Standard Costing 2013-14

AL WADI INTERNATIONAL SCHOOL STANDARD COSTING GRADE 12
NOTES
STANDARD COSTING (NOTES) A Standard cost is a planned or target cost production. It is usually expressed in
terms of the cost per unit of output. Standard costs are not the same as budgeted
costs. Budgeted costs relate to a business as a whole, or to a department within a
business. Standard costs relate unit of output. For example, the budgeted cost of a
production department might be $100,000. This figure might be calculated on the basis
of a planned output of 50,000 units and a standard cost of $2 per unit. Standard costing
is a management technique that involves comparing standard costs with actual costs.
The difference between standard and actual costs is known as a Variance. Variance
analysis is used to examine the differences. When actual costs are significantly different
from standard costs, it means that the production process is not going to plan. Identifying
variances alerts managers to this problem, allowing them to take corrective action.
Types of Standards
In addition to standard costs, which are expressed in monetary terms, businesses
sometimes use other standard measures. For example, a business might decide that a
standard performance for labour cost of $12.00 per unit. When setting standards,
managers need to be aware of two requirements. First, standards must provide a means
of controlling production by establishing planned outcomes. Second, standards must
have the effect of motivating staff rather than demotivating them. Three approaches to
setting standards are outlined below.
(a) Ideal standards One approach is to base standards n what can be achieved under the most favourable
operating conditions. This involves setting standards on the assumption that all the
resources used by a business will operate to their optimal efficiency. So, for example, it
is assumed that:
all machines will work non-stop without breaking down;

all workers will work to their maximum efficiency, without taking unofficial breaks
or time off work;
Without any wastages.
This approach and service sometimes criticised because such standards are unrealistic
and not likely to be attainable. Staff might therefore become frustrated and demotivated.
However, ideal standards can be used to identify the extent to which present
performance falls short of the ideal. The might help management identify areas of
particular weakness.
(b) Attainable Standards A more common approach is to base standards on what should be achieved if resources
are used to their maximum efficiency, but also taking into account normal levels of
disruption and wastage. This approach accepts that machinery will need to be
maintained and might sometimes break down. It also accepts that some materials and
other resources will be wasted and that workers are likely to have some idle time, i.e.
periods when they are not being productive. By setting standards that are demanding yet
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realistic, employees are likely to be positive towards achieving targets that are set.
Increasing, businesses are involving employees in setting standards. By consulting their
workforce on the standards that are achievable, businesses believe that staff will have a
greater sense of ownership. They will therefore be better motivated in their work. On
the other hand, workers who have standards imposed on them might become
demotivated.
(c) Current Standards Current standards are based on present levels of performance, which may be quite
inappropriate for the future. They do not offer management or workers any incentive to
perform more efficiently. Current standards should only be used when present conditions
are too uncertain to enable more appropriate standards to be set.
Setting cost Standards The process of setting costs is complex and might involve a large number of people over
a lengthy period of time. The first step in the process is to gather relevant information.
This can take a number of forms.
The production department will provide information relating to the resources that
are needed to make one unit of production. For example, it will know the quantity of
materials and the number of machine and labour hours are required.
The human resources or personnel department will know the salaries and current
wage rates that are paid to different grades of worker, and overcome, bonus and
piece work rates.
The purchasing department will be able to provide information about the cost of
materials and other resources such as energy, insurance and advertising.
Some businesses employ consultants to carry out a work study. This involves
measuring the amount of time it takes an average worker to perform tasks in the
production process.
The information gathered by the business is then used to calculate the standard cost.
This can broken down into three components, the standard material cost, the standard
labour cost and the standard overhead cost.
Standard Material cost This is the cost of the direct materials that are used to make a standard unit. In this
context, a standard unit consists of one item production. It could be a car, a book, a shirt
or loaf of bread. In order to calculate the standard cost, it is first necessary to draw up a
standard product specification. This is a list of the qualities of raw materials and
components required per unit. The standard material cost is found by multiplying the
quantities of materials and components by their prices. The purchasing department will
estimate these prices by reference to current prices, expected price increases and, in
some cases, to price discounts that might be available.
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Standard Labour cost This is the cost of direct labour required to make one unit of output. In order to calculate
the cost, it is necessary to draw up a standard operation sheet, which specifies the
number of hours spent by different workers to produce on unit. The standard cost is then
determined by multiplying the number of hours by the wage rates that are paid to
workers. This calculation can become complex when different grades of workers, paid on
different wage rates are involved in the production process.
Standard Overhead cost This is the cost of a businesss overheads per unit of output. It can be calculated using
overhead absorption rates. Two examples are given.
If the basis of absorption is direct labour hours and if overheads are absorbed at a
rate of $2.50 per direct labour hour, and 3 hours of direct labour used to produce one
unit, the standard overhead cost is $7.50 (3 x $2.50).
If a cost unit overheads absorption rate is used, the standard overhead is calculated
by dividing the total overheads by the total output for a given budget period. For
example, if total overheads are $50,000 and budgeted output is 10,000, the standard
overhead cost is $5.00 per unit ($50,000 10,000).
In some cases, overheads might be divided into fixed overheads that do not change with
output such as factory rent, and variable overheads that do not change with output such
as commission earned by sales personnel. It is possible, under these circumstances,
that different absorption rates might be used for fixed and variable overheads.
To illustrate how the standard cost for a unit of output might be calculated, consider
Blakes Ltd, a specialist manufacturer of audio speakers. The following information
relates to the production costs of one standard speaker unit.
Direct Materials
Wood
Fabric
Wire
Electric components
Other materials
Standard material cost
1.20
1.80
1.70
7.50
2.80
15.00
Direct Labour cost

