Question

1. (a) Define standard costs.
(b) Name some advantages of standard cost system.

2. A conference speaker discussing budgets and standard costs made the following statement:

“Budgets and standards are not the same thing. They have different purposes and are set up and used in different ways; yet a specific relationship exists between them.”

(a) Identify distinctions or differences between budgets and standards.
(b) Identify similarities between budgets and standards.

3. The use of standard costs in pricing and budgeting is quite valuable since decisions in the fields of pricing and budgetary planning are made before the costs under consideration are incurred.

4. What type of variances are computed for materials, labour, and factory overhead?

Answer 1

1. Definition and advantages of standard cost

a) Standard Cost :- the estimated or predetermined cost of a process, resource, or item used in a manufacturing enterprise, entered in an account and compared with the actual cost so that anomalies are detectable.

b. Advantages of standard cost :- i)Improves cost control - companies can gain greater cost control by setting standards for each type of cost.

ii)More useful information for managerial planning and decision making - when management develops appropriate cost standards and success in controlling production cost, future actual costs should be close to the standard.

iii)More reasonable and easier inventory measurement - a standard cost system provides easier inventory valuation than an actual cost system.

iv)Cost savings in record-keeping - although a standard cost system may seem to require more detailed record-keeping during the accounting period than an actual cost system, the reverse is true.

v)Possible reductions in production costs--a standard cost system may lead to cost savings.

2 Differences and similarities of standard cost

a)Distinction or differences between standard and budgets

i) Standard cost means the budgeted cost of one unit of product and Budget means the cost of whole budgeted production

ii) Standard cost system can operate without any comprehensive budgeting system but Budget in absence of standard cost will only be fair estimates and cannot provide a reasonable base.

iii) Standard costs are developed only for the production and manufacturing related cost but a Budget is a profit plan reflecting anticipated financial inflows and outflows.

iv) Standards are minimum targets which are to be attained by actual performance at specific efficency but Budgets project the volume of business and levels of costs which should be maintained.

v) Standard cost are more static and subject to less change where as Budgets are revised and reviewed based on the changing circumstances.

b) Similarities between standard and budget

i) Both standard and budget involve looking to the future and forecasting what is like to happen given a certain set of circumstances.

ii) Both standard and budget have a common objective of controlling business operations by establishing pre-determined targets.

iii) In both standard and budget systems the actual performance is compared with the pre-determined targets in order to ascertain variance.

3.The use of standard costs in pricing and budgeting

Standard costs are useful in setting selling prices. The budget shows the expected expenses incurred by the business. By considering these expenses, management can determine how much to charge for a product so that it can produce the desired net income. The standard cost are useful in deciding prices and budget to earn desired percentage of profits.

4.Types of variance

i) Material overhead/cost - material price variance and material usage variance. the material usage variance is further computing by i) material mix variance ii) material yield variance.

ii) Labour overhead/cost - labour rate variance and labour efficiency variance. The labour efficiency variance is further computed by i) labour mix variance ii) idle time variance iii) labour yield variance.

iii) Factory overhead/cost - Variable overhead cost variance and Fixed overhead cost variance. The variable overhead cost variance is computed by i) budget or expenditure variance ii) efficiency variance.

The fixed overhead cost variance is computed by i) expenditure or budget variance ii) volume variance which is further computed by i) efficiency variance ii) capacity variance iii) calendar variance.