standard costing 2013-14.doc

8/9/2019 STANDARD COSTING 2013-14.doc

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AL WADI INTERNATIONAL SCHOOL STANDARD COSTING GRADE 12NOTES

STANDARD COSTING (NOTES) -

A Standard cost is a planned or targetcost production. It is usually expressed interms of the cost per unit of output. Standard costs are not the same as budgetedcosts. Budgeted costs relate to a business as a whole, or to a department within abusiness. Standard costs relate unit of output. For example, the budgeted cost of a

production department might be $!!"!!!#This figure might be calculated on the basisof a planned output of !"!!! un%tsand a standard cost of $& 'er un%t# Standard costingis a management technique that inoles comparing standard costs with actual costs.The difference between standard and actual costs is !nown as a ar%ance# "arianceanalysis is used to examine the differences. #hen actual costs are significantly differentfrom standard costs, it means that the production process is not going to plan. Identifyingariances alerts managers to this problem, allowing them to ta!e correctie action.

T'es o* Standards

In addition to standard costs, which are expressed in monetary terms, businessessometimes use other $standard% measures. For example, a business might decide that astandard performance for labour cost of $!! per unit. #hen setting standards,managers need to be aware of two requirements. First, standards must proide a meansof controlling production by establishing planned outcomes. Second, standards musthae the effect of motiating staff rather than demotiating them. T+reeapproaches tosetting standards are outlined below.

(a) Idea, standards -

&ne approach is to base standards n what can be achieed under the most faourableoperating conditions. This inoles setting standards on the assumption that all theresources used by a business will operate to their optimal efficiency. So, for example, itis assumed that'

all machines will wor! non(stop without brea!ing down)

all wor!ers will wor! to their maximum efficiency, without ta!ing unofficial brea!sor time off wor!)

#ithout any wastages.This approach and serice sometimes criticised because such standards are unrealisticand not li!ely to be attainable. Staff might therefore become frustrated and demotiated.*oweer, ideal standards can be used to identify the extent to which presentperformance falls short of the ideal. The might help management identify areas ofparticular wea!ness.

(b) Atta%nab,e Standards -

A more common approach is to base standards on what should be achieed if resourcesare used to their maximum efficiency, but also ta!ing into account $normal% leels ofdisruption and wastage. This approach accepts that machinery will need to bemaintained and might sometimes brea! down. It also accepts that some materials andother resources will be wasted and that wor!ers are li!ely to hae some idle time, i.e.periods when they are not being productie. By setting standards that are demanding yet

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realistic, employees are li!ely to be positie towards achieing targets that are set.Increasing, businesses are inoling employees in setting standards. By consulting theirwor!force on the standards that are achieable, businesses beliee that staff will hae agreater sense of $ownership%. They will therefore be better motiated in their wor!. &nthe other hand, wor!ers who hae standards imposed on them might becomedemotiated.

(c) Current Standards -

+urrent standards are based on present leels of performance, which may be quiteinappropriate for the future. They do not offer management or wor!ers any incentie toperform more efficiently. +urrent standards should only be used when present conditionsare too uncertain to enable more appropriate standards to be set.

Sett%ng cost Standards -

The process of setting costs is complex and might inole a large number of people oera lengthy period of time. The first step in the process is to gather releant information.

This can ta!e a number of forms.

The production department will proide information relating to the resources thatare needed to ma!e one unit of production. For example, it will !now the quantity ofmaterials and the number of machine and labour hours are required.

The human resources or personnel department will !now the salaries and currentwage rates that are paid to different grades of wor!er, and oercome, bonus andpiece wor! rates.

The purchasing department will be able to proide information about the cost ofmaterials and other resources such as energy, insurance and adertising.

Some businesses employ consultants to carry out a wor! study. This inolesmeasuring the amount of time it ta!es an $aerage% wor!er to perform tas!s in theproduction process.

The information gathered by the business is then used to calculate the standard cost.This can bro!en down into three components, the standard material cost, the standardlabour cost and the standard oerhead cost.