1.5 hours @ $6 per hour
Standard labour cost
9.00
15.00
10.00
34.00
Overheads -
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Total overhead cost
Budgeted production total units
Standard overhead cost ($28,000 5,000)
$28000
5000
Standard cost per unit
5.60
54.60
The standard cost per unit is the total of the Standard Material, Standard Labour and
Standard Overhead costs. In this example it is $54.60.
Flexed Budgets
Its very rare that the actual volume of goods produced or sold is the same as the
volume on which a budget has been based. So, in order to compare like with the like ,
the budget must be flexed to take account of the increase or decrease in costs and
revenue. The process of flexing a budget involves adjusting the costs and revenue
according to the level of activity actually achieved i.e. the actual units produced and
sold. The sales and variable costs in the budget must be adjusted to take account of the
actual volume of goods produced and sold. Note that the Fixed budgeted overheads
remains unchanged because, by definition, they co not vary with the level of output.
Worked example 1 Dawsons Ltd produced the following budget for the production and sale of 28000 cases
of cereals for the six months ending 31st December 2011.
$
$
187600
Sales revenue (28000 x $6.70)

Variable costs Direct materials (8500 kg x $1.20 per kg)
Direct labour (5980 hrs x $ 5.00 per hr)
Variable production overheads (4100 hrs x $5.00 per hr)
Variable selling and distribution overheads (3900 hrs x $4.30 per hr)
Fixed overheads Production overheads
Selling and distribution overheads
Administration overheads
Budgeted costs
Budgeted Profit
10200
29900
20500
16770
30000
15000
20000
(142370)
45230
The actual output produced and sold was 35000 cases of cereals. The budget is
flexed by multiplying the sales and variable costs by 35000 / 28000, which is by
1.25 times the standard or budgeted quantity or hours per unit. For example;
Flexed Direct material (8500 kg x 35000 / 28000) x $1.20 per kg = $12750.
Dawsons Ltd Flexed Budget for 35000 cases of cereals
$
Sales revenue (35000 x $6.70)
$
234500
Variable costs -
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Direct materials (8500 kg x 1.25 $1.20 per kg)
Direct labour (5980 hrs x 1.25 $ 5.00 per hr)
Variable production overheads (4100 hrs x 1.25 x $5.00 per hr)
Variable selling and distribution overheads (3900 hrs x 1.25 x $4.30 per hr)
Fixed overheads Production overheads

