Standard Costs in Cost Control and Variance Analysis for Business

What are standard costs?

Benchmarks for how much a single unit of product should cost, used to measure performance and control costs.

What are ideal standards?

Standards that assume 100% efficiency and zero waste, not realistic for normal operations.

What are practical (attainable) standards?

Standards that allow for normal downtime, waste, and imperfections; more realistic and widely used.

What are quantity standards?

Measures how much input should be used for one unit of product.

What are price (cost) standards?

Measures how much each input should cost.

Why are standard costs developed?

To provide clear expectations for cost control, aid in budgeting and planning, evaluate performance, and create a baseline for variance analysis.

What is one benefit of standard costs?

Improve cost control and decision-making.

How do you set quantity standards for direct materials?

Determine the amount needed per unit (DMSQ).

How do you set price standards for direct labour?

Determine the wage rate including benefits (DLSR).

What is the formula for calculating direct material standard cost?

DM Standard Cost = DMSQ × DMSP.

What is the purpose of variance analysis?

To compare actual results to standards and identify inefficiencies, price changes, and resource waste.

What is a materials price variance?

The difference between the actual price paid for materials and the expected price.

What does a favourable variance indicate?

Costs are lower than expected.

What is the overhead rate variance?

The difference between the actual overhead rate and the standard overhead rate.

What is a flexible budget?

A budget that adjusts budgeted revenues and expenses to actual units sold/produced.

Why are flexible budgets useful?

They provide more accurate performance evaluations and help determine the causes of variances.

What is the sales volume variance?

The difference between the static budget and the flexible budget, explaining how changes in the number of units sold affected outcomes.

What is the static budget variance?

The overall difference between the static budget and actual results.

What is recorded in a standard cost accounting system?

Inventory is recorded at standard cost, not actual cost, with variance accounts created for various costs.

How are variance accounts treated at the end of the period?

They are closed to the Cost of Goods Sold.

What does a standard cost income statement show?

Standard costs, variances, and adjusted operating income.

What is the efficiency variance in direct labour?

The difference between actual hours worked and standard hours allowed.

Who is responsible for the materials price variance?

The Purchasing Manager.

What is the overhead efficiency variance?

The difference between actual hours used and standard hours allowed based on the cost driver.