Standard Costing

Question 1

What is the purpose of standard costing

Answer 1

Standard costing sets the planned costs for materials, labour and overheads in a period of time

Question 2

Give 3 advantages of standard costing

Answer 2

• to help with decision-making e.g. with the selling price of a product
• to assist in planning e.g. to plan the quantity and cost of resources needed for production
• as a means of controlling costs - standard costs are compared with actual costs and variances calculated so that action can be taken by the responsible manager or department when appropriate
• the detailed study of current production techniques that is needed to set up a standard costing system may reveal hidden inefficiencies and unnecessary expenditure
• the close monitoring of costs should increase the awareness of cost consciousness of both employees and management, and encourage them to achieve the standard costs which have been set

Question 3

Give 2 disadvantages of standard costing

Answer 3

• the standard cost of making a product or providing a service may be set incorrectly = reduced sales bc the product is priced too high, or to increased sales which are being sold at too low a price to make a profit
• prices of materials & labour may fluctuate frequently = standard cost quickly goes out-of-date
• the use of variance analysis may be more complex than a variance from the standard cost, e.g. the use of better quality materials might lead to increased output and lower labour costs

Question 4

How do you calculate sales volume sub-variance

Answer 4

Sp x (Aq - Sq)

Question 5

How do you calculate sales price sub-variance

Answer 5

Aq x (Ap - Sp)

Question 6

How do you calculate material price variance

Answer 6

Aq x (Sp - Ap)

Question 7

How do you calculate material usage variance

Answer 7

Sp x (Sq - Aq)

Question 8

How do you calculate labour rate variance

Answer 8

Aq x (Sp - Ap)

Question 9

How do you calculate labour efficiency variance

Answer 9

Sp x (Sq - Aq)

Question 10

How do you flex a budget

Answer 10

(Actual units ÷ Budgeted units) x budgeted usage (hours)

Question 11

What ways can you link/ interpret materials variances

Answer 11

• use of cheaper material of lower quality may result in a favourable price variance, but may lead to an adverse usage variance as the material may be more difficult to work with and have higher wastage
• use of more expensive material of higher quality may result in an adverse price variance, but may lead to a favourable usage variance because the material is easier to work with and there is less wastage
• price variance = caused by a price rise or price fall in the cost of materials
• usage variance, caused by a change in the amount of materials used

Question 12

What ways can you link/ interpret labour variances

Answer 12

• rate variance = caused by a rise in pay rates, or the need to use a diff grade of employee (at a higher or lower wage rate)
• efficiency variance resulting in more/ fewer hours worked
• use of a lower grade of staff may result in a favourable labour rate variance, but may lead to an adverse labour efficiency variance as they will be less skilled at carrying out the work
• use of a higher grade of staff may result in an adverse labour rate variance, but may lead to a favourable labour efficiency variance as they will be more skilled = get the work done more quickly & to a higher standard

Question 13

What ways can you link/ interpret sales variances

Answer 13

• lower selling price may result in an adverse sales price variance, but may lead to a favourable sales volume variance as more of the product is sold
• a higher selling price may result in a favourable sales price variance, but may lead to an adverse sales volume variance as customers switch to cheaper products

Question 14

What is variance analysis

Answer 14

Financial management tool used to assess the difference between the standard cost/expected revenue and the actual cost/revenue