Selling and distribution overheads
Administration overheads
Flexed costs
Flexed Profit
Variance Analysis -
12750
37375
25625
20962
30000
15000
20000
(161712)
72788
A variance is the difference between an actual result and an expected result. The
process by which the total difference between standard and actual results is analysed is
known as variance analysis. When actual results are better than the expected results,
we have a favourable variance (F). If, on the other hand, actual results are worse than
expected results, we have an adverse (A). Standard costing and the related variances is
a valuable management tool. If a variance arises, management becomes aware that
manufacturing costs have differed from the standard (planned, expected) costs.
If actual costs are greater than standard costs the variance is unfavorable. An
unfavorable variance tells management that if everything else stays constant the
company's actual profit will be less than planned.
If actual costs are less than standard costs the variance is favorable. A
favorable variance tells management that if everything else stays constant the actual
profit will likely exceed the planned profit.
Figure 1: Variance within a business -
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The sooner that the accounting system reports a variance, the sooner that management
can direct its attention to the difference from the planned amounts. If we assume that a
company uses the perpetual inventory system and that it carries all of its inventory
accounts at standard cost (including Direct Materials Inventory or Stores), then the
standard cost of a finished product is the sum of the standard costs of the inputs:
1. Direct Material
2. Direct Labour
3. Manufacturing overhead
a) Variable manufacturing overhead
b) Fixed manufacturing overhead
Usually there will be two variances computed for each input:
Input for Product
Direct material
Direct labour
Variance #1
Price (or cost)
Rate (or cost)
Variance #2
Usage (or quantity)
Efficiency (or quantity)
Worked Example 2 -
Standard cost of Product A

Materials (4.7kgs x $10 per kg)
Labour (4hrs x $5 per hr)
Variable overheads (4 hrs x $2 per hr)
Fixed overheads (4 hrs x $6 per hr)
Budgeted results
STANDARD COSTING
$
47
20
8
24
99
Actual results -
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Production:
Sales:
Selling price:
1200 units
1000 units
$150 per unit
Production:
Sales:
Materials:
Labour:
Variable overheads
Fixed overheads
Selling price:
1000 units
1100 units
4850 kgs, $46075
4200 hrs, $21210
$9450
$25000
$140 per unit
VARIABLE COST VARIANCES

1. Direct Material Total Variance The direct material total variance is the difference between the Flexed direct materials
cost and the actual direct materials cost. From the example above the material total
variance is calculated by:
Flexed material cost (1000 units x $47)

(-) Actual material cost
Direct material total variance
$
47000
46075
925 (F)
It can be divided into two sub-variances a) The Direct Material Price variance The materials price variance is calculated by multiplying the difference between the
actual and standard prices by the actual amount used. A favourable materials price
variance arises if the actual price paid for materials is lower than the standard, i.e.
planned price. An adverse materials price variance arises if the actual price of materials
is more than the standard price. The materials price variance is calculated by:
Materials price variance = (Standard price Actual price) x Actual usage
= $(10 - $9.50) x 4850 kg
= $0.50 x 4850 kg
= $2425 (F)
Materials prices variances might occur for a number of reasons:
materials might be purchased at special discount prices for a period;
a new, lower priced supplier might be found;
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unexpected inflation might increase prices;
a fall in the exchange rate might cause the price of imported materials to increase, or
a rise in the exchange rate might cause import prices to decrease;
a price war might break out between suppliers;
a change might be made in the product specification, either raising or lowering the
quality required;
cheaper, inferior materials might be purchased.
If an adverse materials price variance occurs, it might be possible for a purchasing

department to shop around for less expensive sources. This could involve negotiating
deals for bulk purchase discounts or looking abroad for lower priced imports.
b) The Direct Material Usage Variance The materials usage variance is calculated by subtracting the actual amount from the
standard amount of materials used and then multiplying by the standard price. Note that
all the difference is valued at the standard price and not the actual price. The materials
usage variance is calculated by:
Materials usage variance
(Standard usage (flexed) Actual usage) x Standard Price
=
=
=
[(1000kg x 4.7 per kg) 4850 kg)] x $10

(4700 4850) x $10
$1500 (A)
The materials usage variance is adverse because more materials were actually used
than the standard amount. Materials usage variances might arise for a number of
reasons:
materials might be wasted due to careless work, or used more efficiently if staff are
better trained;
materials might be wasted because they are of poor quality, possibly as a result of a
decision to buy cheaper materials.
poor stock control or pilferage could cause materials to be lost;
materials might be wasted due to a machine malfunction.
If the materials usage variance is adverse due to defective materials, managers might try
to improve quality control systems in the purchasing department. If the problem arises in
the production department, managers might be able to reduce wastage by better
maintenance of machinery or better training of the workforce.
2. Direct Labour Total Variance -
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The direct labour total variance is the difference between the Flexed Budget Labour cost
and the actual labour cost. From the example above the Labour Total variance is
calculated by:
Flexed Labour cost (1000 units x $20)

(-) Actual Labour cost
Direct Labour total variance
a) Direct Labour rate variance -
$
20000
21210
1210 (A)
This is calculated by subtracting the actual wage rate from the standard wage rate and
multiplying the difference by the actual number of hours worked. The wage rate variance
is calculated by:
Wage Rate Variance
= (Standard Wage Rate Actual Wage Rate) x Actual Hours

