Standard Costing and Variance Analysis

Question 1

What is standard costing?

Answer 1

The practice of substituting the expected costs of manufacturing a product or delivering a service for the actual cost in the accounting records.

Question 2

What are the benefits of implementing a standard costing system?

Answer 2

• Improved cost control
• Useful information for planning and decision making
• Greater cost control by highlighting exceptions or variances.

Question 3

What is a standard cost card?

Answer 3

A record showing the expected cost incurred in manufacturing or delivering one unit of a product or service, detailing each component part.

Question 4

What is variance analysis?

Answer 4

The process of comparing production costs using standard costing to the actual results at the end of a budget period.

Question 5

List the four steps in the standard costing process.

Answer 5

• Identify the standard costs for a budget period
• Record the actual results for the same period
• Compare the actual results to the standards to identify detailed variances
• Investigate significant variances to improve future performance and standard setting.

Question 6

What are the three main categories of standards in standard costing?

Answer 6

• Ideal standards
• Attainable standards
• Current standards.

Question 7

Define ideal standards.

Answer 7

Standards that can only be achieved with optimal efficiency, assuming no wastage, idle time, or interruptions.

Question 8

Define attainable standards.

Answer 8

Standards using normal operating conditions as a benchmark, recognizing some inefficiencies.

Question 9

Define current standards.

Answer 9

Standards set using current operating conditions and prices, useful in volatile economic environments.

Question 10

What is the difference between marginal and absorption costing in standard cost cards?

Answer 10

• Marginal costing includes only variable costs of production.
• Absorption costing includes variable costs and a proportion of fixed production overheads.

Question 11

What does a favorable variance indicate?

Answer 11

The actual profit is greater than expected.

Question 12

What does an adverse variance indicate?

Answer 12

The actual profit is lower than expected.

Question 13

What are the two main types of sales variances?

Answer 13

• Sales price variance
• Sales volume variance.

Question 14

Fill in the blank: Under marginal costing, fixed production costs are treated as _______.

Answer 14

period costs.

Question 15

True or False: Current standards aim to motivate employees to improve upon current working conditions.

Answer 15

False.

Question 16

What is the purpose of a flexed budget?

Answer 16

To adjust the budget based on the actual production and sales volume to ensure accurate comparisons.

Question 17

What does the contribution margin represent in the budgetary control statement?

Answer 17

The difference between sales revenue and total variable costs.

Question 18

What does the sales volume variance identify?

Answer 18

Difference in profit or contribution due to the difference between budgeted and actual sales volume

Question 19

Which costing method uses standard contribution per unit for sales volume variance?

Answer 19

Marginal costing

Question 20

How is the standard contribution per unit calculated?

Answer 20

Standard selling price minus standard variable cost per unit

Question 21

What is the formula for calculating sales volume variance?

Answer 21

Actual units sold × Standard contribution/profit per unit -
Budgeted units sold × Standard contribution/profit per unit

Question 22

What is the total material cost variance?

Answer 22

Difference between actual material cost incurred and standard material cost expected

Question 23

What are the two components of the total material cost variance?

Answer 23

• Material price variance (PPV)
• Material usage variance

Question 24

What does the material price variance measure?

Answer 24

Difference between actual cost of material purchased and expected cost

Question 25

How is the material price variance calculated?

Answer 25

Actual quantity purchased × Actual price per metre - Actual quantity purchased × Standard price per metre

Question 26

What does the material usage variance compare?

Answer 26

Actual material used in production vs. standard quantity expected for production

Question 27

What is the calculation for material usage variance?

Answer 27

Actual quantity used × Standard price per metre - Standard quantity for actual production × Standard price per metre

Question 28

What does the total labour cost variance represent?

Answer 28

Difference between actual labour cost incurred and standard labour cost expected

Question 29

What are the two components of the total labour cost variance?

Answer 29

* Labour rate variance * Labour efficiency variance

Question 30

How is the labour rate variance calculated?

Answer 30

Actual hours worked * actual rate per hour - Actual hours paid * standard rate per hour

Question 31

What does the labour rate variance measure?

Answer 31

The difference between the total actual cost of labour and the expected cost based on actual hours paid ## Footnote It is likely controllable by the personnel department.

Question 32

How is the labour rate variance calculated?

Answer 32

Total actual labour cost - Total expected labour cost ## Footnote Total actual labour cost = Actual hours paid × Actual rate per hour; Total expected labour cost = Actual hours paid × Standard rate per hour.

Question 33

What might cause an adverse labour rate variance?

Answer 33

Increase in pay rate, possibly due to overtime or skilled workforce recruitment

Question 34

What does the labour efficiency variance measure?

Answer 34

How effectively the workforce has utilized time to produce output

Question 35

How is the labour efficiency variance calculated?

Answer 35

Actual hours worked × Standard rate per hour - Standard hours for actual production × Standard rate per hour

Question 36

What is idle time in the context of labour variances?

Answer 36

Periods when employees are paid but not working

Question 37

What is the impact of idle time on variance calculations?

Answer 37

It creates an adverse variance and is designated separately before calculating efficiency variance

Question 38

What is the formula for calculating the labour idle time variance?

Answer 38

Actual hours paid × Standard rate per hour - Actual hours worked × Standard rate per hour

Question 39

How is the variable overhead expenditure variance calculated?

Answer 39

Actual hours worked × Actual rate per hour - Actual hours worked × Standard rate per hour

Question 40

What does the variable overhead efficiency variance measure?

Answer 40

The efficiency of the workforce in relation to variable overhead costs

Question 41

How is the variable overhead efficiency variance calculated?

Answer 41

Actual hours worked × Standard overhead rate per hour - Standard hours for actual production × Standard overhead rate per hour

Question 42

What is the purpose of variance summary in financial reporting?

Answer 42

To reconcile budgeted contribution and actual contribution, highlighting significant variances

Question 43

What is the formula for calculating variable overhead expenditure variance?

Answer 43

Actual hours worked * actual rate per hour - Actual hours worked * standard rate per hour ## Footnote This formula helps in assessing the difference between expected and actual variable overhead costs.

Question 44

What is the purpose of the reconciliation between budgeted contribution and actual contribution?

Answer 44

To show each detailed variance calculated so that management can determine the most significant variances that require further investigation and corrective action.

Question 45

Fill in the blank: A standard costing approach relies on a consistent and repetitive _______.

Answer 45

production process

Question 46

What does the closing inventory adjustment represent?

Answer 46

Overspent inventory not accounted for in the material usage variance

Question 47

What is the effect of buying more inventory than needed?

Answer 47

Increases actual cost compared with budgeted expectation, reducing actual contribution.

Question 48

What is the purpose of variance analysis in management?

Answer 48

To identify deviations from standards and undertake actions to improve future performance.