PM - Budgeting and control
Contents
Standard Costing .....................................................................................................................2
STANDARD COST: .................................................................................................................2
FLEXED BUDGET: ..................................................................................................................3
CONTROLLABILITY: ...............................................................................................................4
Expected Value ........................................................................................................................5
High / low Analysis ..................................................................................................................6
Learning Curve.........................................................................................................................8
Linear Regression Analysis .....................................................................................................11
Correlation and The Correlation Coefficient...........................................................................14
GRAPHICAL PRESENTATION: ..............................................................................................14
STATISTICAL TECHNIQUE: ...................................................................................................15
Time Series Analysis...............................................................................................................18
Material Mix and Yield Variances ...........................................................................................21
Sales Mix and Quantity Variances ..........................................................................................22
Planning and Operational Variances ......................................................................................23
DEFINITION: .......................................................................................................................23
REVISED BUDGET: ..............................................................................................................23
PLANNING AND OPERATIONAL VARIANCES: .......................................................................23
1
,Standard Costing
STANDARD COST:
A standard cost for a product or service is a predetermined unit cost set under specified
working conditions.
A standard cost can have the following uses:
1) Budget preparation. Standard costs and standard sales prices are necessary for the
preparation of budgets;
2) Motivation. A standard cost can motivate those working within the cost centre to
ensure that the standard is achieved;
3) Control. By comparing a standard cost to an actual cost differences are highlighted and
can be investigated;
4) Performance measurement. Differences between the standard cost and the actual cost
can form the basis for assessing the performance of cost centre managers;
5) Inventory valuation. Standard costs can be used for the measurement of inventory to
be included in the organisation’s SFP and P&L.
There are four main types of standard:
1) Basic Standards. The assumption is that nothing has changed since the standard was
first set.
Used for trend analysis to illustrate how costs have changed over time;
They become outdated so they cannot be used to highlight efficiency levels or as a
basis of performance assessment;
They demotivate employees as an outdated standard can become either too easy or
too difficult to achieve;
Performance assessment would be difficult given a demotivated employee.
2
, 2) Current Standards. They are based on current working conditions and assume current
efficiency and cost levels will be maintained.
Staff may become demotivated as they are not encouraged or expected to improve
on what they are currently doing;
Productivity levels could suffer and fair assessment of performance would be difficult
to achieve.
3) Ideal Standards. They are based on perfect working conditions and assume an optimal
level of efficiency and cost.
It may not be possible to achieve the standard, which can have a negative impact on
employee motivation and productivity;
Fair performance appraisal would be difficult to achieve.
4) Attainable Standards. It assumes there will be some improvements in current efficiency
and cost levels.
Employees should feel that attainable standards are challenging yet realistic and
achievable;
Employees should be motivated to meet the standard.
FLEXED BUDGET:
A flexed budget is prepared at the end of the period by applying standard costs and standard
revenues to the actual number of units produced & sold in that period.
Flexed budget variance = Actual cost - Flexed cost
Flexed cost = Standard cost x Actual units produced
Note: The variances should be analysed into its component parts (e.g. material, labour,
overhead). They should form the basis of performance assessment and future cost control.
3
Contents
Standard Costing .....................................................................................................................2
STANDARD COST: .................................................................................................................2
FLEXED BUDGET: ..................................................................................................................3
CONTROLLABILITY: ...............................................................................................................4
Expected Value ........................................................................................................................5
High / low Analysis ..................................................................................................................6
Learning Curve.........................................................................................................................8
Linear Regression Analysis .....................................................................................................11
Correlation and The Correlation Coefficient...........................................................................14
GRAPHICAL PRESENTATION: ..............................................................................................14
STATISTICAL TECHNIQUE: ...................................................................................................15
Time Series Analysis...............................................................................................................18
Material Mix and Yield Variances ...........................................................................................21
Sales Mix and Quantity Variances ..........................................................................................22
Planning and Operational Variances ......................................................................................23
DEFINITION: .......................................................................................................................23
REVISED BUDGET: ..............................................................................................................23
PLANNING AND OPERATIONAL VARIANCES: .......................................................................23
1
,Standard Costing
STANDARD COST:
A standard cost for a product or service is a predetermined unit cost set under specified
working conditions.
A standard cost can have the following uses:
1) Budget preparation. Standard costs and standard sales prices are necessary for the
preparation of budgets;
2) Motivation. A standard cost can motivate those working within the cost centre to
ensure that the standard is achieved;
3) Control. By comparing a standard cost to an actual cost differences are highlighted and
can be investigated;
4) Performance measurement. Differences between the standard cost and the actual cost
can form the basis for assessing the performance of cost centre managers;
5) Inventory valuation. Standard costs can be used for the measurement of inventory to
be included in the organisation’s SFP and P&L.
There are four main types of standard:
1) Basic Standards. The assumption is that nothing has changed since the standard was
first set.
Used for trend analysis to illustrate how costs have changed over time;
They become outdated so they cannot be used to highlight efficiency levels or as a
basis of performance assessment;
They demotivate employees as an outdated standard can become either too easy or
too difficult to achieve;
Performance assessment would be difficult given a demotivated employee.
2
, 2) Current Standards. They are based on current working conditions and assume current
efficiency and cost levels will be maintained.
Staff may become demotivated as they are not encouraged or expected to improve
on what they are currently doing;
Productivity levels could suffer and fair assessment of performance would be difficult
to achieve.
3) Ideal Standards. They are based on perfect working conditions and assume an optimal
level of efficiency and cost.
It may not be possible to achieve the standard, which can have a negative impact on
employee motivation and productivity;
Fair performance appraisal would be difficult to achieve.
4) Attainable Standards. It assumes there will be some improvements in current efficiency
and cost levels.
Employees should feel that attainable standards are challenging yet realistic and
achievable;
Employees should be motivated to meet the standard.
FLEXED BUDGET:
A flexed budget is prepared at the end of the period by applying standard costs and standard
revenues to the actual number of units produced & sold in that period.
Flexed budget variance = Actual cost - Flexed cost
Flexed cost = Standard cost x Actual units produced
Note: The variances should be analysed into its component parts (e.g. material, labour,
overhead). They should form the basis of performance assessment and future cost control.
3
