MANAGEMENT
AND COST
ACCOUNTING
SIXTH EDITION
COLIN DRURY
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2004 Colin Drury
Part Four:
Information for planning, control and performance
Chapter Eighteen:
Standard costing and variance analysis 1
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.1a
Definition
•
Standard costs are target costs for each operation that can be built
up to produce a product standard cost.
•
A budget relates to the cost for the total activity,whereas standard
relates to a cost per unit of activity.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.1b
Operation of a standard costing system
1. Most suited to a series of common or repetitive organizations (this can
result in the production of many different products).
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2004 Colin Drury
18.1c
Operation of a standard costing system (contd.)
2. Variances are traced to responsibility centres (not products).
3. Actual product costs are not required.
4. Comparisons after the event provide information for corrective action
or highlight the need to revise the standards.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.2
An overview of a
standard costing
system
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.3a
Establishing cost standards
1.
Two approaches:
(i) past historical records
(ii) engineering studies
2.
Engineering studies
A detailed study of each operation is undertaken:
• direct material standards (standard quantity × standard prices)
• direct labour standards (standard quantity × standard prices)
• overhead standards:
• cannot be directly observed and studied and traced to units
of output;
• analysed into fixed and variable elements;
• fixed tend not to be controllable in the short term.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.3b
Standard hours produced
1.
Used to measure output where more than one product is produced.
Example
Standard (target) times: X = 5 hours, Y = 2 hours, Z = 3 hours
Output = 100 units of X, 200 units of Y, 300 units of Z
Standard hours produced = (100 × 5 hours) + (200 ×2 hours) +
(300 ×3 hours) = 1 800
2.
If actual DLH are less than 1 800 the department will be efficient,whereas if
hours exceed 1 800 the department will be inefficient.
Note:Different activity measures and other factors (besides activity)will
influence cost behaviour.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.4
Purposes of standard costing
1.
To provide a prediction of future
costs that can be used for
decision-making.
2.
To provide a challenging target
that individuals are motivated to
achieve.
3.
To assist in setting budgets and
evaluating performance.
4.
To act as a control device by
highlighting those activities that
do not conform to plan.
5.
To simplify the task of tracing
costs to products for inventory
valuation.
Figure 18.2 Standard costs for inventory valuation
and profit measurement
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.5a
Direct material variances
1. Can be analysed by price and quantity.
2. Material price variance
•
(SP – AP) × AQ
(£10 - £11) x 19 000 = £19 000A (Material A)
(£15 - £14) x 10 100 = £10 100F (Material B)
•
Possible causes
•
Should AQ be quantity purchased or quantity used?
Example
Price variance = 10 000 units purchased in period 1 at £1 over SP
2000 units per period used
Should £10 000 variance be reported in period 1 or £2000 per period?
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.5b
3. Material usage variance
• (SQ – AQ) × SP
(9 000 x 2 kg = 18 000 - 19 000) x £10 = £10 000A (Mat.A)
(9 000 x 1 kg = 9 000 - 10 000) x £15 = £16 500A (Mat.B)
• Possible causes
• Speedy reporting required
4. Joint price/usage variance
• It could be argued that SQ used to compute pricevariance and that (SP
– AP) × (AQ – SQ) is reported as a joint price/usage variance.
5. Total material variance = SC – AC
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.6a
Direct labour and overhead variances
1. Can also be analysed into price and quantity.
2. Wage rate variance
• (SR – AR) × AH
(£9 - £9.60) x 28 500 = £17 100A
• Possible causes
3. Labour efficiency variance
• (SH – AH) × SR
(9 000 x 3 hours = 27 000SHP - 28 500AH ) x £9 = 13 500A
• Possible causes
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.6b
Direct labour and overhead variances (cont.)
4. Variable overhead expenditure variance
• Flexed budget allowance (AH × SR) – Actual cost
(28 500 x £2 = £57 000) - £52 00 = £5 000F
• Possible causes
5. Variable overhead efficiency variance
• (SH – AH) × SR
(9 000 x 3 hours = 27 000SHP - 28 500AH) x £2 = £3 000A
• Possible causes (note similarity to labour efficiency)
6. Fixed overhead expenditure (spending) variance
• BFO – AFO
(£1 440 000/12 = £120 000 - £116 000 = £4000F
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.7a
Sales variances
1. Variances should be computed in terms of contribution
profit margins rather than sales revenues.