= $(5 5.05) x 4200 hrs
= $ - 0.05 x $4200 hrs
= $210 (A)
Wage rate variance is adverse because the actual wage rate was higher then the
standard wage rate. The factors that might affect the wage rate variance include:
a pay rise caused by trade union pressure;
a shortage of skilled labour;
government legislation such as raising the minimum wage;
the use of unskilled or trainee workers at lower rates of pay then standard.
b) The Direct Labour Efficiency variance This is calculated by subtracting the actual number of hours worked from standard
number of hours and multiplying the difference by the standard wage rate. The labour
efficiency variance is calculated by:
Labour Efficiency Variance
(Standard hours (Flexed) Actual hours) x Standard Wage Rate
=
=
=
[(1000 hrs x 4 per hr) 4200] hrs x $5

(4000 hrs 4200 hrs) x $5
$1000 (A)
The labour efficiency variance is adverse because the actual number of hours worked
was greater than the standard or budgeted number. The cause of labour efficiency
variances include:
greater or reduced reliability of machinery used by workers, perhaps caused by

changes in maintenance procedures;
improvements or reductions in the quality of raw materials and components;
changes in the productivity of workers, possibly due to changes in the level to

improvements in worker motivation;
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loss of morale and motivation in the workforce, possibly caused by fears of job
losses.
To improve managers might automate the production process so that less skilled, lower
paid workers could be used. An alternate policy could be to try and improve productivity
by rewarding workers for suggestions on how output might be increased.
3. Overhead Variances The third component of the total cost variance in Figure 1 is the overhead variance. This
is the difference between standard overheads and actual overheads. The total overhead
variance is often divided into two variances, the variable overhead variance and the fixed
overhead variance. The CIE syllabus does not require the calculation of Overhead
Sub - variances except the Total Overhead Variances.
a) Variable Production Overhead Variance

This is the difference between the actual variable overhead and the flexed standard
variable overhead. It can be calculated as follows:
Flexed standard variable overhead (1000 units x $8)

(-) Actual variable overhead
Variable production over head expenditure variance
$
8000
9450
1450 (A)
The factors that might affect the variable overhead variance include:
changes in the price of variable overheads such as fuel, cleaning

telephone charges and delivery costs;
changes in the amount of variable overheads used;
changes in the efficiency of staff providing overhead services;
materials,
changes in the number of production hours, possibly caused by poor quality raw
materials, so causing changes in the use of variable overheads such as fuel or
serving.
b) Fixed Production Overhead expenditure variance
This is the difference between the budgeted fixed production overhead expenditure and
actual fixed production overhead expenditure.
$
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Budgeted overhead (1200 x $24)
(-) Actual overhead
Expenditure variance
28800
25000
3800 (F)
The factors that might affect the fixed overhead variance include:
changes in the price of fixed overheads such as rent, rates or insurance;
changes in the efficiency of staff providing overhead services.
When faced with an adverse overhead variance, managers might try to reduce their
costs. However, the price of overheads that are external to the business, such as
insurance or rent, could be difficult to control. It might be easier to adjust those
overheads that are internal to the business, such as cleaning and maintenance. But, if
this policy is adopted, care must be taken that overall efficiency is not damaged. For
instance, if it was decided to cut the number of hours spent maintaining machinery; the
effect might be to cause more breakdowns and lost production time.
SALES VARIANCES A sales variance is the difference between budgeted sales revenue and actual sales
revenue. If actual revenue is higher than budgeted revenue, there is to be a favourable
variable. However, if actual revenue is lower than budgeted revenue, there is said to be
an adverse variance. It can be calculated as follows:
Actual sales revenue (1100 x $140)

(-) Budgeted sales revenue (1000 x $150)
Sales variance
$
154000
150000
4000 (F)
The sales price variance is dependent on two sub-variances; the sales price variance
and the sales volume variance.
a) Sales Price Variance This is calculated by subtracting the standard price from the actual price and multiplying
the difference by the actual number of sales. The sales price variance is calculated by:
Sales Price Variance = (Actual Price Standard Price) x Actual Sales (units)
= $(140 - 150) x 1100
= - $10 x 1100
= $11000 (A)
The sales price variance is adverse because the actual price charged was lower than
the standard price. Sales price variances might arise due to:
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unplanned sales in new markets at different prices, for example sales to a new
export market at a lower price than charged in the home market;
new competitors in the market causing prices to be lower, or rivals leaving the market
allowing prices to be raised;
discounts for bulk buying customers.
b) Sales Volume Variance This is calculated by subtracting the standard units of sales from the actual units of sales
and multiplying the difference by the standard price. The sales volume variance is
calculated by:
Sales Volume Variance =
=
=
=
(Actual Sales Standard Sales) x Standard Price