Standard ater%a, cost -

This is the cost of the direct materials that are used to ma!e a standard unit. In thiscontext, a standard unit consists of one item production. It could be a car, a boo!, a shirtor loaf of bread. In order to calculate the standard cost, it is first necessary to draw up astandard product specification. This is a list of the qualities of raw materials andcomponents required per unit. The standard material cost is found by multiplying thequantities of materials and components by their prices. The purchasing department willestimate these prices by reference to current prices, expected price increases and, insome cases, to price discounts that might be aailable.



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Standard .abour cost -

This is the cost of direct labour required to ma!e one unit of output. In order to calculatethe cost, it is necessary to draw up a standard operation sheet, which specifies thenumber of hours spent by different wor!ers to produce on unit. The standard cost is thendetermined by multiplying the number of hours by the wage rates that are paid to

wor!ers. This calculation can become complex when different grades of wor!ers, paid ondifferent wage rates are inoled in the production process.

Standard O/er+ead cost -

This is the cost of a business%s oerheads per unit of output. It can be calculated usingoerhead absorption rates. Two examples are gien.

If the basis of absorption is direct labour hours and if oerheads are absorbed at arate of -./ per direct labour hour, and 0 hours of direct labour used to produce oneunit, the standard oerhead cost is 1./ 20 x -./3.

If a cost unit oerheads absorption rate is used, the standard oerhead is calculatedby diiding the total oerheads by the total output for a gien budget period. Forexample, if total oerheads are /,/// and budgeted output is 4/,///, the standardoerhead cost is .// per unit 2/,/// 4/,///3.

In some cases, oerheads might be diided into fixed oerheads that do not change withoutput such as factory rent, and ariable oerheads that do not change with output suchas commission earned by sales personnel. It is possible, under these circumstances,that different absorption rates might be used for fixed and ariable oerheads.

To illustrate how the standard cost for a unit of output might be calculated, consider0,a1es .td, a specialist manufacturer of audio spea!ers. The following information

relates to the production costs of one standard spea!er unit.

D%rect ater%a,s $ $

#ood 4.-/Fabric 4.5/#ire 4.1/6lectric components 1./&ther materials -.5/Standard material cost 4.//

D%rect .abour cost

4. hours 7 8 per hour 9.//4. hours 7 4/ per hour 4.//-./ hours 7 per hour 4/.//Standard labour cost 0:.//

O/er+eads -



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?irect materials (9!! 1g 5 #& $#&! 'er 1g) 4-1/?irect labour (;9! +rs 5 #& $ #!! 'er +r) 0101"ariable production oerheads (2!! +rs 5 #& 5 $#!! 'er +r) -8-"ariable selling and distribution oerheads (


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The sooner that the accounting system reports a ariance, the sooner that managementcan direct its attention to the difference from the planned amounts. If we assume that acompany uses the 'er'etua, %n/entor sste8and that it carries all of its inentoryaccounts at standard cost 2including ?irect ;aterials Inentory or Stores3, then the

standard cost of a finished product is the sum of the standard costs of the inputs'

# D%rect ater%a,

D%rect .abour


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unexpected inflation might increase prices)

a fall in the exchange rate might cause the price of imported materials to increase, ora rise in the exchange rate might cause import prices to decrease)

a price war might brea! out between suppliers)

a change might be made in the product specification, either raising or lowering the

quality required)

cheaper, inferior materials might be purchased.

If an aderse materials price ariance occurs, it might be possible for a purchasingdepartment to $shop around% for less expensie sources. This could inole negotiatingdeals for bul! purchase discounts or loo!ing abroad for lower pricedimports.

b) T+e D%rect ater%a, sage ar%ance -

The materials usage ariance is calculated by subtracting the actual amount from thestandard amount of materials used and then multiplying by the standard price. >ote thatall the difference is alued at the standard price and not the actual price. The materialsusage ariance is calculated by'

ater%a,s usage /ar%ance (Standard usage (*,e5ed) Actua, usage) 5 Standard =r%ce

C D24///!g x :.1 per !g3 :5/ !g3E x 4/C 2:1// :5/3 x 4/C $!! (A)

The materials usage ariance is aderse because more materials were actually usedthan the standard amount. ;aterials usage ariances might arise for a number ofreasons'

materials might be wasted due to careless wor!, or used more efficiently if staff are

better trained)

materials might be wasted because they are of poor quality, possibly as a result of adecision to buy cheaper materials.

poor stoc! control or pilferage could cause materials to be lost)

materials might be wasted due to a machine malfunction.

