Standard Costing & Variance Analysis Practice

Flashcards covering standard costing definitions, budgetary control, variance formulas, and interpretation based on the lecture transcript.

What is the definition of a standard cost?

A standard cost is a pre-determined target cost for one unit of output, intended to be incurred under efficient, practically achievable operating conditions.

How does a standard cost differ from a budget in terms of scope?

A standard cost is set per unit of product or service, whereas a budget is usually for the whole operation or activity level.

What are the five main reasons why standard costing is useful for an organisation?

1. Setting budgets; 2. Budgetary control; 3. Decision making and pricing; 4. Performance evaluation; 5. Inventory valuation.

In the context of the standard cost card for Barker & Karpis Ltd, what is the standard variable cost per unit?

$£72$ ($6\,kg \times £4 = £24$ for materials and $8\text{ hours} \times £6 = £48$ for labour).

What is the formula for calculating a Flexed Budget?

$$\text{Flexed budget} = \text{standard costs and revenues} \times \text{actual volume}$$

When is a sales variance considered favourable (F)?

A sales variance is favourable when the actual sales revenue, price, or volume is higher than the standard or budget.

What is the formula for the Sales margin/volume variance?

$(AV - BV) \times SM$, where $AV$ is actual sales volume, $BV$ is budgeted sales volume, and $SM$ is standard margin/contribution per unit.

What is the formula for the Material Price variance?

$(SP - AP) \times AQ$, where $SP$ is standard price, $AP$ is actual price, and $AQ$ is actual quantity used or purchased.

What is the formula for the Material Usage variance?

$(SQ - AQ) \times SP$, where $SQ$ is the standard quantity allowed for actual output, $AQ$ is the actual quantity used, and $SP$ is the standard price.

In the Barker & Karpis Ltd worked example, how is the Standard Quantity (SQ) for materials calculated for 18,000 actual units?

$$SQ = 18,000\text{ units} \times 6\,kg = 108,000\,kg$$

What is the formula for the Labour Efficiency variance?

$(SH - AH) \times SR$, where $SH$ is standard hours allowed for actual output, $AH$ is actual hours worked, and $SR$ is the standard labour rate per hour.

What is the formula for the Fixed Overhead Expenditure variance?

$BFO - AFO$, which is the Budgeted fixed overhead minus the Actual fixed overhead.

What are three possible causes for an adverse Labour efficiency variance?

Possible causes include poor staff training, machine breakdowns, low-quality materials, or poor supervision.

Define a Planning variance according to the notes.

A planning variance is the effect of reality changing since the standard was set, representing what standard would have been set if the new conditions had been known.

What is an Operational variance?

An operational variance is the effect of actual performance compared with a revised, realistic standard.

According to the Tarmak (ZFC Ltd) example, what was the standard contribution per unit?

$£184$ ($£340\text{ selling price} - £156\text{ variable cost}$).

What is a major limitation of standard costing in modern production environments?

Traditional systems may be too labour-focused when modern production is often machine-paced, and standards can become obsolete quickly.

What is the common exam mistake regarding the valuation of the usage variance?

Using the actual price instead of the standard price, as usage should always be valued at the standard price or rate.