(1100 1000) x $150
100 x $150
$15000 (F)
The sales volume variance is favourable because the actual level of sales was higher
than expected. Sales volume variances might be caused by:
changes in the state of the economy, so causing a rise or fall in consumer demand;
competitors action, for example a new advertising campaign;
sudden changes in consumer tastes, perhaps caused by health scares;
government policy, such as a change in VAT, income tax or interest rate;
changes in the quality of the product;
changes in marketing techniques, for example a new direct mail campaign to

potential customers.
The analysis of sales variances is generally the responsibility of the sales and marketing
department within a business. If an adverse variance occurs, a number of policies might
be adopted. These include a greater effort in promoting the product, perhaps by
advertising or by offering more generous incentives to sales staff. Sometimes a policy of
price cuts can increase the sales volume so much that overall revenue increases.
However, the success of such a policy depends to a large extent on the reaction of
competitors and on the perception of consumers. So, for example, price cuts would not
be successful if competitors immediately copied the policy, or if consumers felt that
cheaper prices meant a lowering of quality.
Interrelationships between Variances There are a number of other interrelationships between variances.
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If wages rise unexpected during a budget period, this will result in an adverse wage
rate variance. However, higher wages might raise labour productivity and therefore
the labour efficiency variance might improve.
If the purchasing department obtains cheaper materials and components, the

materials price variance is likely to improve. However, the materials and components
might be inferior and result in more materials being wasted. This could lead to a
worsening of the materials usage variance.
Purchasing cheaper, lower quality raw materials might have an effect on the sales
volume variance if consumers buy fewer products.
Reducing the amount spent on maintaining and lubricating machinery might improve
the variable overhead variance. However, if the machines then break down and
workers are idle, the labour efficiency variance will worsen.
The Advantages of Standard Costing There are a number of advantages of using standard costing techniques.
Management control - By calculating variances, a business can identify areas of

weakness and inefficiency practice. For example, if a member of staff in the
purchasing department buys materials from more expensive suppliers, this is likely to
show up in the materials price variance. When analysing variances, some
businesses use an approach called management by exception. It involves
investigating variances only if they are exceptional. This allows some tolerance in the
control system. Variances are considered acceptable provided they do not exceed
certain limits. For example, a business might only investigate variances that are
more than 5% different from the standard. This approach means that a business will
not waste time investigating the cause of trivial variances.
Staff motivation - If staff are consulted and given responsibility for meeting their
own cost, volume and price targets, they might take more pride in their work and
have increased job satisfaction when targets are met. Such approach is called
responsibility accounting. Some businesses reward staff financially if variances are
favourable. This is also likely to increase motivation.
Business planning - Predetermined standards can be used in budgets to calculate

the quantity of resources needed in the next budget period. If standard costs are
monitored and updated regularly, the accuracy of budgets will be improved.
Setting prices - Standard costs represent the best estimates of what a product
should cost to make. So, by using standard costs, estimates of costs for products
and price quotations for orders are likely to be more reliable.
The Limitations of Standard Costing Standard costing system also has some limitations.
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Cost of implementation - Standard costing requires a business to gather a large

amount of information. This process can be time consuming and expensive. Also,
since standard costs are regularly updated, this cost is ongoing.
Modern management - Companies that adopt modern approaches to business

management might find that standard costing is inappropriate. For example, if a
technique such as Kaizen is adopted, where employees are expected to survive for
continuous improvement, standards might become a barrier to innovation. This is
because they might be regarded as a ceiling for employees improvement efforts.
Once the standard is reached, there is no incentive to make further improvements.
Unforeseen consequences - Standard costing is likely to encourage staff to survive

for favourable variances, even if this harms a businesss overall objectives. For
example, in order to achieve a favourable materials price variance; a member of the
purchasing department might order some cheap, but inferior quality, materials. This
might damage the reputation of the company and possibly lead to a fall in sales.
Service industries - In some service sector businesses, staff performance

indicators cannot be easily quantified and do not necessarily relate to costs. For
example, in relating, the quantity of customer service provided by staff is very
important but it is also very difficult to measure. Standard costing has little no role to
play in these circumstances.
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STANDARD COSTING LAYOUTS