If the materials usage ariance is aderse due to defectie materials, managers might tryto improe quality control systems in the purchasing department. If the problem arises inthe production department, managers might be able to reduce wastage by bettermaintenance of machinery or better training of the wor!force.

D%rect .abour Tota, ar%ance -



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The direct labour total ariance is the difference between the Flexed Budget


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loss of morale and motiation in the wor!force, possibly caused by fears of =oblosses.

To improe managers might automate the production process so that less s!illed, lowerpaid wor!ers could be used. An alternate policy could be to try and improe productiity

by rewarding wor!ers for suggestions on how output might be increased.


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Budgeted oerhead (&!! 5 $&2) -55//

(-)Actual oerhead -///

E5'end%ture /ar%ance


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unplanned sales in new mar!ets at different prices, for example sales to a newexport mar!et at a lower price than charged in the home mar!et)

new competitors in the mar!et causing prices to be lower, or rials leaing the mar!et

allowing prices to be raised)

discounts for bul! buying customers.

b) Sa,es o,u8e ar%ance -

This is calculated by subtracting the standard units of sales from the actual units of salesand multiplying the difference by the standard price. The sales olume ariance iscalculated by'

Sa,es o,u8e ar%ance (Actua, Sa,es Standard Sa,es) 5 Standard =r%ce C 244// 4///3 x 4/ C 4// x 4/ C $!!! (4)

The sales olume ariance is faourable because the actual leel of sales was higherthan expected. Sales olume ariances might be caused by'

changes in the state of the economy, so causing a rise or fall in consumer demand)

competitors% action, for example a new adertising campaign)

sudden changes in consumer tastes, perhaps caused by health $scares%)

goernment policy, such as a change in "AT, income tax or interest rate)

changes in the quality of the product)

changes in mar!eting techniques, for example a new direct mail campaign topotential customers.

The analysis of sales ariances is generally the responsibility of the sales and mar!etingdepartment within a business. If an aderse ariance occurs, a number of policies mightbe adopted. These include a greater effort in promoting the product, perhaps byadertising or by offering more generous incenties to sales staff. Sometimes a policy ofprice cuts can increase the sales olume so much that oerall reenue increases.*oweer, the success of such a policy depends to a large extent on the reaction ofcompetitors and on the perception of consumers. So, for example, price cuts would notbe successful if competitors immediately copied the policy, or if consumers felt thatcheaper prices meant a lowering of quality.

Interre,at%ons+%'s bet6een ar%ances -

There are a number of other interrelationships between ariances.



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If wages rise unexpected during a budget period, this will result in an aderse wagerate ariance. *oweer, higher wages might raise labour productiity and thereforethe labour efficiency ariance might improe.

If the purchasing department obtains cheaper materials and components, thematerials price ariance is li!ely to improe. *oweer, the materials and components

might be inferior and result in more materials being wasted. This could lead to aworsening of the materials usage ariance.

@urchasing cheaper, lower quality raw materials might hae an effect on the salesolume ariance if consumers buy fewer products.

educing the amount spent on maintaining and lubricating machinery might improethe ariable oerhead ariance. *oweer, if the machines then brea! down andwor!ers are idle, the labour efficiency ariance will worsen.

T+e Ad/antages o* Standard Cost%ng -

There are a number of adantages of using standard costing techniques.

anage8ent contro, - By calculating ariances, a business can identify areas ofwea!ness and inefficiency practice. For example, if a member of staff in thepurchasing department buys materials from more expensie suppliers, this is li!ely toshow up in the materials price ariance. #hen analysing ariances, somebusinesses use an approach called 8anage8ent b e5ce't%on. It inolesinestigating ariances only if they are exceptional. This allows some tolerance in thecontrol system. "ariances are considered acceptable proided they do not exceedcertain limits. For example, a business might only inestigate ariances that aremore than Fdifferent from the standard. This approach means that a business willnot waste time inestigating the cause of triial ariances.

Sta** 8ot%/at%on - If staff are consulted and gien responsibility for meeting theirown cost, olume and price targets, they might ta!e more pride in their wor! andhae increased =ob satisfaction when targets are met. Such approach is calledresponsibility accounting. Some businesses reward staff financiallyif ariances arefaourable. This is also li!ely to increase motiation.

