ma ch11 slides

8/3/2019 Ma Ch11 Slides

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Chapter 11

Standard Costing and VarianceAnalysis


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Standard costing

Standard costing is a system where preset standardsare used in the estimation of costs. This can providemore detailed variance analysis information formanagers.

It involves the setting of detailed predeterminedstandard product costs, so that a business canaccurately estimate, based on the standards set, whatthe cost of a product or service should be.

Comparing this standard to the actual cost of aproduct enhances cost control.


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Standard cost

Benchmark measurement of resource usageor revenue or profit generation, set in defined

conditions.Standard cost as defined by CIMA Official Terminology

A standard cost is a predetermined calculation ofwhat a cost should be under specified workingconditions.

Setting a standard involves the establishment of twocomponents for each cost type, the volume requiredand the unit cost attached to that volume.


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Variance analysis

Evaluation of performance by a means of

variances, whose timely reporting should

maximise the opportunity for managerial

actionVariance analysis as defined by CIMA Official Terminology


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Budgetary control worksheet


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Budgetary control reconciliation


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Direct materials variance

The materials variance of 3,000 adverse couldbe further analysed into its two component parts:

Materials price variance: This variance reflects the

difference between the actual purchase price ofmaterials (food) and the standard purchase price set.

Materials usage variance: This variance reflects thedifference between the actual quantity of materials

used and the quantity allowed, for the variousproducts produced.


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Direct labour variance

The direct labour variance of 3,000 favourablecould be further analysed into its two componentparts:

Labour rate variance: This is caused by differencesbetween the actual labour rate and the standard rateset in the budget.

Labour efficiency variance: This is due to the

differences between the actual time spent inproducing the products and the standard time allowedor set in the budget.


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Overhead variances

The variable overhead variance of 2,000 adverse couldbe further analysed into its two component parts:

Rate: Caused by the difference between the actual variableoverhead rate and the budgeted rate.

Efficiency: Caused by the difference between the actual variableoverhead 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.


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Summary of variances


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Key variances in standardcosting

Direct material variances


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Direct labour variances


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Variable overhead variances


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Example 11.1: Standard costing


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a) Calculate the standard variable cost of a single souvenirunit


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b) Prepare a worksheet showing the fixed budget, flexiblebudget, actual results and variance for the period


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c) Further analyse the materials, labour and overhead

variances into the following sub-variances


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d) Prepare a statement reconciling the budgeted net profit

with actual net profit


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Interpretation of Variances

Materials Price

1543 F

Possible reasons

Availing of quantity discounts

General reduction in price ofraw materials

Materials usage40 A

Possible reasons

Purchase of poor qualitymaterials

Quality/age of equipment usedleading to greater waste

Poor labour efficiency leadingto greater wasteAccuracy of standard

Theft


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Labour rate

630 A

Possible reasons

Unexpected wage deal thatapplied 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 asworking conditions, pay, career

prospects.Quality of materials.

Quality and age of equipment.

Accuracy of standard.


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Variable O/H rate

293F

Possible reasons

Standard not reviewedregularly

Fall in the rate

Variable O/H Efficiency

100 A

Possible reasons

This variance is related to thelabour efficiency variance andis influenced by the same

factors that influence thelabour efficiency variance.


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Summary of reasons for variances

MaterialsPrice

Changes in market price between the agreeing of standards andactual performance.

Poor performance by the purchasing department staff in not

achieving better value purchasing.

Unrealistic standards not regularly reviewed.

Materials

Usage

Poor quality materials purchased, leading to high levels of waste.

Faulty equipment leading to higher levels of waste.

Poor levels of labour efficiency.

Unrealistic standards not reviewed.

Labour Rate Standard not reflecting changing rates of pay.

Unanticipated increases in overtime levels.

Unanticipated increases in labour taxes (employers PRSI).

Labour

Efficiency

Poor staff motivation.

High staff turnover and hence an increase in staff training.

Poor quality materials.

Faulty equipment.

Delays in material supplies resulting in wasted labour time.


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Interrelationship of variances

The purchase of cheap and inferior materials will lead to afavourable materials price variance but can cause an adversematerials usage variance, due to increased waste associatedwith the inferior materials. It can also lead to an adverse labourefficiency variance as employees may require added time as aresult of the inferior materials.

Cheaper labour costs will lead to a favourable labour ratevariance but can cause an adverse labour efficiency variancedue to the requirement for training and the effects of the learningcurve. This can also cause an adverse materials usagevariance.Adverse labour efficiency variances can also create adverse

variable overhead efficiency variancesNot reinvesting in equipment can create favourable capitalspending variances, however this can lead to adverse variancesin materials usage, labour efficiency and variable overhead.


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The standard setting process

Crucial to a system of standard costing is the setting ofstandard costs that can be used as a benchmark againstwhich actual performance can be measured. Before asystem of standard costing can be implemented, a range

of information must be collected from variousdepartments to be analysed. Examples would include:

Purchasing costs of direct materials from the purchasingdepartment.

Wage rates and productivity agreements from the personneldepartment.

Details of overhead costs from the accounting / productiondepartment.


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Direct materials standard costsStandard price based on prices agreed and negotiated with supplier(average price the firm expects to pay during the life of the standard)Standard usage - based on product specifications allowing forunavoidable losses.

Direct labour standard costsStandard rate the wage rate as agreed in any trade union agreement.Standard efficiency the average time a direct labour employee takesto perform tasks related to a unit of production.

Variable production overhead standard costsVariable overhead rate standard based on historic information aboutvariable overhead costs.Variable overhead efficiency standard is generally either direct labourhours or direct machine hours.


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Standards should be attainable and should notassume perfect or ideal conditions.Built into any standard should be certain allowancesfor what is termed 'normal loss'.Standards, although realistic and with allowancesbuilt in, should also have a motivating affect onemployees.Employees must be involved in the standard settingprocess where it affects them, especially in terms ofthe efficiency standards.

In setting standards, management must accept andanticipate some degree of variability between actualperformance and the standard set.Standards should to be revised to ensure they arestill realistic.


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Advantages of standard costing

More accurate pricing of products based on detailed costanalysis.

Carefully planned standards are an aid to more accuratebudgeting.

The business will have a more simplified stock control system,

as all materials purchased are valued at standard cost ratherthan LIFO or FIFO value systems.

More detailed variance analysis leading to a deeper level ofinvestigation and better management decision-making.

A target of efficiency is set for employees and cost

consciousness is stimulated.The setting of standards involves determining the bestmaterials and practices, which may lead to economies.

An overall improvement in the financial control of the business.

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