Master Budgeted Manufacturing Account and Income Statement
$
Sales revenue
(-) Cost of Production -
$
xxx
Direct Raw Material (Standard Units x Standard Qty. x Standard Rate)

Direct Labour Cost (Standard Units x Standard Hours x Standard Wage Rate)
Direct Expenses (Royalties / Patents)
Prime Cost
* Fixed Overheads Production (Standard Units x Standard Hours x Standard Wage Rate)
*Direct / Variable Overheads - Production (Standard Units x Standard Hours x Standard Wage Rate)
Cost of Production
(+) Factory Profit
Transfer Value
Gross Profit
(-) Fixed Overheads - Administration
- Selling and Distribution
Variable Overheads - Administration
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Trading Profit
(+) Factory Profit
Budgeted Profit
* Note: If based on Direct Labour Hours
Flexed Budgeted Manufacturing Account and Income Statement

(Actual Units x Standard Rate)
$
Sales
(-) Cost of Production
Direct Raw Material (Actual Units x Standard Qty. x Standard Rate)
Direct Labour Cost (Actual Units x Standard Hours x Standard Wage Rate)
Prime Cost
*Fixed Overheads - Production (Same as Budgeted)
*Direct / Variable Overheads - Production (Actual Units x Standard Hours x Standard Wage Rate)
Cost of Production
(+) Factory Profit
Transfer Value
Gross Profit
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Trading Profit
(+) Factory Profit
Flexed Profit
STANDARD COSTING
$
xxx
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NOTES
* Note: Fixed Overheads remains constant even if output level changes.
Actual Manufacturing and Profit and Loss Account

(Actual Units x Actual Rate)
$
Sales
(-) Cost of Production
Direct Raw Material (Actual Units x Actual Qty. x Actual Rate)
Direct Labour Cost (Actual Units x Actual Hours x Actual Wage Rate)
Prime Cost
*Fixed Overheads - Production (Actual Units x Actual Hours x Actual Wage Rate)
*Direct / Variable Overheads - Production (Actual Units x Actual Hours x Actual Wage Rate)
Cost of Production
(+) Factory Profit
Transfer Value
Gross Profit
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Trading Profit
(+) Factory Profit
Actual Profit
RECONCILIATION STATEMENTS - PROFITS
Reconciliation Statement of Master Budgeted Profit with the Actual Profit
$
Master Budgeted Profit
(+) Favourable Variances
(-) Adverse Variances
$
xxx
xxx
(xxx)
xxx
xxx
Actual Profit
Note: If Quantity Profit Variance is given then do not include Sales Volume Variance in the Reconciliation
Statement. Sales Volume Variance would only be included in the Reconciliation Statement if Quantity
Cost Variance is required or when Reconciliation of Master Budgeted Profit with Flexed Profit is required
in a question.
Reconciliation Statement of Flexed Profit with the Actual Profit
$
Flexed Profit
Actual Profit
$
xxx
xxx
(xxx)
xxx
xxx
Reconciliation Statement of Master Budgeted Profit with the Flexed Profit
STANDARD COSTING
$
xxx
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NOTES
$
Master Budgeted Profit
$
xxx
xxx
(xxx)
xxx
xxx
Flexed Profit
RECONCILIATION STATEMENTS - COSTS
Reconciliation Statement of Master Budgeted Costs with the Actual Cost
$
Master Budgeted Costs
(+) Adverse Cost Variances
(-) Favourable Cost Variances
$
xxx
xxx
(xxx)
xxx
xxx
Actual Costs
Note: Only include the Variances occurred between the Master Budgeted Costs of Material, Labour,
Variable Production Overheads and Fixed Production Overheads with the Actual Costs.
Reconciliation Statement of Flexed Costs with the Actual Costs
$
Flexed Costs
(+) Adverse Variances
(-) Favourable Variances
$
xxx
xxx
(xxx)
xxx
xxx
Actual Costs
Reconciliation Statement of Master Budgeted Costs with the Flexed Costs

$
Master Budgeted Costs
Flexed Costs
STANDARD COSTING
$
xxx
xxx
(xxx)
xxx
xxx
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KEY FORMULAE
Quantity Cost Variance
Master Budgeted Costs Flexed Budgeted Costs
Quantity Profit Variance
Flexed Budgeted Profit Master Budgeted Profit
Total Cost Variance
Master Budgeted Costs Actual Costs
Total Sales Variance
Actual Sales Revenue Budgeted Sales Revenue
Total Material Variance
Flexed Material Cost Actual Material Cost
Total Labour Variance
Flexed Labour Cost Actual Labour Cost
Variable Production Overhead

