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Management and Cost Accounting: Colin Drury
Management and Cost Accounting: Colin Drury
AND COST
ACCOUNTING
SIXTH EDITION
COLIN DRURY
Chapter Eighteen:
Standard costing and variance analysis 1
Definition
• Standard costs are target costs for each operation that can be built
up to produce a product standard cost.
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.
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.
5. To simplify the task of tracing Figure 18.2 Standard costs for inventory valuation
costs to products for inventory and profit measurement
valuation.
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?
Sales variances
2. Example
Example 18.1
Actual contribution
Actual sales (9 000 × £90) = £810 000
Standard VC of sales (9 000 × £68) = £612 000
£198 000
Variance = £2 000 A
Therefore,
Sales margin price = (£90 – £88) × 9 000 = £18 000 F
Sales margin volume = (9 000 – 10 000)× £20 = £20 000 A
£2 000 A
£ £ £
Budgeted net profit 80 000
Sales variances:
Sales margin price 18 000 F
Sales margin volume 20 000 A 2 000 A
Direct cost variances:
Material: Price 8 900 A
Usage 26 500 A 35 400 A
Labour: Rate 17 100 A
Efficiency 13 500 A 30 600 A
Manufacturing overhead variances:
Fixed overhead expenditure 4 000 F
Variable overhead
expenditure 5 000 F
Variable overhead efficiency 3 000 A 6 000 F 62 000 A
or £120 000 /30 000 hours = £4 per standard hour = £12 per unit (3 ×£4).
4. Volume variances are not useful for cost control since FC are sunk costs.
£ £ £ £
Budgeted net profit 80 000
Sales variances
Sales margin price 18 000 F
Sales margin volume 8 000 A 10 000 F
Direct cost variance
Material Price: Material A 19 000 A
Material B 10 100 F 8 900 A
Usage: Material A 10 000 A
Material B 16 500 A 26 500 A 35 400 A
Labour Rate 17 100 A
Efficiency 13 500 A 30 600 A
Manufacturingin overhead variances
Fixed Expenditure 4 000 F
Volume capacity 6 000 A
Volume efficiency 6 000 A 8 000 A
Variable Expenditure 5 000 F
Efficiency 3 000 A 2 000 F 6 000 A 62 000 A
Actual profit 18 000