APT TECHNICAL CPD - MAF STANDARD COSTING
Standard Costing Nicholas Riemer Nicholas.Riemer@firstrand.co.za
Agenda • Workflow to understanding standard costing • What is standard costing? Generic Problem • Industry considerations? • What is the specific problem? • How to incorporate into your file
Standard costing Workflow Approach
Standard costing generic problem What is standard costing? • Financial control system • Analyze deviations from budget • Generally applied to manufacturing activities, but can be applied in other environments (i.e. service environment): – Common / repetitive operations – Input to produce output can be specified – Can be applied where different products are produced, as long as there are common operations / processes 5
Introduction cont. • Standard cost: – Predetermined – Target cost under efficient operating conditions – Represent future target costs, therefore more useful for decision making than actual past costs • Difference between a BUDGET and a STANDARD : – Budget – for TOTAL activity – Standard – the budget on a PER UNIT basis – Therefore, take the budget ÷ budgeted number of units to get standard (i.e. per unit) 6
Introduction cont. • Variances: • What is a variance? • Analyse variance per process , not per product • Allocated to responsibility centres • Remember: for production variances, compare actual costs and usage to standard costs and usage for ACTUAL PRODUCTION • If reason for variance is permanent change, then standards should be changed • Two main elements of variances: • Price • Quantity / Usage 7
Overview of standard costing system STANDARD cost of ACTUAL costs TRACED to ACTUAL output each responsibility centre RECORDED for each responsibility centre Standard and actual costs COMPARED and VARIANCES ANALYSED and REPORTED Variances INVESTIGATED and CORRECTIVE ACTION taken STANDARDS MONITORED and ADJUSTED to reflect changes in standard usage and / or prices 8
Setting standard costs • Set for performing an OPERATION, not the complete product • Standard cost for each operation: • Multiply amount that SHOULD have been USED by the amount that SHOULD have been PAID • Therefore STANDARD QUANTITIES X STANDARD PRICES • Use past HISTORICAL records: • Danger they includes past inefficiencies • Use ENGINEERING studies • Unavoidable / inevitable wastage and delays SHOULD BE taken into account when setting standards • Need to unitise FIXED OVERHEADS for STOCK VALUATION purposes 9
Uses of standard costing • Decision making: • Represent future target costs, eliminating avoidable inefficiencies • Preferable to estimates based on past costs that could include avoidable inefficiencies • Motivation: • Provide challenging target • Help setting budgets and evaluating managerial performance • Control device: • Highlighting areas that are ‘out of control’ • Pinpoint where issues are arising through detailed analysis of variances 10
Uses of standard costing cont. • Simplifies profit measurement and inventory valuation: • Inventory valued at standard cost • Variances written off through the Income Statement as a period cost • Comparison of standard and actual costs done at responsibility centre level and not at the product level, therefore actual costs are not assigned to individual products 11
Variances
Flexing – NB! BUDGET FLEXED BUDGET ACTUAL BUDGETED units X ACTUAL units X STANDARD ACTUAL units X ACTUAL STANDARD PRICES and PRICES and STANDARD PRICES and ACTUAL STANDARD QUANTITIES per QUANTITIES per unit QUANTITIES per unit unit FLEXING = KEY 13
Variances • Cost determined by PRICE paid and QUANTITY used • Therefore, ACTUAL cost can differ from STANDARD cost because: Actual price paid differs from Actual quantity used differs from standard price you ‘should have’ standard quantity you ‘should have’ paid used PRICE / RATE variance USAGE / EFFICIENCY variance For price variances, use ACTUAL For usage variances, keep prices purchases / sales / production / at STANDARD because we aren’t hours etc. because that is HOW evaluating that now – we want to MANY TIMES the ‘different’ price ISOLATE the usage / efficiency happened only 14
Materials
Materials variances Difference between what your cost SHOULD HAVE BEEN (Standard Price x Standard Quantity) for your ACTUAL level of production and what your cost ACTUALLY WAS (Actual Price x Actual Quantity) PRICE variance USAGE variance (Actual Price per unit of (Actual Quantity used – what material – Standard Price per you SHOULD HAVE used for unit of material) X Number of ACTUAL production) X units ACTUALLY purchased Standard Price per unit of or used material MIX YIELD Based on quantity purchased or quantity used? See following slides 16
