standard costing Flashcards
(24 cards)
what is the standard cost of a product?
- the expected level of performance
- based on carefully predetermined amounts
- benchmarks for measuring performance
- used for planning labour, material and overhead requirements
what do managers focus on?
quantities and costs that exceed standards, a practice known as management by exception
how do we set standard costs?
- ideal standard
- practical standard
accountants, engineers, personnel administrators, operations and production managers combine efforts to set standards based on experience and expectations
what are ideal standards
- assume perfect operating conditions
- no wastage, scarp, no breakdowns, and no idea time
- very demanding and are unlikely to be accepted as achievable targets by staff
- can negatively affect employee motivation
what are practical/attainable standards
- based upon efficient but not perfect operating conditions
- takes into account factors such as fatigue, machine breakdown, and normal material losses
- strike a balance between efficiency and practicality
- motivate performance because they can be realistically achieved
- basis for product costing, cost control, inventory valuation, and estimating
- provide a reasonable benchmark for budgeting purposes
what distinguishes attainable standards from ideal standards in the context of performance evaluation of goal-setting?
direct material standards
price standards - final, delivered cost of materials, after any discounts
quantity standards - use product design specifications
direct labour standards
rate standards - use wage surveys and labour contracts
time standards - use time and motion studies for each labour operation
variable overhead standards rate standards - rate is variable portion of the predetermined overhead rate
activity standards - activity is the base used to calculate the predetermined overhead
are standards the same as budgets?
a standard is the expected cost for one unit
a budget is the expected cost for all units
what is the standard cost variance?
amount by which the actual cost differs from the standard cost
what is an unfavourable variance
when actual cost>standard cost
what is the variance analysis cycle?
prepare standard cost performance report
analyse variances
identify questions
receive explanations
take corrective actions
conduct next period’s operations
what are the standard cost variances
price variance - difference between the actual price and the standard price
quantity variance - the difference between the actual quantity and standard quantity
what is the standard price?
the amount that should have been paid for the resources acquired
what is standard quantity?
Quantity allowed for the actual good output
what is the price variance?
difference between (actual quantity x actual price) and (actual quantity x standard price)
= AQ (AP-SP)
what is quantity variance?
difference between (actual quantity x standard price) and (standard quantity x standard price)
= SP (AQ-SQ)
what is rate variance?
difference between (actual hours x actual rate) and (actual hours x standard rate)
= AH (AR-SR)
what is the efficiency variance?
difference between (actual hours x standard rate) and (standard hours x standard rate)
= SR (AH-SH)
what results in an unfavourable rate variance?
using highly paid skilled workers to perform unskilled tasks
what results in an unfavourable efficiency variance
- poorly trained workers
- poor quality materials
- poorly maintained equipment
- poor supervision of workers
what is the caution about labour efficiency variance?
another important cause of an unfavourable labour efficiency variance is insufficient demand for the output of the factory
the manager has 2 options:
- either accept an unfavourable labour efficiency variance or build inventory
what is the spending variance?
difference between (actual hours x actual rate) and (actual hours x standard rate)
= AH (AR-SR)
what is the efficiency variance?
difference between (actual hours x standard rate) and (standard hours x standard rate)
= SR (AH-SH)
what happens if variable overhead is applied on the basis of direct labour hours?
the labour efficiency and variable overhead efficiency variances will move in tandem