0us%ness ',ann%ng - @redetermined standards can be used in budgets to calculatethe quantity of resources needed in the next budget period. If standard costs aremonitored and updated regularly, the accuracy of budgets will be improed.

Sett%ng 'r%ces - Standard costs represent the best estimates of what a productshould cost to ma!e. So, by using standard costs, estimates of costs for productsand price quotations for orders are li!ely to be more reliable.

T+e .%8%tat%ons o* Standard Cost%ng -

Standard costing system also has some limitations.



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Cost o* %8',e8entat%on - Standard costing requires a business to gather a largeamount of information. This process can be time consuming and expensie. Also,since standard costs are regularly updated, this cost is ongoing.

odern 8anage8ent - +ompanies that adopt modern approaches to businessmanagement might find that standard costing is inappropriate. For example, if a

technique such as a%Henis adopted, where employees are expected to surie forcontinuous improement, standards might become a barrier to innoation. This isbecause they might be regarded as a ceiling for employees% improement efforts.&nce the standard is reached, there is no incentie to ma!e further improements.

n*oreseen conse?uences -Standard costing is li!ely to encourage staff to suriefor faourable ariances, een if this harms a business%s oerall ob=ecties. Forexample, in order to achiee a faourable materials price ariance) a member of thepurchasing department might order some cheap, but inferior quality, materials. Thismight damage the reputation of the company and possibly lead to a fall in sales.

Ser/%ce %ndustr%es - In some serice sector businesses, staff performanceindicators cannot be easily quantified and do not necessarily relate to costs. Forexample, in relating, the quantity of customer serice proided by staff is eryimportant but it is also ery difficult to measure. Standard costing has little no role toplay in these circumstances.



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STANDARD COSTING .AOTS

aster 0udgeted anu*actur%ng Account and Inco8e State8ent

$ $Sa,es re/enue 555(-) Cost o* =roduct%on -

D%rect Ra6 ater%a, (Standard n%ts 5 Standard Jt# 5 Standard Rate) 555D%rect .abour Cost (Standard n%ts 5 Standard ours 5 Standard 7age Rate) 555D%rect E5'enses (Roa,t%es > =atents) 555=r%8e Cost 555K 4%5ed O/er+eads =roduct%on (Standard n%ts 5 Standard ours 5 Standard 7age Rate) 555KD%rect > ar%ab,e O/er+eads - =roduct%on (Standard n%ts 5 Standard ours 5 Standard 7age Rate) 555Cost o* =roduct%on 555(L) 4actor =ro*%t 555Trans*er a,ue 555Gross =ro*%t 555(-) 4%5ed O/er+eads - Ad8%n%strat%on 555

- Se,,%ng and D%str%but%on 555 ar%ab,e O/er+eads - Ad8%n%strat%on 555 - Se,,%ng and D%str%but%on 555

555Trad%ng =ro*%t 555(L) 4actor =ro*%t 5550udgeted =ro*%t 555

K NoteB I* based on D%rect .abour ours

4,e5ed 0udgeted anu*actur%ng Account and Inco8e State8ent(Actua, n%ts 5 Standard Rate)

$ $Sa,es 555(-) Cost o* =roduct%on

D%rect Ra6 ater%a, (Actua, n%ts 5 Standard Jt# 5 Standard Rate) 555D%rect .abour Cost (Actua, n%ts 5 Standard ours 5 Standard 7age Rate) 555D%rect E5'enses (Roa,t%es > =atents) 555=r%8e Cost 555K4%5ed O/er+eads - =roduct%on (Sa8e as 0udgeted) 555KD%rect > ar%ab,e O/er+eads - =roduct%on (Actua, n%ts 5 Standard ours 5 Standard 7age Rate) 555Cost o* =roduct%on 555(L) 4actor =ro*%t 555Trans*er a,ue 555Gross =ro*%t 555

(-) 4%5ed O/er+eads - Ad8%n%strat%on 555 - Se,,%ng and D%str%but%on 555 ar%ab,e O/er+eads - Ad8%n%strat%on 555 - Se,,%ng and D%str%but%on 555

