What is standard costing?
A standard cost for a product or service is a predetermined unit cost set under specified working conditions
What is the main purposes of standard costs? (5)
Control, planning, performance measurement, inventory calculation and accounting simplification
In terms of standard costs, what is the purpose of control?
The standard cost can be compared to the actual costs and any differences investigated
In terms of standard costs, what is the purpose of planning?
Standard costing can help with budgeting
In terms of standard costs, what is the purpose of 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.
In terms of standard costs, what is the purpose of inventory valulation?
An alternative to methods such as LIFO and FIFO
In terms of standard costs, what is the purpose of accounting simplification?
There is only one cost, the standard.
What organisation is standard costing most suited to?
Mass production of homogenous (similar products) products and repetitive assembly work
What organisations is standard costing not suited to?
That produce products that are not homogeneous or where the level of human intervention is high
What are the four different types of standard?
Attainable standards
Basic standards
Current standards
Ideal standards
What are attainable standards?
They are based upon efficient (but not perfect) operating conditions
What will attainable standards include allowances for?
Normal material losses, realistic allowances for fatigue, machine breakdowns ect
What is the most frequently encountered type of standard?
Attainable standards
What do attainable standards do?
Motivate employees to work harder since they provide a realistic but challenging target
What are basic standards?
Long term standards which remain unchanged over a period of years
What is the sole use of basic standards?
Their sole use is to show trends over time for such items such as material prices, labour rates and efficiency and the effect of changing methods
What can’t basic standards be used for?
To highlight current efficiency
What can basic standards do to employees?
Demotivate employees, if over time, they become too easy to achieve and, as a result, employees may feel bored and unchallenged
What is current working standards?
These are standards based on current working conditions
What are current standards useful for?
When current conditions are abnormal and any other standard would provide meaningless information
What are the disadvantages of current standards?
The disadvantage is that they do not attempt to motivate employees to improve upon current working conditions and, as a result, employees make unchallenged
What are ideal standards and what does this mean?
Ideal standards are based upon perfect operating conditions. This means there is no wastage of scrap, no breakdowns, no idle time; In short, no inefficiencies
What do Japanese company use ideal standards for?
In search for pinpointing areas where close examination may result in large cost saving.
What is the effect on employees of ideal standards?
AN adverse motivational impact since employees may feel that the standard is impossible to achieve
What do attainable standard set allowance for? (2)
Ideal time and wastage
What is a fixed budget?
This is prepared before the beginning of a budget period for single level of activity
What is a flexible budget?
This is also prepared before the beginning of a budget period. It is the prepared for a number of levels of activity and requires analysis of costs between fixed and variable elements.
What is a flexed budget?
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
What does budgetary control compare?
Actual results and expected results
What is the difference called between budgetary control?
A variance
What is a direct/prime cost?
Materials and labour
What is an indirect/production overheads cost?
Factory rent, supervisor’s salary, electricity, depreciation etc
What is a nonproduction cost?
selling and distribution costs and admin costs
Under absolution costing, how is this made up?
Production costs (direct, indirect costs)
What is the aim of absorption costing?
To determine a full production cost per unit
What is the prime cost?
All the direct costs
What is the standard full production costs made up of (absorption costing)?
Variable and fixed production overheads
What is the formula for overhead absorption rate?
Production overhead/activity level
What is the formula for pre-determined overhead absorption rate?
Budgeted overhead/budgeted volume
What does ‘budgeted volume’ mean in terms of the predetermined overhead absorption rate?
total units, direct labour hours, machine hours ect
How do you calculate if a product has been over or under absorbed?
OAR X actual activity. The difference between this and the actual is how much has been over or under absorbed
What is marginal costing?
The accounting system in which variable costs are charged to cost units and fixed costs of the period are written off in full against the aggregate contribution.
What is the marginal cost?
The marginal cost is the extra cost arising as a result of making or selling one more unit of a product, or is the saving in cost as a result of making or selling one more unit
What is contribution?
The difference between sales value and the variable costs of sales
How can contribution be expressed?
Per unit or total
What is contribution short for?
Contribution to fixed costs and profits
What does contribution varies with?
Direct proportion to the volume of units sold
What does marginal costing allow a firm to see?
How a firm’s cash flow and profits are affected by changes in sales volumes.
What are advantages of absorption costing? (3)
- It includes an element of fixed overheads in inventory values, in accordance with IAS 2.
- Analysing under/over absorption of overheads is a useful exercise in controlling costs of an organisation.
- In small organisations, absorbing overheads into the cost of products is the best way of estimating job costs and products on jobs
What are disadvantages of absorption costing? (2)
It is more complex to operate than marginal costing, and it does not provide any useful information in decision making
What are advantages of marginal costing (5)
- Contribution per unit is consistent.
- There is no under or over absorption of overheads which means no adjustment needs to be made to the income statement.
- Fixed costs are a period cost and are charged in full to the period under consideration.
- Useful in decision making
- Simple to operate
What are the main disadvantages of marginal costing?
Closing inventory is not valued in accordance with IAS 2 principles, and that fixed production overheads are not shared out between units of production, but written off in full instead.
