h*0.5p.h.
= 3150 3500

= 350 (

Managerial
implications

??
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2.0 Different Costing Principles revisit

Product Cost

Product Cost

Variable Costing vs. Absorption Costing

Purposes (internal vs. external)

Stock valuation
Timing of release of Fixed MOH

14

2.1 Standard Variable Costing System

Stock @ Standard Variable Manufacturing Costs
Budgeted Fixed MOH expensed off as incurred

Product Cost

Analysis of cost variances reflect cost structure

Direct Material
Direct Labour

Variable MOH
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2.2 Standard Absorption Costing System

Stock @ Standard Total Manufacturing Costs
Budgeted Fixed MOH allocated to products

Product Cost

Analysis of cost variances reflect cost structure

Direct Material

Direct Labour
Variable MOH
Fixed MOH
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2.3 Volume Variance [up close]

Making more sense out of Volume Variance

for better business management?

Example:
How is the current use of capacity?
Any idle capacity?
$ ?
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2.3 Volume Variance [up close]

Static
Budget

Flexible
Budget

BV

AV

AV

*SH
@ SR

*AH
@ SR

* SH
@ SR

Variance due to
capacity usage

Actual
Results

(Actual hours Budget hour) *Std Rate

= (6100 1000*7h) *0.5p.h.
= 450 ( )
= Volume Capacity Variance

Managerial
implications

??

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2.3 Volume Variance [up close]

Static
Budget

Flexible
Budget

BV

AV

AV

*SH
@ SR

*AH
@ SR

* SH
@ SR

Variance due to
labour efficiency
Managerial
implications

??

Actual
Results

(Allowed hours Actual hour)*Std Rate

= (900*7h 6100)* 0.5p.h.
= 100 ( )
= Volume Efficiency Variance

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3.0 Changes in Anticipated Environment

Actual performances compared with planned
performance (standard set based on anticipated environment)

Ex-post analysis
approach
~ reflect changes in anticipated
environment (Demski, 1977)

Total Variances
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3.1 Changes in Anticipated Environment

Ex-post analysis approach
Original standard

Ex-post standard

Planning
Variance

(given the benefit of hindsight)

Operating
Variance

Actual outcome

Managerial
implications

??
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3.2 Ex-post Variance Analysis - Example

Budgeted output from
production 1,000 units.
Std cost for Material A:
3kg @ 2/kg.
After the budget was set, the
local government announced a
sharp increase in fuel price and
the cost of Mat A was raised
to 2.30/kg for the near
foreseeable future.
Actual output 900 units.

Cost of Mat A actually incurred:

2.20/kg for 2,800kg.

Planning variances
Material Price Planning variance
= (__- __)*3kg*1000units
= __ (_)

Operational variances
Mat Price Variance
= (__- __)*2800kg
= __ (_)
Mat Usage Variance
= (3kg*900units 2800kg)* __
= __ (_)
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Readings
GNBCY Ch12

D Ch17, Ch18
Cheatham & Cheatham (1996) Re-designing Cost
Systems: Is Standard Costing Obsolete?, Accounting
Horizons, Dec, Vol 10(4): 23-31
Johnsen & Sopariwala (2000) Standard Costing is Alive
and Well at Parker Brass, Management Accounting
Quarterly, Winter, Vol 1(2): 1-9.
KPMG (2010) Standard costing: Insights from leading
companies, in association with CIMA.
End of Lecture
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Exe.
Seminar 1 preparation
Attempt the Questions Set
(at the back of this handout)

Indicative solutions in Moodle.

Please refer before attending seminar
Seminar starts next week!
(Details in Module Outline Document, p6)

Remember to go by your registered grouping

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