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Standard costing
Standard costing is a system where preset standards are used in the estimation of costs. This can provide more detailed variance analysis information for managers. It involves the setting of detailed predetermined standard product costs, so that a business can accurately estimate, based on the standards set, what the cost of a product or service should be. Comparing this standard to the actual cost of a product enhances cost control.
Standard cost
Benchmark measurement of resource usage or revenue or profit generation, set in defined conditions.
Standard cost as defined by CIMA Official Terminology
A standard cost is a predetermined calculation of what a cost should be under specified working conditions. Setting a standard involves the establishment of two components for each cost type, the volume required and the unit cost attached to that volume.
Variance analysis
Evaluation of performance by a means of variances, whose timely reporting should maximise the opportunity for managerial action
Variance analysis as defined by CIMA Official Terminology
Overhead variances
The variable overhead variance of 2,000 adverse could be further analysed into its two component parts:
Rate: Caused by the difference between the actual variable overhead rate and the budgeted rate. Efficiency: Caused by the difference between the actual variable overhead usage and the standard usage allowed in the budget.
The fixed overhead variance of 3,000 adverse Standards are not normally set for fixed overhead because they are a product of time and not of efficiency or production.
Summary of variances
b) Prepare a worksheet showing the fixed budget, flexible budget, actual results and variance for the period
c) Further analyse the materials, labour and overhead variances into the following sub-variances
c) Further analyse the materials, labour and overhead variances into the following sub-variances
c) Further analyse the materials, labour and overhead variances into the following sub-variances
c) Further analyse the materials, labour and overhead variances into the following sub-variances
c) Further analyse the materials, labour and overhead variances into the following sub-variances
c) Further analyse the materials, labour and overhead variances into the following sub-variances
c) Further analyse the materials, labour and overhead variances into the following sub-variances
d) Prepare a statement reconciling the budgeted net profit with actual net profit
Interpretation of Variances
Materials Price
1543 F
Materials usage
40 A
Possible reasons Availing of quantity discounts General reduction in price of raw materials
Possible reasons Purchase of poor quality materials Quality/age of equipment used leading to greater waste Poor labour efficiency leading to greater waste Accuracy of standard Theft
Interpretation of Variances
Labour rate
630 A
Possible reasons Unexpected wage deal that applied retrospectively. Out of date standard. Increase in overtime. Increase in labour taxes.
Labour efficiency
500 A
Possible reasons
Skill and training of staff. Motivational factors such as working conditions, pay, career prospects. Quality of materials. Quality and age of equipment. Accuracy of standard.
Interpretation of Variances
Variable O/H rate 293F Possible reasons
Standard not reviewed regularly Fall in the rate
Materials Usage
Labour Rate
Labour Efficiency
Interrelationship of variances
The purchase of cheap and inferior materials will lead to a favourable materials price variance but can cause an adverse materials usage variance, due to increased waste associated with the inferior materials. It can also lead to an adverse labour efficiency variance as employees may require added time as a result of the inferior materials. Cheaper labour costs will lead to a favourable labour rate variance but can cause an adverse labour efficiency variance due to the requirement for training and the effects of the learning curve. This can also cause an adverse materials usage variance. Adverse labour efficiency variances can also create adverse variable overhead efficiency variances Not reinvesting in equipment can create favourable capital spending variances, however this can lead to adverse variances in materials usage, labour efficiency and variable overhead.