2. Example
Budgeted sales
= 10 000 units × £11
Standard and actual cost
per unit
Actual sales
= 12 000 units ×£10
Variance in terms of sales
value
Variance in terms of contribution margin
= £110 000
= £7
= £120 000
= £10 000F
= £4 000A
(Budgeted contribution margin =10 000 × £4 = £40 000
Actual contribution margin =12 000 × £3
= £36 000)
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.7b
3. Objective is to maximize profits (not sales value).
4. Total sales margin variance
Example 18.1
Actual contribution
Actual sales (9 000 × £90)
Standard VC of sales (9 000 × £68)
= £810 000
= £612 000
£198 000
Budgeted contribution margin: 10 000 × £20
Variance
£200 000
=
£2 000 A
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.8
Sales variances (contd.)
5. Total sales contribution variance can be analysed further:
Sales margin price
or
Sales margin volume
Therefore,
Sales margin price
Sales margin volume
= (AP – BP) × AQ
(AM – BM) × AQ
= (AQ – BQ) × SM
= (£90 – £88) × 9 000
= £18 000 F
= (9 000 – 10 000)× £20 = £20 000 A
£2 000 A
Reconciliation of budgeted and actual profit (see slide 18.9).
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.9
Reconciliation of budgeted and actual profit
Budgeted net profit
Sales variances:
Sales margin price
Sales margin volume
Direct cost variances:
Material: Price
Usage
Labour: Rate
Efficiency
Manufacturing overhead variances:
Fixed overhead expenditure
Variable overhead
expenditure
Variable overhead efficiency
Actual profit
£
£
18 000 F
20 000 A
2 000 A
8 900 A
26 500 A
17 100 A
13 500 A
£
80 000
35 400 A
30 600 A
4 000 F
5 000 F
3 000 A
6 000 F
62 000 A
18 000
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.10a
Standard absorption costing
1. For financial accounting (stock valuation) fixed overheads must be allocated to
products.This results in a volume variance.
2. Fixed overhead rate = budgeted fixed overhead
budgeted activity (10 000 units)
= £12 per unit
or £120 000 /30 000 hours = £4 per standard hour = £12 per unit (3 ×£4).
3. If actual production is different from budgeted production, a volume variance will
arise:
Actual production
Budgeted production
Volume variance
Volume variance
=
=
=
=
9 000 units or 27 000 SHP
10 000 units or 30 000 SHP
1 000 units × £12 or (3 000 SHP ×£4) = £12 000A
(AP – BP) × SR
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.10b
4. Volume variances are not useful for cost control since FC are sunk costs.
5. Sometimes analysed into two sub-variances (capacity and efficiency):
(A) Budgeted hours of input and output
(B) Actual hours of input
(C) Actual hours of output
Volume variance
Capacity variance
Efficiency variance
=A–C
=A–B
=B–C
= 30 000
= 28 500
= 27 000
= 3 000 hours (£12 000)
= 1 500 hours (£6 000)
= 1 500 hours (£6 000)
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.11a
Reconciliation of budgeted and actual profit (absorption
costing)
To reconcile the budget and actual profit with an absorption costing
system,the sales volume margin variance is measured at the standard
profit margin (and not the contribution margin), i.e.1 000 units × £8 = £8
000.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
18.11b
£
Budgeted net profit
Sales variances
Sales margin price
Sales margin volume
Direct cost variance
Material
Price:
Usage:
Rate
Efficiency
Manufacturingin overhead variances
Fixed
Expenditure
Volume capacity
Volume efficiency
Variable
Expenditure
Efficiency
Actual profit
Material A
Material B
Material A
Material B
19 000 A
10 100 F
10 000 A
16 500 A
Labour
4 000 F
6 000 A
6 000 A
5 000 F
3 000 A
£
£
18 000 F
8 000 A
10 000 F
£
80 000
8 900 A
26 500 A
17 100 A
13 500 A
35 400 A
30 600 A
8 000 A
2 000 F
6 000 A
62 000 A
18 000
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury