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COST AND MANAGEMENT ACCOUNTING
LECTURE 8
Standard Costing and Variance Analysis.
STANDARD COSTING
Standard costing is a financial control system that enables the
deviations from the budget to be analysed in detail, thus enabling
costs to be controlled more effectively.
It is the setting of predetermined estimates of the costs of products
and then compares these predetermined costs with actual costs as
they are incurred. The predetermined costs are known as Standard
Costs and the difference between the Standard costs and actual costs
is known as Variance.
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STANDARD COSTING
Standard Costing System
A standard costing system is one in which a company sets cost
standards and uses them to evaluate actual performance.
Standard costing is more suited to an organization whose activities
consists of a series of common or repetitive operations and the input
required to produce each unit of output can be specified. It is
therefore relevant in manufacturing companies, since the processes
involved are often of a repetitive nature. Standard costing
procedures can also be applied in service industries such as banks,
where output can be measured in terms of the number of cheques
or the number of loan applications processed. Standard costing
cannot, however, be applied to activities of a non-repetitive nature,
since there is no basis for observing repetitive operations and
consequently standards cannot be set.
STANDARD COSTING
Types of standard
Ideal standard – an standard that allows for no inefficiencies of any kind.
These are based on perfect operating conditions: no wastage, no spoilage, no
inefficiencies, no idle time, no breakdowns. Variances from ideal standards are useful
for pinpointing areas where a close examination may result in large savings in order to
maximise efficiency and minimise waste. However ideal standards are likely to have an
unfavourable motivational impact because reported variances will always be adverse.
Employees will often feel that the goals are unattainable and not work so hard.
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STANDARD COSTING
Attainable standard –allows for the normal inefficiencies of production.
These are based on the hope that a standard amount of work will be carried out
efficiently, machines properly operated or materials properly used. Some allowance is
made for wastage and inefficiencies. If well-set they provide a useful psychological
incentive by giving employees a realistic, but challenging target of efficiency. The
consent and co-operation of employees involved in improving the standard are
required.
Current standard – it is the current status of affairs
These are based on current working conditions (current wastage, current
inefficiencies). The disadvantage of current standards is that they do not attempt to
improve on current levels of efficiency.
STANDARD COSTING
Basic standard – reflects the normal status of affairs
These are kept unaltered over a long period of time, and may be out of date. They are
used to show changes in efficiency or performance over a long period of time. Basic
standards are perhaps the least useful and least common type of standard in use.
COST AND MANAGEMENT ACCOUNTING
LECTURE 8
Standard Costing and Variance Analysis.
STANDARD COSTING
Standard costing is a financial control system that enables the
deviations from the budget to be analysed in detail, thus enabling
costs to be controlled more effectively.
It is the setting of predetermined estimates of the costs of products
and then compares these predetermined costs with actual costs as
they are incurred. The predetermined costs are known as Standard
Costs and the difference between the Standard costs and actual costs
is known as Variance.
, 2
STANDARD COSTING
Standard Costing System
A standard costing system is one in which a company sets cost
standards and uses them to evaluate actual performance.
Standard costing is more suited to an organization whose activities
consists of a series of common or repetitive operations and the input
required to produce each unit of output can be specified. It is
therefore relevant in manufacturing companies, since the processes
involved are often of a repetitive nature. Standard costing
procedures can also be applied in service industries such as banks,
where output can be measured in terms of the number of cheques
or the number of loan applications processed. Standard costing
cannot, however, be applied to activities of a non-repetitive nature,
since there is no basis for observing repetitive operations and
consequently standards cannot be set.
STANDARD COSTING
Types of standard
Ideal standard – an standard that allows for no inefficiencies of any kind.
These are based on perfect operating conditions: no wastage, no spoilage, no
inefficiencies, no idle time, no breakdowns. Variances from ideal standards are useful
for pinpointing areas where a close examination may result in large savings in order to
maximise efficiency and minimise waste. However ideal standards are likely to have an
unfavourable motivational impact because reported variances will always be adverse.
Employees will often feel that the goals are unattainable and not work so hard.
, 3
STANDARD COSTING
Attainable standard –allows for the normal inefficiencies of production.
These are based on the hope that a standard amount of work will be carried out
efficiently, machines properly operated or materials properly used. Some allowance is
made for wastage and inefficiencies. If well-set they provide a useful psychological
incentive by giving employees a realistic, but challenging target of efficiency. The
consent and co-operation of employees involved in improving the standard are
required.
Current standard – it is the current status of affairs
These are based on current working conditions (current wastage, current
inefficiencies). The disadvantage of current standards is that they do not attempt to
improve on current levels of efficiency.
STANDARD COSTING
Basic standard – reflects the normal status of affairs
These are kept unaltered over a long period of time, and may be out of date. They are
used to show changes in efficiency or performance over a long period of time. Basic
standards are perhaps the least useful and least common type of standard in use.
