Accounting Standard costing
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Transcript of Accounting Standard costing
Management Accounting & Decisions II N12401
Lecture 3
Standard Costing: Additional Variances
by Hung Woan-Ting
2
Learning Objectives
1. To understand and be able to quantify the analysis for fixed overhead costs
2. To appreciate different costing principles within a standard costing environment
3. To appreciate how changes in anticipated environment should be reflected in variances analysis
3
0.0 Revisiting the concept
4
0.0 Revisiting the concept
• Chicken roll (P*Q)
• Egg (P*Q)
• Cheese (P*Q)
• McMuffin (P*Q)
• …
Standard Cost Card
• Meal (P*Q)
• Laundry (P*Q)
• Care time (P*Q)
• Lab test (P*Q)
• Medicine (P*Q)
• …
Standard Cost Card
• Engine (P*Q)
• Valve (P*Q)
• Fuel Tank (P*Q)
• Brake (P*Q)
• Headlamp (P*Q)
• Wheel (P*Q)
• Audio (P*Q)
• …
Standard Cost Card
•Manufacturing costs •Cost competiveness • Assembly line defect rate •…
Effective cost control Price & Quantity
5
0.1 Revisiting Cost Classifications
Total Costs
Material Costs
Labour Costs
Other Manufacturing Costs
Non-manufacturing costs
PRODUCT
Purpose: Cost analysis for better management
6
0.2 Cost Analysis for Management
Reflecting cost behaviour in cost analysis The flexible budgeting approach
7
0.3 Cost Analysis for Management
VARIABLE COSTS
ANALYSIS
DIRECT MATERIAL
COST
DIRECT LABOUR COST
VARIABLE OH
FIXED COSTS
ANALYSIS
FIXED OH
8
1.0 Determining Fixed MOH Variances
Example
• Budgeted output 1000 units
• Budgeted Fixed MOH ₤3500
• All OHs allocated on direct labour hour basis
• Std direct labour hour = 7
• Actual output 900 units. Actual Fixed MOH ₤2800
• Actual hours worked 6100
Std Rate
= ₤__ per hr
9
1.1 Expenditure Variance
• Expected to be constant within the relevant range of activities and in the short term
• What happens when spending differs from plan?
• Fixed MOH Expenditure Variance
Budgeted Fixed MOH – Actual Fixed MOH
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1.1 Expenditure Variance
Fixed MOH Expenditure Variance
= Budgeted Fixed MOH – Actual Fixed MOH
= ₤3500 - ₤2800
= ₤700 ( )
Managerial implications ??
11
1.2 Volume Variance
• Fixed MOH may be allocated (absorbed) into products (external financial reporting regulation; pricing; etc.)
• Standard costing system records (absorbs) budgeted fixed MOH via pre-determined rate (budgeted labour
hours; machine hours; etc.)
• What happens when actual volume differs from plan?
• Fixed MOH Volume Variance
12
1.2 Volume Variances
Fixed MOH Volume variance
= (Actual Vol.–Budgeted Vol.) @ Std Rate
= (Actual Vol.*Std Rate)–(Budgeted Vol.*Std Rate)
= Absorbed Fixed MOH – Budgeted Fixed MOH
13
[Refer Slide #8]
Fixed MOH Volume variance
= Absorbed Fixed MOH – Budgeted Fixed MOH
= 900units*7h*₤0.5p.h. – 1000units*7h*₤0.5p.h.
= ₤3150 – ₤3500
= ₤350 ( )
1.2 Volume Variances
Managerial implications ??
14
2.0 Different Costing Principles – revisit
Variable Costing vs. Absorption Costing
Pro
duct
Cost
Pro
duct
Cost
• Purposes (internal vs. external)
• Stock valuation • Timing of release of Fixed MOH
15
2.1 Standard Variable Costing System
• Stock @ Standard Variable Manufacturing Costs
• Budgeted Fixed MOH expensed off as incurred
• Analysis of cost variances – reflect cost structure
Pro
duct
Cost
Direct Material
Direct Labour
Variable MOH
16
2.2 Standard Absorption Costing System
• Stock @ Standard Total Manufacturing Costs
• Budgeted Fixed MOH allocated to products
• Analysis of cost variances – reflect cost structure
Pro
duct
Cost
Direct Material
Direct Labour
Variable MOH
Fixed MOH
17
2.3 Volume Variance [up close]
Making more sense out of Volume Variance for better business management?
Example:
How is the current use of capacity?
Any idle capacity?
$¢ ?
18
2.3 Volume Variance [up close]
Static Budget
Flexible Budget
Actual Results
BV AV AV
*SH *AH * SH
@ SR @ SR @ SR
Variance due to capacity usage
(Actual hours – Budget hour) *Std Rate = (6100 – 1000*7h) *₤0.5p.h. = ₤450 ( )
= Volume Capacity Variance
Managerial implications ??
19
2.3 Volume Variance [up close]
Static Budget
Flexible Budget
Actual Results
BV AV AV
*SH *AH * SH
@ SR @ SR @ SR
Variance due to labour efficiency
(Allowed hours – Actual hour)*Std Rate = (900*7h – 6100)* ₤0.5p.h. = ₤100 ( )
= Volume Efficiency Variance
Managerial implications ??
20
3.0 Changes in Anticipated Environment
Actual performances compared with planned performance (standard set based on anticipated environment)
Total Variances
Ex-post analysis approach ~ reflect changes in anticipated
environment (Demski, 1977)
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3.1 Changes in Anticipated Environment
Ex-post analysis approach
Original standard
Actual outcome
Planning Variance
Operating Variance
Ex-post standard (given the benefit of hindsight)
Managerial implications ??
22
Planning variances
Operational variances
3.2 Ex-post Variance Analysis - Example
Budgeted output from production 1,000 units.
Std cost for Material A: 3kg @ ₤2/kg.
After the budget was set, the local government announced a sharp increase in fuel price and the cost of Mat A was raised to ₤2.30/kg for the near foreseeable future.
Actual output 900 units.
Cost of Mat A actually incurred: ₤2.20/kg for 2,800kg.
Mat Price Variance = (₤__- ₤__)*2800kg = ₤__ (_) Mat Usage Variance = (3kg*900units – 2800kg)* ₤ __ = ₤ __ (_)
Material Price Planning variance = (₤__- ₤ __)*3kg*1000units = ₤__ (_)
23
– GNBCY Ch12
– D Ch17, Ch18
– Cheatham & Cheatham (1996) ‘Re-designing Cost Systems: Is Standard Costing Obsolete?’, Accounting Horizons, Dec, Vol 10(4): 23-31
– Johnsen & Sopariwala (2000) “Standard Costing is Alive and Well at Parker Brass”, Management Accounting Quarterly, Winter, Vol 1(2): 1-9.
– KPMG (2010) Standard costing: Insights from leading companies, in association with CIMA.
End of Lecture
Readings
24
Seminar 1 preparation
Attempt the Questions Set (at the back of this handout)
Indicative solutions in Moodle.
Please refer before attending seminar
Seminar starts next week!
(Details in Module Outline Document, p6)
Remember to go by your registered grouping
Exe.