Standard costing and variance analysis (A Level) flashcards

Topic 11: Standard costing and variance analysis

Standard cost

A target cost per unit, fixed before the period from the quantities and prices the business expects when it works efficiently.

Standard 5 kg of clay at $1.20 per mug. 640 mugs made using 3,120 kg costing $3,900. Materials variances?

AP $1.25; SQ 3,200 kg. Price (1.20 − 1.25) × 3,120 = $156 A. Usage (3,200 − 3,120) × 1.20 = $96 F. Total $60 A.

Standard 0.4 hours at $14.00 per mug. 640 mugs made in 270 hours costing $3,672. Labour variances?

AR $13.60; SH 256. Rate (14.00 − 13.60) × 270 = $108 F. Efficiency (256 − 270) × 14 = $196 A. Total $88 A.

Budget 2,000 units, standard contribution $7. Actual sales 2,150 units at $0.50 below standard price. Sales variances?

Price −0.50 × 2,150 = $1,075 A. Volume (2,150 − 2,000) × 7 = $1,050 F.

Total materials variance $340 A; usage variance $520 A. Price variance?

Price = total − usage = −340 − (−520) = $180 F.

Why is standard quantity based on actual output, not budgeted output?

So the comparison is like for like; using budgeted output would mix a volume difference into the usage or efficiency result.

Why is the sales volume variance valued at standard contribution rather than selling price?

Each extra unit sold also brings standard variable cost; only the contribution changes profit.

Cost reconciliation vs profit reconciliation: treatment of an adverse variance

Cost reconciliation: adverse variances are added. Profit reconciliation: adverse variances are subtracted from budgeted profit.

For which type of business is standard costing poorly suited?

One doing one-off or bespoke work: there is no repeated unit to set a standard for.

Two advantages and two disadvantages of standard costing

Advantages: each variance has an owner; management by exception saves time; supports budgets and pricing. Disadvantages: costly to set and maintain; out-of-date standards mislead; reports come after the event.