Variance
Flexed Budgeted VOH Actual VOH
Fixed Production Overhead

Variance
Master Budgeted FOH Actual FOH
Variable Administration
Overhead Variance
Fixed Administration Overhead

Variance
Variable Selling Overhead

Variance
Fixed Selling Overhead Variance
Sub - Variances
Sales Price Variance
(Actual Selling Price Standard Selling Price) x Actual Sales (In Units)
Sales Volume Variance
(Actual Sales in Units Standard Sales in Units) x Standard Selling

Price.
Material Price Variance
(Standard Material Price Actual Material Price) x Actual Material

Quantity.
* Material Usage Variance
(Standard Material Qty. Actual Material Qty.) x Standard Material Price.
Labour Rate Variance
(Standard Wage Rate Actual Wage Rate) x Actual Labour Hours.
STANDARD COSTING
Page 18

NOTES
*Labour Efficiency Variance
(Standard Labour Hours Actual Labour Hours) x Standard Wage Rate.
*Note: Material Usage & Labour Efficiency variances would be Flexed if the number of units produced and
sold differs.
(Flexed Standard Material Qty. = Actual Units x Standard Material Qty per unit)
(Flexed Standard Labour Hours = Actual Units x Standard Labour Hours per unit)
STANDARD COSTING (WORKSHEET)

1.
Brekkifoods Ltds Budget for the production of 100000 packets of Barleynuts for the
year ending 31 December 2011 was as follows.
$
Variable costs:
Direct materials
Direct labour
Production expenses
Fixed costs:
Production expenses
Administration
20 000
15 000
6 000
41 000
13 000
29 000
83 000
The Actual output for the year ended 31 December 2011 was 110000 packets of
Barleynuts.
Required:
Prepare a Flexed Budget for the Production 110 000 packets of Barleynuts.
2.
Flexers Ltd has prepared the following budgets for the production of time locks.
No. of locks
Direct materials
Direct labour
Production overhead
Selling and distribution
Administration
6000
$
15 000
36 000
25 000
24 000
80 000
180 000
8000
$
20 000
48 000
31 000
28 000
80 000
207 000
Required:
Prepare a Flexed Budget for the Production of 9000 time locks.
STANDARD COSTING
Page 19

NOTES
3.
Enigma ltd. has prepared a Budget based on standard costs. It is shown below together
with the actual results:
No. of Units
Direct material
Direct labour
Variable overhead
Fixed overhead
Total Costs
Budget
Actual
4000
$
20 000
46 000
10 000
50 000
126 000
4250
$
23 400
47 236
10 500
50 000
131 136
Required:
(a)
Prepare a Flexed Budget for 4250 units.
(b)
Calculate:
(i)
(ii)
(iii)
(iv)
(c)
(d)
4.
Total Cost Variance.

Expenditure Variance.
Direct Material Variance.
Direct Labour Variance.
Reconcile the Actual costs incurred with the Budgeted costs, using the variances
calculated in (b).
Reconcile the Actual costs with Flexed costs.
Underpar Ltd has prepared a Budget based on Standard costs. It is shown below
together with the actual results.
No. of units
Direct material
Direct labour
Variable overhead
Fixed overhead
Total costs
Budget
Actual
7000
$
23 800
47 250
3 500
62 000
136 550
6300
$
20 890
44 065
3 250
62 000
130 205
Required:
(a)
Prepare a Flexed budget for 6300 units.
(b)
Calculate:
(i)
Total Cost Variance.
(ii) Direct Material Variance.
(iii) Direct Labour Variance.
STANDARD COSTING
Page 20

NOTES
(c)
(d)
5.
Reconcile the Actual cost incurred with the Budgeted costs, using the variances
calculated in (b).
Reconcile the Actual costs with Flexed Costs.
The following Budgeted income statement was used in the section relating to Budgets
and the Actual results at the end of the year are shown alongside:
Sales Volume
Sales revenue
Materials
Direct Labour
Production Overheads
Selling and distribution Overheads
Administration Overheads
Finance Overheads
Total Costs
Net Profit
Required:
(a)
(b)
(c)
6.
Budgeted
Actual
1000 units
$
100000
30000
10000
5000
15000
17000
3000
1100 units
$
108900
35200
10500
6000
18000
17000
3000
80000
20000
89700
19200
Devise a Flexible budget for 1200 units.

