Week 5

• A standard cost is a per unit predetermined cost which is used as a target
• Standard costing is used in manufacturing and service organisations where operations are repetitive
• Standard costs are created from combining standard prices, standard hours, standard quantities etc
• A budget for the whole activity is then based on standard costs
• Basic standard: doesn’t change; base line for long-term comparisons§
• Ideal standard: represents cost under most efficient operating conditions
• Currently attainable standard: represents expectations under normally efficient operating conditions
• A variance is the difference between the budgeted figure and the actual figure
• Costs are made up of price x quantity, therefore..
• Basic cost variances can be separated into two categories:  Price variance and Quantity variance
• Depending on the cost type the names vary slightly
• Variances can be adverse (A) or favourable (F).
• Variances allow investigation leading to control
• Budgets are prepared on the basis of estimates including the expected level of activity (i.e. sales)
• Most likely the actual level of activity will be different from the budgeted level
• Therefore we have to adjust the budget to make the actual figures comparable to the budget. This is called flexing the budget.
• In summary, flexible budgets allow comparisons between what actually happens and what we would have expected for the actual level of activity
• As with costs, if your actual sales income is different from your budgeted income it will be for two reasons:

  The price was different from what you planned (sales price variance)

  And / Or

  The volume (amount you sold) was different from what you planned        (sales volume variance)

  These two things are related – we would often expect the volume to fall if the price is raised, depending on the price elasticity of demand
• Sales volume variance

  Occurs when volume (amount you sold) was different from what you planned
• Sales price variance

  Occurs when the selling  price per unit was different from what you planned
• Variable overheads are assumed to vary with

  Labour hours (normally) or Units produced
• If variable costs are considered to vary with labour hours, the idea is that for every hour the workers are working, the lights are on, factory is being heated etc.  So part of any change in overhead costs will be related to the hours worked.And the other part of any variance is related to the actual price paid for variable overheads, eg the price paid for electricity etc