ACC304 ACC324 StdCosting Topic 6

7/30/2019 ACC304 ACC324 StdCosting Topic 6

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ACC304/ACC324 COST & ACTIVITY MANAGEMENT

TOPIC 6 Standard Costing & Variance Analysis

Sub-topic 6.1 Standard Costing

1) In this chapter , we look at s tandard costs of products and services and thepurposes of preparing standard costs.

2) The sub-topics in this chapter includes;

What is standard costing?

Setting standards.

3) Standard costing is a control technique, which compares standard costs and

revenues with actual results to obtain variances, which are used to st imulate

improved performance. Standards are predetermined measurable quantities,

set in defined condit ions and expressed in monetary terms. Thus, a standard

cost is a planned unit cost.

4) Standard costing is most effectively used where output or production is routineand regular. Thus , i t can be easi ly and accura te ly measured . I t enables a

det ai led compari son o f i nd iv idua l i nput s o f mat er ia l, l abour and o ther

production costs to be made with standard inputs.

5) The total s tandard cost is buil t up from standards for each cost elements;

Standard quantities of materials at standard prices.

Standard quantities of labor time at standard rates.

Standard variable production overheads wil l usually be calculated based

on standard labor times.

If absorption costing is used, pre-determined f ixed production overhead

absorption rates will be calculated based on budgeted information.

6) Therefore, management has to est imate the following;

The expected prices for material, labor & expenses. Efficiency levels in the use of material & labor.

Budgeted overhead costs and budgeted volumes of activity.

7) Standard Cost Card the standard cost of each of the elements of a product

is brought together and totaled here.

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INTRODUCTION

WHAT IS STANDARD COSTING?


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8) Standard costs are comprised of 2 elements which are mult ipl ied together;

Std Costs = Physical measure of Expected price to be paid

the resources required X for each unit of the resource

for each unit of output

(allowing for NL, wastage (allowing for inflation level)discounts & inefficiency)

9) Below, shows the standard cost for a s ingle unit of a product;

Direct Materials

Material Y 4 kg at 2 per kg 8Material Z - 5 litres at 3 per litre 15

23

Direct LabourGrade A 4 hours at 1.50 per hour 6

Grade B 8 hours at 3.00 per hour 24

30

Standard Direct Costs 53

Variable production overheads 12 hours at 1.00 per hour 12Standard Variable Production costs 65

Fixed Production Overheads 12 hours at 2.00 per hour 24Standard Full Production costs 89

Administration & Marketing Overheads 11Standard Cost of Sale 100Standard Profit 30

Standard Selling Price 130===

10) Standard cos ts se t, should be revised on a r egular bas is , i e a t l east once a

year to reflect any changes made in the organization in respect of methods ofoperations or otherwise.

11) Uses of standard costs are for;

i . S tock va lua tions and valua tion of production cos ts .

ii. Budget p reparations

ii i. B as is f or p ri ci ng d ec is io ns .

i v. Budge ta ry con tr ol ( Vari ance Ana lysi s)

v . P romote t he use o f Management By Except ion.

12) There are 4 types of s tandards that an organization can set ; Bas ic s td, Idealstd, Attainable std and Current std. See below for explanation.

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13) Types of performance standards will include;

i. Basic Standard a s tandard es tabl ished for use over a long per iod,

from which, a current standard can be developed.

ii. Ideal Standard a s tandard, which can be at tained under the mostf avor ab le condi ti ons ( ie per fect ope ra ti ng condi ti ons) , w it h no

al lowance for normal losses , wastages and machine downt ime. Also

known as potential standards.

iii . Attainable Standard a standard, which can be at tained if a s tandard

unit of work is carr ied out eff iciently, a machine properly operated or material properly used. Allowances are made for normal losses, waste

and machine downt ime. This s tandard has a des irable motivational

impact on employees because i t represents future performance andobjectives, which are reasonably attainable.

iv. Current Standard a standard established for use, over a short period

of time, related to current conditions.

14) Standard costing as a control technique

i . S tandard cost ing therefore involves the fol lowing;

The es tabli shment of predetermined es timates of the cost s of

products or services.

The collection of actual costs.

The compari son o f t he act ua l cos ts w it h t he p rede te rmined

estimates.

i i . The predetermined costs are known as s tandard cos ts and the di fference

between standard and actual costs is known as a variance. The process

by which the total difference between standard and actual results isanalyzed is known as variance analysis .

i ii . S tandard cos ting i s bes t su it ed in s itua tion where there i s a degree of

repetition in the production process, ie suited to mass production and

repetitive assembly work.

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15) Problems in setting standards includes;

i . Deciding how to incorporate inflation into planned uni t cos ts .

i i. Agr ee ing on a pe rf or mance s tandar d.

i ii . Deciding on the quali ty of mater ia l s to be used .

i v. E st im at in g ma te ria l p ric es w he re s ea so na l p ri ce v ar ia ti on s o r b ul k purchase discounts may be significant.

v . F in di ng s uf fi ci en t t im e t o c on st ru ct a cc ur at e s ta nd ar ds as s ta nd ardsetting can be a time-consuming process.

vi. Incurring the cost of setting up and maintaining a system for establishing standards.

vi i. Dealing wi th possible behavioral problems, managers responsible for the

achievement of standards possibly resisting the use of a standard costing

control system for fear of being blamed for any adverse variances.

16) The advantages of standard costing are;

i . Car ef ul ly pl anned s tandar ds ar e an aid to more accurate budgeting .

i i. Std costs provide a yardstick aga inst whi ch act ua l cos ts can be

measured.

i ii . The s et ti ng o f s tandar ds i nvol ves det er mi ni ng t he bes t ma te ri al s and

methods, which may lead to economies.

iv. A target of ef fic iency is set for emp lo yee s to re ach a nd cost

consciousness is stimulated.

v . Variances can be ca lcula ted which enable the princ ip le of management

by exception t o be ope ra ted. Onl y t he var iances , whi ch exceed

acceptable tolerance-limit need to be investigated by management with aview to control action.

vi. Standard costs simplify the process of bookkeeping in cost accounting,

because they are easier to use than LIFO, FIFO and weighted averagecosts.

vii. Standard times simplify the process of production scheduling .

v ii i. S tandard performance l evels might provide an incentive for individualsto achieve targets for themselves at work.

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QUESTION 1

BOOM Ltd makes a product called the Boomerang. A unit of Boomerang is made

up of three types of materials. 8kgs of direct material A, 5 litres of direct material

B and 4 meters of direct material C are needed. The cost per unit of measurement

for direct material A, B and C is 2, 3 and 4 respectively.

Two types of labour are involved in the production of a Boomerang, skil led and

semi-skilled. Skilled labour is paid 10 per hour and semi-skilled labour is 6 perhour. Thrice as many skilled labour hours as semi-skilled labour hours are needed

to produce a Boomerang, three semi-skilled labour hours being needed.

Variable production overheads are incurred at BOOM Ltd at the rate of 3.00 per

di rect labour (ski l led) hour . A sys tem of absorpt ion cos t ing is in operat ion at

BOOM Ltd. The basis of absorption is direct labour (skilled) hours. The budgetedf ixed production overheads are 270,000 and the budgeted product ion of the

Boomerang is 6,000 units.

Administrat ion, sel l ing and distr ibution overheads are added to products at the

rate of 13.00 per unit. A mark-up of 25% is made on the Boomerang.

Required:

Draw up a standard cost card for the Boomerang.

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ACC304 ACC324 StdCosting Topic 6