Download - Ma Ch11 Slides
-
8/3/2019 Ma Ch11 Slides
1/33
Chapter 11
Standard Costing and VarianceAnalysis
-
8/3/2019 Ma Ch11 Slides
2/33
Standard costing
Standard costing is a system where preset standardsare used in the estimation of costs. This can providemore detailed variance analysis information formanagers.
It involves the setting of detailed predeterminedstandard product costs, so that a business canaccurately estimate, based on the standards set, whatthe cost of a product or service should be.
Comparing this standard to the actual cost of aproduct enhances cost control.
-
8/3/2019 Ma Ch11 Slides
3/33
Standard cost
Benchmark measurement of resource usageor revenue or profit generation, set in defined
conditions.Standard cost as defined by CIMA Official Terminology
A standard cost is a predetermined calculation ofwhat a cost should be under specified workingconditions.
Setting a standard involves the establishment of twocomponents for each cost type, the volume requiredand the unit cost attached to that volume.
-
8/3/2019 Ma Ch11 Slides
4/33
Variance analysis
Evaluation of performance by a means of
variances, whose timely reporting should
maximise the opportunity for managerial
actionVariance analysis as defined by CIMA Official Terminology
-
8/3/2019 Ma Ch11 Slides
5/33
Budgetary control worksheet
-
8/3/2019 Ma Ch11 Slides
6/33
Budgetary control reconciliation
-
8/3/2019 Ma Ch11 Slides
7/33
Direct materials variance
The materials variance of 3,000 adverse couldbe further analysed into its two component parts:
Materials price variance: This variance reflects the
difference between the actual purchase price ofmaterials (food) and the standard purchase price set.
Materials usage variance: This variance reflects thedifference between the actual quantity of materials
used and the quantity allowed, for the variousproducts produced.
-
8/3/2019 Ma Ch11 Slides
8/33
Direct labour variance
The direct labour variance of 3,000 favourablecould be further analysed into its two componentparts:
Labour rate variance: This is caused by differencesbetween the actual labour rate and the standard rateset in the budget.
Labour efficiency variance: This is due to the
differences between the actual time spent inproducing the products and the standard time allowedor set in the budget.
-
8/3/2019 Ma Ch11 Slides
9/33
Overhead variances
The variable overhead variance of 2,000 adverse couldbe further analysed into its two component parts:
Rate: Caused by the difference between the actual variableoverhead rate and the budgeted rate.
Efficiency: Caused by the difference between the actual variableoverhead usage and the standard usage allowed in the budget.
The fixed overhead variance of 3,000 adverse -Standards are not normally set for fixed overhead because they are
a product of time and not of efficiency or production.
-
8/3/2019 Ma Ch11 Slides
10/33
Summary of variances
-
8/3/2019 Ma Ch11 Slides
11/33
Key variances in standardcosting
Direct material variances
-
8/3/2019 Ma Ch11 Slides
12/33
Key variances in standardcosting
Direct labour variances
-
8/3/2019 Ma Ch11 Slides
13/33
Key variances in standardcosting
Variable overhead variances
-
8/3/2019 Ma Ch11 Slides
14/33
Example 11.1: Standard costing
-
8/3/2019 Ma Ch11 Slides
15/33
a) Calculate the standard variable cost of a single souvenirunit
-
8/3/2019 Ma Ch11 Slides
16/33
b) Prepare a worksheet showing the fixed budget, flexiblebudget, actual results and variance for the period
-
8/3/2019 Ma Ch11 Slides
17/33
c) Further analyse the materials, labour and overhead
variances into the following sub-variances
-
8/3/2019 Ma Ch11 Slides
18/33
c) Further analyse the materials, labour and overhead
variances into the following sub-variances
-
8/3/2019 Ma Ch11 Slides
19/33
c) Further analyse the materials, labour and overhead
variances into the following sub-variances
-
8/3/2019 Ma Ch11 Slides
20/33
c) Further analyse the materials, labour and overhead
variances into the following sub-variances
-
8/3/2019 Ma Ch11 Slides
21/33
c) Further analyse the materials, labour and overhead
variances into the following sub-variances
-
8/3/2019 Ma Ch11 Slides
22/33
c) Further analyse the materials, labour and overhead
variances into the following sub-variances
-
8/3/2019 Ma Ch11 Slides
23/33
c) Further analyse the materials, labour and overhead
variances into the following sub-variances
-
8/3/2019 Ma Ch11 Slides
24/33
d) Prepare a statement reconciling the budgeted net profit
with actual net profit
-
8/3/2019 Ma Ch11 Slides
25/33
Interpretation of Variances
Materials Price
1543 F
Possible reasons
Availing of quantity discounts
General reduction in price ofraw materials
Materials usage40 A
Possible reasons
Purchase of poor qualitymaterials
Quality/age of equipment usedleading to greater waste
Poor labour efficiency leadingto greater wasteAccuracy of standard
Theft
-
8/3/2019 Ma Ch11 Slides
26/33
Interpretation of Variances
Labour rate
630 A
Possible reasons
Unexpected wage deal thatapplied retrospectively.
