Question

Describe at least two types of standard costs a technology company might use. Additionally, explain the types of direct and overhead variances a technology organization might encounter. Provide an example.

Answer 1

(A)

Standard costing is a technique that uses standards for costs and revenues for the purpose of control through variance analysis. Standard is a predetermined measurable quantity set in defined conditions against which actual performance can be compared, usually for an element of work, operation, or activity.

(a) Predetermined estimates.

(b) Established for inputs and outputs.

(c) Applicable to all routine aspects of an organization’s operations.

(d) Accounting for standard costs and obtaining variances.

(e) Reporting to management for taking appropriate action wherever necessary.

Types of Standards:

1. Current Standard:

The current standard is a standard established for use over a short period of time, related to current conditions. The problem with this type of standard is that it does not try to improve on current levels of efficiency.

2. Basic Standard:

Basic standard is standard established for use over a long period from which a current standard can be developed. The main disadvantage of this type of standard is that because it has remained unaltered over a long period of time, it may be out of date. The main advantage is in showing the changes in trend of price and efficiency from year to year.

3. Ideal Standard:

Ideal standard is a standard which can be attained under the most favourable conditions. No provision is made, e.g., for shrinkage, spoilage or machine breakdowns. Users believe that the resulting unfavourable variances will remind management of the need for improvement in all phases of operations. Ideal standards are not widely used in practice because they may influence employee motivation adversely.

4. Attainable Standard:

Attainable standard is a standard which can be attained if a standard unit of work is carried out efficiently, on a machine properly utilized or material properly used. Allowances are made for normal shrinkage, waste and machine breakdowns. The standard represents future performance and objectives which are reasonably attainable.

Besides having a desirable motivational impact on employees, attainable standards serve other purposes, e.g., cash budgeting, inventory valuation and budgeting departmental perfor­mance. If correctly set attainable standards are the best type of standards to use, since they provide employees with a realistic target. Attainable standards have the greatest motivational impact on the workforce.

Setting Standards:

In order to use predetermined standard costs, standards have to be set for each element of cost for each line of product manufactured or service supplied. Standard cost shows what the cost should be keeping in mind the most favorable production conditions, and on the assumption, that plant will operate at maximum possible efficiency.

The collaboration of all functional departments is a must in setting standards. The quantities, price and rates, qualities or grades, terms of purchase, product substitution, etc. have to be kept in mind while setting standards.

Understanding the concept of Standard Costing and their use in a business the best suitable SC for a Technology based company are 1. Ideal Standard 2. Attainable Standard .

Both of these help in recusing the errors in the process of devoleping any softwares or hardware(general business of techonology companies ) and provide optimum products at least cost without any wastage of resources.

(B)

The direct variance is the difference between the standard cost of some product resulting from production activities and the actual costs incurred.

Images has been attached of all direct materials variances, direct labor variances, and overhead variances presented as both formulas and tree diagrams.

Example

Give the total variances that have been analyzed till now.

For the XYZ Company for the month of October, calculate the various overhead variances from the information given below:

Normal Overhead rate = $2

Actual hours operated = 20,000

Allowed hours for actual production = 22,000

Allowed overheads for budgeted hours = $60,000

Actual overheads = $62,000

Solution

Budgeted overhead = $60,000

Recovered overhead = Standard rate per hour x Standard hours for actual output

= 2 x 22,000 = $44,000

Standard overhead = Standard rate per hour x Actual hours

= 2 x 20,000 = $40,000

Overhead cost = Recovered overhead – Actual overhead variance

= 44,000 – 62,000 = 18,000 (unfavorable)

The total overhead cost variance can be analyzed into a budgeted or spending variance and a volume variance.

Overhead Spending Variance = Budgeted overheads – Actual overheads

= 60,000 – 62,000 = 2,000 (Unfavorable)

Overhead Volume Variance = Recovered overheads – Budgeted overheads

= 44,000 – 60,000 = 16,000 (Unfavorable)