Fundamentals Of Management Accounting

Standard Costing & Variance Analysis

Fundamentals Of Management Accounting

Class Slides Ian Wilson

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2.

3.

4.

Explain the benefit of setting a benchmark

standard
Calculate standard costs for
Materials/Labour & Variable Overheads
Calculate Variances for
Materials/Labour/Variable Overheads &
Sales
Prepare Reconciliation Statements between
budgeted & actual contributions



What do we need to cover?

cover
Types of Standards
Standard Cost Cards
Variances
Operating Statements
Causes of Variances
Marginal operating statements



What is a Standard Cost?.

A unit/batch cost, prepared in advance,
based on expected resource usage and cost,
operating under pre-determined conditions.
A standard will include standard amounts of
Labour/Material & Budgeted Production
Overheads

Standards are used to measure ACTUAL

activity & performance against this predetermined BENCHMARK
The difference is called a VARIANCE.

See page 90 of your notes to see what a

Standard Cost Card looks like

I liken a standard cost card to a recipe or a

menu of costs.

Pay attention to the various sub-totals

Consider the next slide also

STANDARD COST CARD Sample layout



1.
2.
3.
4.

There are 4 types of Standard Cost:

Cost
Ideal Standard
Current Standard
Expected/Attainable Standard
Basic Standard
Make sure you know each one in detail.
See page 93

The perfect standard. 100% efficient, 100%

of the time.
No wastage or idle time, everything works
perfectly.
A target, aspiration or goal
Unlikely to be achieved in practice
Can motivate but may in practice demotivate!



Attainable or Expected Standard.

Standard
Standards that are set above current norms
The degree of improvement is attainable
over current performance.
Firm but fair
Challenging, you have to sweat to achieve
Motivational for staff

As the name suggests, what is currently

being achieved, good or bad
Used as a benchmark to measure
improvement
May not provide any inspiration for
improvement or maintaining high standards
of performance
Limited use but good benchmark to asses
current performance



Historic achievement, not updated

Provides a reference point to measure
progress from
Often the launch standard, if it was good at
launch, provides a reminder & focus of the
original cost base & justification for the
original decisions taken

Calculate a Standard Cost Card for this

exercise
Your notes have a pro-forma layout available
to you
Page 91
Complete



What is a Variance?.
Variance
Difference between a planned, budgeted or
standard cost and the actual cost incurred.
The same comparison can be made for
revenues.
The analysis of these differences is called
VARIANCE ANALYSIS.

Types of Variances:
Variances
1. FAVOURABLE VARIANCES: when actual
results are better than expected, producing
higher profits.
2. ADVERSE VARIANCES: when actual results
are worse than expected, producing lower
than planned profits.

Family Tree of Variances

Material

Price

Variable Overheads

Usage

Expenditure

Labour

Rate

Efficiency

Efficiency

Sales

Price

Volume Profit

Formula method uses Key Phrases that need

quantification:
AQ (or AH) = Actual Quantity of material
AP (or AR) = Actual Price paid for material
SP (or SR) = Standard Price of material per
unit of material
SQ (or SH) = Standard Quantity of material
per unit x ACTUAL OUTPUT QUANTITY
AQ AP SQ SP evolves to:
AH AR SH SR for Labour

SALES VARIANCES

Actual sales x Actual price

= Price variance

Actual sales x Standard price

Actual sales x Standard profit margin

= Volume Variance

Budgeted sales x Standard profit margin

This is a great practice question!.

You have to calculate ALL possible
VARIANCES

8 variances in total are required

Consider the question layout carefully:
1. Top section, ALL your STANDARDS are given
here:
2. Bottom part of question, usually where the
ACTUAL data is found

Operating Statement
The budgeted and actual profit can be reconciled using the variances calculated
above. This reconciliation can be shown in an Operating Statement.
$
Budgeted profit
Sales volume
Sales price
Fav
$
Material

Price
Usage

Labour

Rate
Idle time
Efficiency

Variable Overhead

Rate
Efficiency

Fixed overhead

Expenditure
Volume

Actual Profit

Adv
$

Put together an Operating Statement based

on MARGINAL costing principles



Efficiency Variances:
Variances
As per Labour Efficiency reasons:
Expenditure Variances:
Variances
Variable overheads will be made up of a
variety of different costs.
Each cost element will have to be the subject
of analysis, based on actual & planned
expenditure, to ascertain favourable/adverse
reasons for a variance