555Trad%ng =ro*%t 555(L) 4actor =ro*%t 5554,e5ed =ro*%t 555



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K NoteB 4%5ed O/er+eads re8a%ns constant e/en %* out'ut ,e/e, c+anges#

Actua, anu*actur%ng and =ro*%t and .oss Account(Actua, n%ts 5 Actua, Rate)

$ $

Sa,es 555(-) Cost o* =roduct%onD%rect Ra6 ater%a, (Actua, n%ts 5 Actua, Jt# 5 Actua, Rate) 555D%rect .abour Cost (Actua, n%ts 5 Actua, ours 5 Actua, 7age Rate) 555D%rect E5'enses (Roa,t%es > =atents) 555=r%8e Cost 555K4%5ed O/er+eads - =roduct%on (Actua, n%ts 5 Actua, ours 5 Actua, 7age Rate) 555KD%rect > ar%ab,e O/er+eads - =roduct%on (Actua, n%ts 5 Actua, ours 5 Actua, 7age Rate) 555Cost o* =roduct%on 555(L) 4actor =ro*%t 555Trans*er a,ue 555Gross =ro*%t 555(-) 4%5ed O/er+eads - Ad8%n%strat%on 555 - Se,,%ng and D%str%but%on 555 ar%ab,e O/er+eads - Ad8%n%strat%on 555 - Se,,%ng and D%str%but%on 555

555Trad%ng =ro*%t 555(L) 4actor =ro*%t 555Actua, =ro*%t 555

RECONCI.IATION STATEENTS - =RO4ITS

Reconc%,%at%on State8ent o* aster 0udgeted =ro*%t 6%t+ t+e Actua, =ro*%t

$ $

aster 0udgeted =ro*%t 555

(L) 4a/ourab,e ar%ances 555

(-) Ad/erse ar%ances (555)555

Actua, =ro*%t 555

NoteB I* Juant%t =ro*%t ar%ance %s g%/en t+en do not %nc,ude Sa,es o,u8e ar%ance %n t+e Reconc%,%at%onState8ent# Sa,es o,u8e ar%ance 6ou,d on, be %nc,uded %n t+e Reconc%,%at%on State8ent %* Juant%tCost ar%ance %s re?u%red or 6+en Reconc%,%at%on o* aster 0udgeted =ro*%t 6%t+ 4,e5ed =ro*%t %s re?u%red%n a ?uest%on#

Reconc%,%at%on State8ent o* 4,e5ed =ro*%t 6%t+ t+e Actua, =ro*%t

$ $

4,e5ed =ro*%t 555(L) 4a/ourab,e ar%ances 555

(-) Ad/erse ar%ances (555)

555

Actua, =ro*%t 555

Reconc%,%at%on State8ent o* aster 0udgeted =ro*%t 6%t+ t+e 4,e5ed =ro*%t



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$ $

aster 0udgeted =ro*%t 555



555

4,e5ed =ro*%t 555

RECONCI.IATION STATEENTS - COSTS

Reconc%,%at%on State8ent o* aster 0udgeted Costs 6%t+ t+e Actua, Cost

$ $

aster 0udgeted Costs 555

(L) Ad/erse Cost ar%ances 555

(-) 4a/ourab,e Cost ar%ances (555)

555

Actua, Costs 555

NoteB On, %nc,ude t+e ar%ances occurred bet6een t+e aster 0udgeted Costs o* ater%a," .abour"ar%ab,e =roduct%on O/er+eads and 4%5ed =roduct%on O/er+eads 6%t+ t+e Actua, Costs#

Reconc%,%at%on State8ent o* 4,e5ed Costs 6%t+ t+e Actua, Costs

$ $

4,e5ed Costs 555

(L) Ad/erse ar%ances 555

(-) 4a/ourab,e ar%ances (555)

