ACCA F5: Chapter 10 - Standard Costing and Basic Variances

Introduction A standard cost for a product or service is a predetermined unit cost set under specified working conditions.

Introduction - control: the standard cost can be compared to the actual costs and any differences investigated. - performance measurement: any differences between the standard and the actual cost can be used as a basis for assessing the performance of cost centre managers. - to value inventories: an alternative to methods such as LIFO and FIFO - to simplify accounting: there is only one cost, the standard

Introduction - mass production of homogenous products or repetitive assembly work. The large scale repetition of production allows the average usage of resources to be determined. - Standard costing is less suited to organisations that produce non-homogenous products or where the level of human intervention is high.

Introduction A standard cost is based on the expected price and usage of material, labour and overheads

Introduction - They are based upon efficient (but not perfect) operating conditions - The standard will include allowances for normal material losses, realistic allowances for fatigue, machine breakdowns, etc - These are the most frequently encountered type of standard - These standards may motivate employees to work harder since they provide a realistic but challenging target

Introduction - These are long-term standards which remain unchanged over a period of years. - Their sole use is to show trends over time for such items as material prices, labour rates and efficiency and the effect of changing methods. - They cannot be used to highlight current efficiency - These standards may demotivate employees if, over time, they become too easy to achieve and, as a result, employees may feel bored and unchallenged

Introduction - These are standards based on current working conditions - They are useful when current conditions are abnormal and any other standard would provide meaningless information - The disadvantage is that they do not attempt to motivate employees to improve upon current working conditions and, as a result, employees may feel unchallenged

Introduction - These are based upon perfect operating conditions - This means that there is no wastage or scrap, no breakdowns, no stoppages or idle time; in short, no inefficiencies - In their search for perfect quality, Japanese companies use ideal standards for pinpointing areas where close examination may result in large cost savings - Ideal standards may have an adverse motivational impact since employees may feel that the standard is impossible to achieve

Introduction 1) This is prepared before the beginning of a budget period for a single level of activity. 2) This is prepared before the beginning of a budget period. It is prepared for a number of levels of activity and requires the analysis of costs between fixed and variable elements. 3) This is prepared at the end of the budget period. It provides a more meaningful estimate of costs and revenues and is based on the actual level of output.

Introduction A cost is controllable if a manager is responsible for it being incurred or is able to authorise the expenditure. A manager should only be evaluated on the costs over which they have control.

1 Revision of basic variance analysis The process by which the total difference between standard and actual results is analysed.

1 Revision of basic variance analysis Reconciling actual profit to budgeted profit, under marginal costing or under absorption costing principles.

1 Revision of basic variance analysis 1) Variance in the volume of sales and the selling price from budget to actual performance. (When looking at each, assume that this element was the only thing to go wrong) 2) Did we sell more or less than budgeted?Find the difference between original budgeted sales in units and actual number of units sold. (If more, fav, less adv). Multiply by the standard profit (abs) or contribution (marg) 3) Did we sell for more/less than the budgeted sales price?Compare the actual sales, at the actual sales price to actual sales at the std selling price.

1 Revision of basic variance analysis Unexpected price increase due to: - higher than anticipated customer demand - lower than anticipated demand for competitor's products - an improvement in quality or performance

1 Revision of basic variance analysis Unexpected price decrease due to - lower than anticipated customer demand - higher than anticipated demand for competitor's products - a reduction in quality or performance