1. Standard Costs Budget for a single unit
Each unit has standards for:Quantity & Price/ Rate

2. Distinguishing between Standards and Budgets
Both standards and budgets are predetermined costs, and both contribute to management planning and control.
There is a difference:
A standard is a unit amount.
A budget is a total amount

3. Types of standards
Ideal standards (perfection standards): developed under the assumption that no obstacles to the production process will be encountered.
Attainable Standards: developed under the assumption that there will be occasional problems in the production process.
Current standards: are based on the current level of performance, which may be inappropriate for the future, no incentive for workers

4. Standard costing system
The management evaluates the performance of a company by comparing it with some predetermined measures
Therefore, it can be used as a process of measuring and correcting actual performance to ensure that the plans are properly set and implemented

5. Benefits of Standard Costs
Valuation of stock
Assigning the standard cost to the actual output
Planning
Use the current standards to estimate future sales volume and future costs
Controlling
Evaluating performance by determining how efficiently the current operations are being carried out
Motivation
Notify the staff of the management’s expectations
Setting of selling price

6. Benefits of Standard Costs
Helps managers:
In budget preparation
Target levels of performance
Identify performance standards
Set sales prices
Decrease accounting costs
U.S. surveys show that more than 80% of responding companies use standard costing. Over half of responding companies in the United Kingdom, Ireland, Sweden, and Japan use standard costing. Why? Standard costing helps managers:
• Prepare the budget
• Set target levels of performance
• Identify performance standards
• Set sales prices of products and services
• Decrease accounting costs
Copyright (c) 2009 Prentice Hall. All rights reserved.

7. Responsibility Accounting and Variances
Managers should be held responsible only for costs they can control.
This is also true in the area of variance analysis.
A purchasing agent may be held responsible for direct material price variances, but certainly not direct material quantity (usage) variances.

8. Variance analysis
A variance is the difference between the standards and the actual performance
When the actual results are better than the expected results, there will be a favourable variance (F)
If the actual results are worse than the expected results, there will be an adverse variance (A)

9. Materials cost variance
Material Price variance
Material Usage variance
Labour cost variance
Labour Efficiency variance
Labour rate variance

10. Cost variance Cost variance = Price variance + Quantity variance
Cost variance is the difference between the standard cost and the
Actual cost
Price variance = (standard price – actual price)*Actual quantity
A price variance reflects the extent of the profit change
resulting from the change in activity level
Quantity variance = (standard quantity – actual quantity)*
standard cost
A quantity variance reflects the extent of the profit change

11. Three types of cost variance
Material cost variance
Labour cost variance
Variable overheads variance

12. Material cost variance
Material price variance
= (standard price – actual price)*actual quantity
MPV=(SP-AP)AM
SP= standard price per unit of direct material.
AP = actual price per unit of material
AM = actual quantity of material purchased
Material usage variance
= (Standard materials – actual materials)* standard price
= (Standard quantity of materials for actual production – actual quantity of materials production) * standard price
MUV=(SM-AM)SP
SM= Standard quantity of materials
Total Material cost varince=MPV+MUV

13. Causes of Material Variances
Materials price variance – factors that affect the price paid for raw materials include the availability of quantity and cash discounts, the quality of the materials requested, and the delivery method used. To the extent that these factors are considered in setting the price standard, the purchasing department is responsible
Materials usage variance – if the variance is due to inexperienced workers, faulty machinery, or carelessness, the production department is responsible.

14. Labour cost variance Labour rate variance
= (standard rate – actual rate)*actual hours
LRV=(SR-AR)AH
Labour efficiency variance
= (standard Hours – actual Hours)*standard Rate
= Standard hours for actual production – actual hours used) * standard rate
LEV=(SH-AH)SP
Total Lobour cost variance=LRV +LEV
AH = actual number of hours worked.
SH = standard number of hours worked.
SR = standard labor wage rate.

15. Causes of Labor Variances
Labor rate variance – usually results from two factors: (1) paying workers higher wages than expected, and (2) misallocation of workers. The manager who authorized the wage increase is responsible for the higher wages. The production department generally is responsible variances resulting from misallocation of the workforce.
Labor efficiency variances - relates to the efficiency of workers. The cause of a quantity variance generally can be traced to the production department.

