13 terms

Standard Costing

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define standard costing
An estimated or predetermined cost of performing an operation or producing a good or service, under normal conditions.
define variance?
variance is the difference between the standards and the actual performance
list the the types of Standards
1. Basic standards
2. Normal standards
3. Current standards
4.Attainable (expected) standards
5. Ideal (theoretical) standards
What is Variance Analysis?
Process aimed at computing variance between actual and budgeted or targeted levels of performance, and identification of their causes.
What is a Standard?
is an estimated or predetermined cost of performing an operation or producing a good or service, under normal conditions.
The standard cost of direct materials is the cost the manufacturer should have used to make the good output
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The standard cost of a product is:
Ans:The planned unit cost of products produced during a particular period

The standard cost of a product is the planned unit cost of a product, i.e. an estimate made as carefully as possible of what each product is likely to cost during a particular costing period.
define ideal standard cost
Ideal standard is a standard which may be attained under most favourable conditions. This standard is based on the best possible operating conditions.
A standard that represents the most likely scenario can be referred to as the:
Ans: Attainable standard

A standard that represents the most likely scenario can be called the attainable standard as it is within the realms of possibility that the standard will be achieved. Ideal standards would be the standards that were possible if perfect operating conditions applied. Basic and average standards would be the basis for determining the current standard that should be used at the present time.
When calculating cost variances under a standard costing system we must:
Ans:Compare actual costs with standard costs at the actual level of output

When we are calculating variances we must flex the standard costs to reflect the actual level of output that was achieved in the period. If we simply compare actual costs against budgeted costs we would have some difficulty in answering the following two questions:

1.How much of the difference between budgeted and actual costs is due to output being different from budget?

2.How much of the difference is due to unit costs being higher or lower than were budgeted?

Variance analysis flexes the original budget to reflect actual output by asking the following two questions:

1. Have we used more labour or materials than we should have for this level of output?

2. Have we paid more than we should have for the labour or materials that we should have used?
The labour rate variance can be calculated by the following equation:
Ans: (Standard wage rate - actual wage rate) * actual hours worked

The labour rate variance shows the difference between the actual price that is paid per hour for labour and the standard price per hour. We would then multiply this by the actual number of hours worked to find the total spent against the budget. The equation can be written in the form:

(Standard wage rate - actual wage rate) * actual hours worked
When carrying out variance analysis, ideally we should:
Ans: Look at controllable adverse and favourable variances that are over a predetermined amount

If we looked at all variances that were produced we may waste time on small variances that are immaterial. We should also not just look at adverse variances but at favourable variances as well in order to see whether we are making the most of the conditions that are causing the favourable variance. Variances should only be reported to managers if they can actually do anything about them. There would be no point in reporting cost variances to a manager unless that manager can influence the actual level of costs.
The efficiency ratio can be defined as:
Ans:Standard hours produced/ actual labour hours worked

The efficiency ratio shows the actual number of hours and compares this with the standard time that it should have taken to make the products. The ratio can be written in the form:

Standard hours produced/ Actual labour hours worked * 100
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