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Types of Cost Standards

BASIC STANDARDS long term standards which

remain unchanged over a period of years. Used toshow trends over time for items such as materialprices, labour rates and labour efficiency. They arealso used to show the effect of using differentmethods over time. Least used and least useful typeof standard.

IDEAL STANDARDS based upon perfect operatingconditions no wastage; no scrap; no breakdowns;no stoppages; no idle time. Will likely have anadverse motivational impact becoz they are unlikelyto be achieved.

ATTAINABLE STANDARDS based upon efficient(butnot perfect) operating conditions. These standardsinclude allowances for the following- normal orexpected material losses; fatigue; machinebreakdowns. Must be based on a high performancelevel so that with a certain amount of hardwork theyare achievable.

CURRENT STANDARDS based on current levels of efficiency in terms of allowance for breakdowns,wastage, losses etc. Disadvantage is they do notprovide any incentive to improve on the current levelof performance.

Sales Variances

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Sales Volume Variance

calculates the effect on profit of the actual sales

volume being different from that budgeted. Theeffect on profit will differ depending upon whether amarginal or absorption costing systems.

= (Actual Quantity Sold * Standard Margin) (BudgetQuantity Sold * Standard Margin

NB: Standard margin = Contribution per unit(marginal costing) or the Profit per unit (Absorptioncosting)

Sales Price Variance shows the effect on profit of selling at a different price from that expected.

= (Actual Quantity Sold * Actual selling price) (Actual Quantity Sold * Budgeted selling price)

Possible causes of sales variances

1. Unplanned price increases/reductions2. Unexpected fall in demand due to recession3. Additional demand attracted by reduced price

4. Failure to satisfy demand due to productiondifficulties.

Materials Cost Variances

Materials Total variance the difference between(a) the standard material cost of the actual

production (flexed budget) and (b) the actual cost of

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direct material. It can be analysed into two sub-variances: materials price variance and a materialsusage variance (ie. Add the two)

Materials Price Variance analyses whether thecompany paid more or less than expected for material

= (Actual Quantity Bought * Actual Price) (ActualQuantity Bought * Standard price per unit of material)

Materials Usage Variance quantifies the effect onprofit of using a different quantity of raw materialfrom that expected for the actual productionachieved.

= (Actual Quantity Used * Standard price per unit) (Standard Quantity Used for actual production *

Standard price per unit)Possible causes of material price variations

1. Suppliers from different sources2. Unexpected general price increases3. Changes in quantity discounts4. Substitution of one grade of material for another5. Materials price standards are usually set at a mid-

year price so one would expect a favourable pricevariance early in a period and an adversevariance later on in a budget period.

Possible causes of material usage variance

1. A higher or lower incidence of scrap

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2. An alteration to product design3. Substitution of one grade of material for another

Later Cost VariancesWage Rate Variance

= (Standard wage rate per hour Actual wage rate) *Actual labour hours

Labour Efficiency Variance

= (Standard quantity of labour hours for actualproduction Actual labour hours) * Standard wagerate

Possible causes of labour price variances

1. An unexpected national wage award2. Overtime or bonus payments which are different

from budgeted3. Substitution of one grade of labour for another

higher or lower grade.

Possible causes of labour efficiency variances

1. Changes in working conditions, eg Bettersupervision2. Consequences of the learning effect3. Introduction of incentive schemes or staff

training4. Substitution of one grade of labour for another

higher or lower grade

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CONCEPT OF RELEVANT COSTING

- Relevant costs and revenues are those costs and

revenues that change as a result of decisiontaken. They are incremental costs and revenues,cash flows and future costs and revenues

RELEVANT COST terms

- Differential costs- the differences in total costs orrevenues between two alternatives

- Opportunity costs- represent the best alternativeforgone

- Avoidable costs- would be avoided if the activitydidnt exist

BREAK-EVEN & CVP ANALYSIS

CVP analysis the study of the effects on future profitsof changes in fixed costs, variable costs, selling price,quantity. Makes use of the contribution concept inorder to assess the following measures for a singleproduct:

- c/s ratio = contribution per unit/selling price p.u- break-even point=fixed costs/cntrbution per unit- margin of safety= budgeted sales - b/e point sales- Target profit =(f.c + required profit) / contribution

per unit

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THROUGHPUT ACCOUNTING

PRINCIPLES

- a measure of profitability- aims to make the best use of a scarce recource in

a JIT environment- aims to max profitability by utilising scarce

resource and also reducing inventory costs- only variable cost in short term is raw materials- direct labour costs are not variable in the short

term as usually guaranteed weekly minimumwage

HOW TO IMPROVE TPAR

- Increase sales price

- Reduce materials cost change materials, switchsuppliers- Reduce total operating expenses to reduce

factory costs per hour

Throughput = sales material costs