L10: Standard costing (variances) pt2 and Planning with limiting factors

What is the purpose of an operating statement in standard costing?

To reconcile budgeted values with actual values using variances, helping understand the impact on profit or contribution.

In an operating statement, how are variances treated under absorption or marginal costing?

Favourable variances are added (increase profit/contribution), adverse variances are subtracted (decrease profit/contribution).

What are the four main causes of variances?

Planning errors, measurement errors, random factors, operational factors.

Give two examples of operational factors causing variances.

Less efficient staff, material spillages.

What factors should be considered when assessing variances?

Size/significance, adverse vs. favourable, cost-benefit of correction, past patterns, measurement reliability, budget reliability.

If a cheaper material is used, what interrelated variances might occur?

Favourable material price variance, adverse material usage variance.

If workers work faster than expected, which variances might be affected?

Favourable labour efficiency variance, adverse material usage variance.

List three possible solutions for adverse variances.

Improve machinery, change supplier, better staff training.

Why might standard costing be problematic in modern production environments?

Non-standard products, fast-changing costs, automation (more fixed costs), outdated standards, late variance feedback.

What is a limiting factor in planning?

A resource constraint (like labour or material) that prevents meeting production goals.

What is the objective when planning with a limiting factor?

Maximise total contribution within the constraint.

What is the first step in planning with one limiting factor?

Identify the scarce resource.

How do you calculate contribution per unit of a scarce resource?

Divide contribution per unit by the units of scarce resource used per product

How should products be ranked when facing a limiting factor?

By contribution per unit of scarce resource (highest first).

A product contributes £72 per unit and uses 8 labour hours. What is the contribution per hour?

£9 per hour (72 ÷ 8).

If only materials are insufficient to meet demand, but labour is enough, what is the limiting factor?

Materials.

Why is calculating contribution per scarce resource more effective than contribution per unit in constraint planning?

Because it prioritises efficient use of the limited resource.