Out of date standard.
Increase in overtime.
Increase in labour taxes.
Labour efficiency
500 A
Possible reasons
Skill and training of staff.
Motivational factors such asworking conditions, pay, career
prospects.Quality of materials.
Quality and age of equipment.
Accuracy of standard.
-
8/3/2019 Ma Ch11 Slides
27/33
Interpretation of Variances
Variable O/H rate
293F
Possible reasons
Standard not reviewedregularly
Fall in the rate
Variable O/H Efficiency
100 A
Possible reasons
This variance is related to thelabour efficiency variance andis influenced by the same
factors that influence thelabour efficiency variance.
-
8/3/2019 Ma Ch11 Slides
28/33
Summary of reasons for variances
MaterialsPrice
Changes in market price between the agreeing of standards andactual performance.
Poor performance by the purchasing department staff in not
achieving better value purchasing.
Unrealistic standards not regularly reviewed.
Materials
Usage
Poor quality materials purchased, leading to high levels of waste.
Faulty equipment leading to higher levels of waste.
Poor levels of labour efficiency.
Unrealistic standards not reviewed.
Labour Rate Standard not reflecting changing rates of pay.
Unanticipated increases in overtime levels.
Unanticipated increases in labour taxes (employers PRSI).
Labour
Efficiency
Poor staff motivation.
High staff turnover and hence an increase in staff training.
Poor quality materials.
Faulty equipment.
Delays in material supplies resulting in wasted labour time.
-
8/3/2019 Ma Ch11 Slides
29/33
Interrelationship of variances
The purchase of cheap and inferior materials will lead to afavourable materials price variance but can cause an adversematerials usage variance, due to increased waste associatedwith the inferior materials. It can also lead to an adverse labourefficiency variance as employees may require added time as aresult of the inferior materials.
Cheaper labour costs will lead to a favourable labour ratevariance but can cause an adverse labour efficiency variancedue to the requirement for training and the effects of the learningcurve. This can also cause an adverse materials usagevariance.Adverse labour efficiency variances can also create adverse
variable overhead efficiency variancesNot reinvesting in equipment can create favourable capitalspending variances, however this can lead to adverse variancesin materials usage, labour efficiency and variable overhead.
-
8/3/2019 Ma Ch11 Slides
30/33
The standard setting process
Crucial to a system of standard costing is the setting ofstandard costs that can be used as a benchmark againstwhich actual performance can be measured. Before asystem of standard costing can be implemented, a range
of information must be collected from variousdepartments to be analysed. Examples would include:
Purchasing costs of direct materials from the purchasingdepartment.
Wage rates and productivity agreements from the personneldepartment.
Details of overhead costs from the accounting / productiondepartment.
-
8/3/2019 Ma Ch11 Slides
31/33
The standard setting process
Direct materials standard costsStandard price based on prices agreed and negotiated with supplier(average price the firm expects to pay during the life of the standard)Standard usage - based on product specifications allowing forunavoidable losses.
Direct labour standard costsStandard rate the wage rate as agreed in any trade union agreement.Standard efficiency the average time a direct labour employee takesto perform tasks related to a unit of production.
Variable production overhead standard costsVariable overhead rate standard based on historic information aboutvariable overhead costs.Variable overhead efficiency standard is generally either direct labourhours or direct machine hours.
-
8/3/2019 Ma Ch11 Slides
32/33
The standard setting process
Standards should be attainable and should notassume perfect or ideal conditions.Built into any standard should be certain allowancesfor what is termed 'normal loss'.Standards, although realistic and with allowancesbuilt in, should also have a motivating affect onemployees.Employees must be involved in the standard settingprocess where it affects them, especially in terms ofthe efficiency standards.
In setting standards, management must accept andanticipate some degree of variability between actualperformance and the standard set.Standards should to be revised to ensure they arestill realistic.
-
8/3/2019 Ma Ch11 Slides
33/33
Advantages of standard costing
More accurate pricing of products based on detailed costanalysis.
Carefully planned standards are an aid to more accuratebudgeting.
The business will have a more simplified stock control system,
as all materials purchased are valued at standard cost ratherthan LIFO or FIFO value systems.
More detailed variance analysis leading to a deeper level ofinvestigation and better management decision-making.
A target of efficiency is set for employees and cost
consciousness is stimulated.The setting of standards involves determining the bestmaterials and practices, which may lead to economies.
An overall improvement in the financial control of the business.