16. Static vs. Flexible Budgets
Static Budget
Flexible Budget
Prepared for several different volume levels within a relevant range
Separates fixed and variable costs
Prepared for only one level of sales volume
Variance = difference between actual and budget
The master budget is a static budget, which means that it is prepared for only one level of sales volume. The static budget does not change after it is developed. A variance is the difference between an actual amount and the budgeted amount. The variances are classified as either:
• Favorable (F) if an actual amount increases operating income, OR
• Unfavorable (U) if an actual amount decreases operating income.
A flexible budget summarizes costs and revenues for several different volume levels within a relevant range. Flexible budgets separate variable costs from fixed costs; it is the variable costs that put the “flex” in the flexible budget. To create a flexible budget, you need to know:
• Budgeted selling price per unit
• Variable cost per unit
• Total fixed costs
• Different volume levels within the relevant range
Favorable – actual amount increases income
Unfavorable – actual amount decreases income
Copyright (c) 2009 Prentice Hall. All rights reserved.

17. Sales variance

18. Budgeted
contribution
(Standard margin*
Standard volume)
Actual contribution
Budgeted contribution
(Standard margin * Actual
Volume)
Sales margin price variance
Sales margin volume variance
Total sales margin variance

19. Sales variance Total sales variance
= Total budgeted sales actual-Total actual sales
TSV=SPV + SVV
1. Sales price variance
=(standard selling price-actual selling price)*Actual quantity of sales
2. SPV=(SSP-ASP)AQS
2. Sales volume variance
=(Standard quantity of sales – Actual quantity of sales)*Standard selling price
SVV= (SQS –AQS)*SSP

20. Fixed overhead variance

21. Absorbed VO
(SP* standard
hours for actual
output
Actual FO
Budgeted FO
FO expenditure variance/
FO spending variance
FO volume variance
Total FO variance
(under-/over- absorbed)

22. Fixed overhead variance
Fixed overheads variance
= Fixed overheads absorbed – Actual fixed overheads incurred
Fixed overheads expenditure variance
Budgeted fixed overheads – Budgeted overheads absorbed
Fixed overheads volume variance
= Absorbed fixed overheads – Budgeted overheads absorbed

23. Profit reconciliation statement

24. Profit reconciliation statement
Profit reconciliation statement is used to sum up all variances
It can help the top management to explain the major reasons for the difference between budgeted and actual profits
The sales margin variance and fixed overheads variance are different between absorption and marginal costing system

25. Marginal costing

26. Profit Reconciliation Statement
$ $ $
Budgeted profit
Sales variances
Sales margin price 8000 F
Sales margin volume 3400 A F
Materials cost variance
Materials price 480 A
Material usage F F
Labour cost variance
Labour rate A
Labour efficiency 4000 A A
Variable overhead variance
VO Expenditure 900 F
VO Efficiency A 700 A
Fixed overhead expenditure variance 400F 980 A
Actual profit

27. Reasons for variances Material price variance
Price changes in market conditions
Change in the efficiency of purchasing dept. to obtain good terms from suppliers
Purchase of different grades or wrong types of materials

28. Reasons for variances Materials usage variance
More effective use of materials/ wastage arising from the efficient production process
Purchase of different grade or wrong types of materials
Wastage by the staff
Change in production methods

29. Reasons for variances Labour rate variance
Non-controllable market changes in the basic wage rate
Use of higher/lower grade of workers
Unexpected overtime allowance paid

30. Reasons for variances Labour efficiency variance
Purchase of different grade or wrong types of materials
Breakdown of machinery
High/low labour turnover
Changes in production method
Introduction of new machinery
Assignment wrong type of worker to work
Adequacy of supervision
Changes in working condition
Change in motivation methods

31. Reasons for variances Variable overheads expenditure variance
It may be caused by the non-controllable change in the price level of indirect wages or utility rates since the predetermined rate is set
It is meaningless to interpret this kind of variance on its own. One should look various components of the fixed overheads

32. Reasons for variances Variable overheads efficiency variance
Both the variable overheads and direct labour cost vary with the direct labour hours worked

33. Reasons for variances Fixed overheads expenditure
It is meaningless to interpret this kind of variance on its own.
It may be caused by the change in the price levels of rent, rates and other fixed expenses

34. Reasons for variances Fixed overhead volume variance
When the level of activity is higher than the budgeted level, there is a favourable variance

35. Reasons for variances Sales margin price variance
Change in the pricing strategies of the company
Response to the change of pricing policies of its competitors
Higher profit margin with growing demand for the product
Lower profit margin for simulating sales

36. Reasons for variances Sales margin volume variance
Change in prices and demand
Change in the market share of its competitiors