Materials mix and yield variances • Relevant where use more than one material to produce product AND can be used in differing ratios i.e. can be substituted • Need to establish ‘target’ (i.e. standard) mix of materials • Use laboratory and engineering studies • Goal of target mix? • Deviating from standard mix can result in changes in cost and changes in yield • Could be conscious decision based on changes in costs of raw materials • Could be due to inefficiencies etc. 17
Materials mix and yield variances cont. TOTAL variance What should you have used and what did you use to PRICE variance produce output (regardless USAGE variance of what mix should have been) MIX YIELD (Actual Quantity – Actual (Actual Quantity in Quantity in STANDARD MIX) STANDARD MIX – Standard X Standard Price per unit of Quantity in STANDARD MIX) material X Standard Price per unit of material For materials you ACTUALLY used, what was mix and What SHOULD you have used in the STANDARD MIX what should it have been; and what did you ACTUALLY use in STANDARD MIX; Regardless of how much you should have used – take ‘Ignore’ differences in your mix at this point. what you ACTUALLY used and just look at MIX; ‘Ignore’ efficient / inefficient usage for now. 18
Materials mix and yield variances cont. TOTAL variance Mix and Yield must add up to Usage variance PRICE variance USAGE variance MIX Compare what I ACTUALLY YIELD used per material with what I SHOULD have used per material Concerned with Concerned with HOW MUCH PROPORTION of materials materials I should have used used NOT with whether I NOT the proportion I used was efficient or inefficient Use ACTUAL TOTAL Work out how much total material I SHOULD HAVE quantity of material used – split this into the STANDARD used and compare to the proportions and compare to total I ACTUALLY used – the ACTUAL amount of each ALL in STANDARD proportion material used On the USAGE side of the variance, therefore use STANDARD PRICES 19
Analysis examples • Materials price variance: • Doesn’t always reflect efficiency of purchasing department: market conditions could have changed influencing price of material • Adverse: failure to source most advantageous sources of supply • Favourable: could be due to purchase of inferior quality materials, could lead to more wastage and inferior quality final product • Materials usage variance: • Usually controllable by manager of appropriate production responsibility centre • Adverse: careless handling of materials; purchase of inferior quality; theft • Either: changes in quality control requirements; changes in method of production 20
Analysis examples cont. • Materials mix variance: • Unfavourable could be due to using more of the expensive, better quality input – affects the yield (i.e. amount and quality produced) • Favourable (i.e. using more of the cheaper material) could lead to sub-par product • Materials yield variance: • Unfavourable variance could be due to use of inferior inputs • Could indicate that standard procedure wasn’t followed (e.g. used a less efficient method) 21
Labour
Labour variances Difference between what your labour cost SHOULD have been (standard wage rate x standard hours) for your ACTUAL level of production and what your cost ACTUALLY was (actual rate x actual hours) RATE (‘PRICE’) variance EFFICIENY (‘USAGE’) variance (Actual wage per hour – (Actual hours worked – how Standard wage per hour) X many hours SHOULD have ACTUAL number of hours been worked for ACTUAL production) X Standard wage rate per hour Further analysis IDLE TIME / CAPACITY USAGE 23
Analysis examples • Wage rate variance: • One of least controllable variances • Generally due to standards not being adjusted to reflect changes in wage rates • Labour efficiency variance: • Normally controllable by manager, but sometimes not if due to change in quality control standards or poor production scheduling by planning department • Adverse: inferior quality materials; failure to maintain equipment properly • Either: using different grades of labour; introduction of new equipment; changes in the production process 24
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