Types of Cost Standards BASIC STANDARDS long term standards which remain unchanged over a period of years.

. Used to show trends over time for items such as material prices, labour rates and labour efficiency. They are also used to show the effect of using different methods over time. Least used and least useful type of standard. IDEAL STANDARDS based upon perfect operating conditions no wastage; no scrap; no breakdowns; no stoppages; no idle time. Will likely have an adverse motivational impact becoz they are unlikely to be achieved. ATTAINABLE STANDARDS based upon efficient(but not perfect) operating conditions. These standards include allowances for the following- normal or expected material losses; fatigue; machine breakdowns. Must be based on a high performance level so that with a certain amount of hardwork they are achievable. CURRENT STANDARDS based on current levels of efficiency in terms of allowance for breakdowns, wastage, losses etc. Disadvantage is they do not provide any incentive to improve on the current level of performance. Sales Variances

Sales Volume Variance calculates the effect on profit of the actual sales volume being different from that budgeted. The effect on profit will differ depending upon whether a marginal or absorption costing systems. = (Actual Quantity Sold * Standard Margin) (Budget Quantity Sold * Standard Margin NB: Standard margin = Contribution per unit (marginal costing) or the Profit per unit (Absorption costing) Sales Price Variance shows the effect on profit of selling at a different price from that expected. = (Actual Quantity Sold * Actual selling price) (Actual Quantity Sold * Budgeted selling price) Possible causes of sales variances 1. Unplanned price increases/reductions 2. Unexpected fall in demand due to recession 3. Additional demand attracted by reduced price 4. Failure to satisfy demand due to production difficulties. Materials Cost Variances Materials Total variance the difference between (a) the standard material cost of the actual production (flexed budget) and (b) the actual cost of

direct material. It can be analysed into two subvariances: materials price variance and a materials usage variance (ie. Add the two) Materials Price Variance analyses whether the company paid more or less than expected for material = (Actual Quantity Bought * Actual Price) (Actual Quantity Bought * Standard price per unit of material) Materials Usage Variance quantifies the effect on profit of using a different quantity of raw material from that expected for the actual production achieved. = (Actual Quantity Used * Standard price per unit) (Standard Quantity Used for actual production * Standard price per unit) Possible causes of material price variations 1. Suppliers from different sources 2. Unexpected general price increases 3. Changes in quantity discounts 4. Substitution of one grade of material for another 5. Materials price standards are usually set at a midyear price so one would expect a favourable price variance early in a period and an adverse variance later on in a budget period. Possible causes of material usage variance 1. A higher or lower incidence of scrap

2. An alteration to product design 3. Substitution of one grade of material for another Later Cost Variances Wage Rate Variance = (Standard wage rate per hour Actual wage rate) * Actual labour hours Labour Efficiency Variance = (Standard quantity of labour hours for actual production Actual labour hours) * Standard wage rate Possible causes of labour price variances 1. An unexpected national wage award 2. Overtime or bonus payments which are different from budgeted 3. Substitution of one grade of labour for another higher or lower grade. Possible causes of labour efficiency variances 1. Changes in working conditions, eg Better supervision 2. Consequences of the learning effect 3. Introduction of incentive schemes or staff training 4. Substitution of one grade of labour for another higher or lower grade

CONCEPT OF RELEVANT COSTING - Relevant costs and revenues are those costs and revenues that change as a result of decision taken. They are incremental costs and revenues, cash flows and future costs and revenues RELEVANT COST terms - Differential costs- the differences in total costs or revenues between two alternatives - Opportunity costs- represent the best alternative forgone - Avoidable costs- would be avoided if the activity didnt exist BREAK-EVEN & CVP ANALYSIS CVP analysis the study of the effects on future profits of changes in fixed costs, variable costs, selling price, quantity. Makes use of the contribution concept in order to assess the following measures for a single product: c/s ratio = contribution per unit/selling price p.u break-even point=fixed costs/cntrbution per unit margin of safety= budgeted sales - b/e point sales Target profit =(f.c + required profit) / contribution per unit

THROUGHPUT ACCOUNTING PRINCIPLES - a measure of profitability - aims to make the best use of a scarce recource in a JIT environment - aims to max profitability by utilising scarce resource and also reducing inventory costs - only variable cost in short term is raw materials - direct labour costs are not variable in the short term as usually guaranteed weekly minimum wage HOW TO IMPROVE TPAR - Increase sales price - Reduce materials cost change materials, switch suppliers - Reduce total operating expenses to reduce factory costs per hour Throughput = sales material costs