555

Actua, Costs 555

Reconc%,%at%on State8ent o* aster 0udgeted Costs 6%t+ t+e 4,e5ed Costs

$ $

aster 0udgeted Costs 555



555

4,e5ed Costs 555



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E 4OR.AE

Juant%t Cost ar%ance aster 0udgeted Costs 4,e5ed 0udgeted Costs

Juant%t =ro*%t ar%ance 4,e5ed 0udgeted =ro*%t aster 0udgeted =ro*%t

Tota, Cost ar%ance aster 0udgeted Costs Actua, Costs

Tota, Sa,es ar%ance Actua, Sa,es Re/enue 0udgeted Sa,es Re/enue

Tota, ater%a, ar%ance 4,e5ed ater%a, Cost Actua, ater%a, Cost

Tota, .abour ar%ance 4,e5ed .abour Cost Actua, .abour Cost

ar%ab,e =roduct%on O/er+eadar%ance 4,e5ed 0udgeted O Actua, O

4%5ed =roduct%on O/er+eadar%ance aster 0udgeted 4O Actua, 4O

ar%ab,e Ad8%n%strat%onO/er+ead ar%ance 4,e5ed 0udgeted O Actua, O

4%5ed Ad8%n%strat%on O/er+eadar%ance aster 0udgeted 4O Actua, 4O

ar%ab,e Se,,%ng O/er+eadar%ance 4,e5ed 0udgeted O Actua, O

4%5ed Se,,%ng O/er+ead ar%ance aster 0udgeted 4O Actua, 4O

Sub - ar%ances

Sa,es =r%ce ar%ance (Actua, Se,,%ng =r%ce Standard Se,,%ng =r%ce) 5 Actua, Sa,es (In n%ts)

Sa,es o,u8e ar%ance (Actua, Sa,es %n n%ts Standard Sa,es %n n%ts) 5 Standard Se,,%ng=r%ce#

ater%a, =r%ce ar%ance (Standard ater%a, =r%ce Actua, ater%a, =r%ce) 5 Actua, ater%a,Juant%t#

K ater%a, sage ar%ance (Standard ater%a, Jt# Actua, ater%a, Jt#) 5 Standard ater%a, =r%ce#

.abour Rate ar%ance (Standard 7age Rate Actua, 7age Rate) 5 Actua, .abour ours#



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K.abour E**%c%enc ar%ance (Standard .abour ours Actua, .abour ours) 5 Standard 7age Rate#

*NoteB ater%a, sage M .abour E**%c%enc /ar%ances 6ou,d be 4,e5ed %* t+e nu8ber o* un%ts 'roduced andso,d d%**ers#

(4,e5ed Standard ater%a, Jt# Actua, n%ts 5 Standard ater%a, Jt 'er un%t)

(4,e5ed Standard .abour ours Actua, n%ts 5 Standard .abour ours 'er un%t)

STANDARD COSTING (7ORSEET)

# 0re11%*oods .tdsBudget for the production of !!!!!pac!ets of Barleynuts for theyear ending 04 ?ecember -/44 was as follows.

$

ar%ab,e costsB?irect materials -/ ///?irect labour 4 ///@roduction expenses 8 ///

2 !!!4%5ed costsB@roduction expenses 40 ///

Administration -9 ///9< !!!

The Actua, out'ut for the year ended 04 ?ecember -/44 was !!!! pac!ets ofBarleynuts.

Re?u%redB

@repare a Flexed Budget for the @roduction 44/ /// pac!ets of Barleynuts.

4,e5ers .tdhas prepared the following budgets for the production of time loc!s.

No# o* ,oc1s 3!!! 9!!!$ $

?irect materials 4 /// -/ ///

?irect labour 08 /// :5 ///@roduction oerhead - /// 04 ///Selling and distribution -: /// -5 ///

Administration 5/ /// 5/ ///9! !!! &!: !!!

Re?u%redB@repare a Flexed Budget for the @roduction of 9/// time loc!s.



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(%) Total +ost "ariance.(%%) ?irect ;aterial "ariance.(%%%) ?irect


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(c) econcile the Actual cost incurred with the Budgeted costs, using the ariancescalculated in (b)#

(d) econcile the Actual costs with Flexed +osts.

# The following Budgeted income statement was used in the section relating to Budgets

and the Actual results at the end of the year are shown alongside'

0udgeted Actua,

Sa,es o,u8e !!! un%ts !! un%ts $ $

Sales reenue 4///// 4/59//;aterials 0//// 0-//?irect



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:# 70 E,ectron%cs ',cma!es and sells a range of electric heaters. These are mar!etedas models 7" 0 and "the current monthly Budget being !!!" :!and &!!! un%tsrespectiely. All models require manufacturing operations in t6o production departmentsas indicated in the following extract from the standard specifications.

