Standard costing and variance analysis flashcards

Topic 11: Standard costing and variance analysis

Standard cost

A predetermined cost of one unit of output, set in advance from expected quantities and prices.

Standard 2 kg at £8 per unit. 600 units made using 1,150 kg costing £9,545. Materials variances?

AP £8.30; SQ 1,200 kg. Price (8.00 − 8.30) × 1,150 = £345 A. Usage (1,200 − 1,150) × 8 = £400 F. Total £55 F.

Standard 0.5 hours at £12 per unit. 1,000 units made in 480 hours costing £6,000. Labour variances?

AR £12.50; SH 500. Rate (12 − 12.50) × 480 = £240 A. Efficiency (500 − 480) × 12 = £240 F. Total nil: offsetting variances can hide behind a nil total.

Budget 1,500 units at £40, standard contribution £15. Actual 1,620 units at £38. Sales variances?

Price (38 − 40) × 1,620 = £3,240 A. Volume (1,620 − 1,500) × 15 = £1,800 F. Net effect of the price cut £1,440 A.

At what value is the sales volume variance measured?

Standard contribution per unit, when fixed costs appear as a separate line (or standard profit per unit if the question gives it), not selling price.

Budgeted profit £18,000. Sales volume £1,200 F, sales price £2,000 A, materials £500 A, labour £300 F. Actual profit?

18,000 + 1,200 − 2,000 − 500 + 300 = £17,000.

Cost reconciliation vs profit reconciliation: what happens to an adverse variance?

Cost reconciliation: adverse variances are added to standard cost (favourable deducted). Profit reconciliation: adverse variances are deducted from budgeted profit.

More skilled labour is used. Which variances can result?

Labour rate A, labour efficiency F and materials usage F.

Who is usually answerable for the materials price and materials usage variances?

Price: the buyer or purchasing manager (unless prices rose across the market). Usage: the production supervisor.

Three disadvantages of standard costing

Costly to set up and maintain; standards date quickly; suits repetitive production rather than one-off work; tight standards can demotivate; information arrives after the event.