Question

Standard costing, flexible budgets and overhead analysis are all tools to evaluate management. Discuss how we set standard costs, how we use them, and what the variances tell us.

Answer 1

Standard cost is defined in the CIMA Official Terminology as “‘the planned unit cost of the product, component or service produced in a period. The standard cost may be determined on a number of bases. The main use of standard costs is in performance measurement, control, stock valuation and in the establishment of selling prices

Types of standards

Ideal Standards: The level of performance attainable when prices for material and labour are most favourable, when the highest output is achieved with the best equipment and layout and when the maximum efficiency in utilisation of resources results in a maximum output with minimum cost. Normal Standards: These are standards that may be achieved under normal operating conditions. Basic or Bogey Standards: These standards are used only when they are likely to remain constant or unaltered over a long period. Current Standards: These standards reflect the management’s anticipation of what actual costs will be for the current period.

flexible budget

According to CIMA official terminology, " a flexible budget is defined as a budget which, by recognizing the difference between fixed, semi-variable and variable cost is designed to change in relation to the level of activity attained".

All of these tools are used to evaluate management now Discuss part

how we set standard cost, as we discuss above under types of standards

1. Idel standards

2. Normal Standards

3. Current standards

4. basic or bogey standards

under these set of standards we can set it.

how we use them,

as we discuss some formula under overhead variances the variances tell us to use it under standards and check it with actual cost and compare.

And what the variances tell us.

two conditions they tell whether it is favourable or unfavourable.

favourable means we at the cost minimization.

unfavourable means we at the higher cost and our profit margins reduce with the same effect.