De'art8ent Standard ,abour Standard t%8e %n 8%nutesrate 'er +our ode, 7 ode, 0 ode,

4 0./ 1- :5 08- 0.5/ 0/ 4 45

There is no opening or closing wor!(in(progress. The following Actua, datahas beenrecorded for the preious month.

4%n%s+ed out'ut (un%ts) ode, 7 ode, 0 ode, ;!! 9!! &!!

De'art8ent De'art8ent &?irect wages incurred 40,-// 8,0-

Actual hours wor!ed 0,8// 4,1//

Re?u%redB

(a) ?efine the term Standard +ourand indicate clearly how, and for what purpose, itis used.

(b) From the data gien calculate, for eac+department'

(%) The ?irect


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&erheads 4-,// (o/era,, /ar%ance $2!! ad/erse)

There was no opening stoc! of the product oember -/4/ reealed'

Budgeted Sales of chairs 45,/// at 5.// each) 6ach chair should ta!e 0 !gof chemical mixture at 4.// per !g)



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6ach chair should ta!e -/ minutes of ?irect labour time) The ?irect labour rate per hour was 8.//.

In inestigating the Actual results for the year ended 04 &ctober -/44 the followinginformation came to light'

4/// chairs were sold) ::/// !g of raw materials was used) :/// hours of direct labour time was cloc!ed

Re?u%redB

(a) +alculate the &erall Sales "ariance for the year ended 04 &ctober -/44.

(b) +alculate the &erall


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Cost 'er un%t?irect material' - litres at : per litre

?irect labour' :/ minutes at 45 per hour

@roduction oerheads' ?irect 2ariable3 8 per ?irect


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Tonta6s 'roduced &3 !!!;aterials used / /// litres+ost of materials - /9/ ///?irect labour 451 // hourso stoc!s of raw materials, wor! in progress or finished goods are held.

Re?u%redB

(%) @repare a Budgeted ;anufacturing, Trading and @rofit and et @rofit or


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(e) @repare a Financial Statement to econcile the &riginal Budgeted @rofit with theActual @rofit.

=e8bro1e .tdma!es an item of furniture !nown as a Tripos. The Standard cost perTripos is as follows.

?irect ;aterial' - !g at 1 per !g?irect


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=roduct een%buc1 Teen%buc1 De,u5%buc1?irect ;aterial (1%,os 'er un%t) 1 4/?irect


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(c) +alculate the following "ariances'

(%) Total ?irect ;aterial "ariance.(%%) Total ?irect


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(%) The Total D%rect ater%a, usage' Budget ;2!!1gsat $!per !g Actual ;3! 1gsat $!per !g

Ot+er CostsB$

epairs' @lant and machinery 4-/ Factory superisory staff salaries 5// Factory heating and lighting -:// Factory rent and rates 0//

?epreciation of plant and machinery :5// General factory expenses 5://Add%t%ona, %n*or8at%onB

(%) The company transfer finished products to the warehouses at a transfer price of!Fof 'r%8e cost#

(%%) ?uring the month of ;ay the target production leels were achieed.

Re?u%redB

(a) A manufacturing account for the month of ;ay -/44 showing clearly the

appropriate classification of costs and the manufacturing profit.

(b) A calculation of the following +ost ariances for the month of ;ay -/44'

(%) ?irect


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(d) If the ?irect et @rofits or


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(c) #hat use can the management of Borrico


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9# The directors of Re,+a8 .td plan to introduce a new product. A machine costing$&!!!will be required. It will be sold at the end of fie years for $

will be financed by a loan of 9F '#a#The following discounting factors are gien'

9F 2Fear !#;&3 !#9::ear & !#9: !":3;ear < !#:;2 !#3:ear 2 !#:et @resent "alue 2>@"3, (%%)Internal ate of

eturn 2I3 and (%%%)Accounting rate of return 2A3.

The budget for the new product is based upon the production and sale of !!!un%tseach year at $;!per unit. The standard cost of production of each unit is made up afollows'

?irect ;aterial' 2 1%,osat $#!per !ilo.

?irect


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standard costing 2013-14.doc

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