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Standard costing & Variance Analysis (Uses of standards (Decision…
Standard costing & Variance Analysis
Standard costing
This is a control costing technique. It establishes predetermined estimates of the product or service cost and then compares these predetermined costs with actual costs as they incurred.
Predetermined costs = standard costs
Difference between standard and actual costs = variance
Uses of standards
Decision making
Motivation
Setting budgets and evaluating managerial performancer
Set selling prices
Cost consciousness and control
Profit measurement and inventory valuation
Standard setting
Important to consider with great care to ensure appropriate and reflect actual conditions which will...
avoid unnecessary variances
will better motivate
be more useful standard in the future
Budgets vs standards
Budgets
Quantified monetary plan for a future period
Planned total costs
Prepared for all functions
Standards
Predetermined quantity target for a future period
Resource usage for a single task
Limited to situations where repetitive actions are performed and output can be measured
Need to be expressed in monetary terms
Considerations required when setting standards
Material
Pricing decisions
Bulk order discounts
Quality of materials
What contract already exists
Optimal quantity once factored in wastage/loss
Most suitable material based on product design and quality specifications
Labour
Most efficient production method to estimate the number of standard hours per unit
Build in unavoidable delays and routine maintenance
Skills required
Grades/ pension/ NI
Variance Analysis
A variance is the difference between an actual result and an expected result