Calculate any Variances.
Comment briefly on the possible reasons for the variances.
A firm has devised the Budgeted income statement, the Actual figures have now been
received and the income statement drawn up.
Budgeted
Actual
Sales revenue
100000
$
850000
119000
$
1029300
Materials
Direct Labour
Production Overheads
Selling Overheads
Administration Overheads
210000
165000
105000
45000
90000
255850
184450
113000
45000
100000
Total Costs
Net Profit
615000
235000
698300
331000
Sales (in units)
Required:
(a)
(b)
(c)
Devise a Flexible budget for 120000 units.

Calculate any Variances.
Comment briefly on the possible reasons for the variances.
STANDARD COSTING
Page 21

NOTES
7.
WBM Electronics plc makes and sells a range of electric heaters. These are marketed
as models W, B and M, the current monthly Budget being 1000, 1750 and 2000 units
respectively. All models require manufacturing operations in two production departments
as indicated in the following extract from the standard specifications.
Department
1
2
Standard labour
rate per hour
$3.50
$3.80
Standard time in minutes

Model W
Model B
Model M
72
48
36
30
15
18
There is no opening or closing work-in-progress. The following Actual data has been
recorded for the previous month.
Finished output (units)
Direct wages incurred
Actual hours worked
Model W
900
Department 1
$13,200
3,600
Model B
1800
Model M
2100
Department 2
$6,325
1,700
Required:
8.
(a)
Define the term Standard hour and indicate clearly how, and for what purpose, it
is used.
(b)
From the data given calculate, for each department:

(i)
The Direct Labour Rate Variance;
(ii)
The Direct Labour Efficiency Variance.
HGW Ltd produces a product called a Lexton. The Standard Selling price and the
Manufacturing Costs of this product are as follows:
$
Standard selling price per unit
Standard production costs:
Direct material
1.5 kilos at $12 per kilo
Direct labour
4.4 hours at $7.50 per hour
Variable overheads 4.4 hours at $5 per hour
86
18
33
22
73
The Projected production and sales for March 2011 were 520 units. On 1 April 2011 the
following Actual figures were determined.
Sales
Production
Direct material
Direct labour
STANDARD COSTING
550 units at $85 each

550 units
785 kilos at $12.40 per kilo
2,400 hours at $7.80 per hour
Page 22

NOTES
Overheads
$12,500 (overall variance $400 adverse)
There was no opening stock of the product Lexton.

Required:
(a)
Prepare an Actual Profit and Loss Statement for HGW Ltd for March.
(b)
Calculate the following Variances and their respective Sub-Variances.

(i)
Sales Price and Volume.
(ii)
Direct Materials Price and Usage.
(iii) Direct Labour Rate and Efficiency.

(c)
9.
Prepare a Statement Reconciling the Actual Profit calculated in part (a) with the
Budgeted Profit on Actual Sales (Flexed Profit). (Use the variances calculated in
part (b) and the given overhead variance).
Dour Ltd manufactures moulded furniture including chairs for general-purpose use.
These chairs are manufactured from a chemical mixture purchased in a prepared state.
Details of the contribution made by these chairs to the overall company results for the
year ended 31 October 2011 were:
Contribution statement for chairs for the year ended 31 October 2011
$
Sales
Less variable costs:
Raw materials
Direct labour
Contribution
55,000
26,000
$
112,500
81,000
31,500
Additional information:
There was no opening or closing stock of chairs.
The budget and standard cost details prepared prior to 1 November 2010 revealed:
Budgeted Sales of chairs 18,000 at $8.00 each;

Each chair should take 3 kg of chemical mixture at $1.00 per kg;
STANDARD COSTING
Page 23

NOTES
Each chair should take 20 minutes of Direct labour time;

The Direct labour rate per hour was $6.00.
In investigating the Actual results for the year ended 31 October 2011 the following
information came to light:
15000 chairs were sold;

44000 kg of raw materials was used;
4000 hours of direct labour time was clocked
Required:
10.
(a)
Calculate the Overall Sales Variance for the year ended 31 October 2011.
(b)
Calculate the Overall Labour Variance for the year ended 31 October 2011
analysing it into:
(i) Rate Variance.
(ii) Efficiency Variance.
(c)
Calculate the Overall Materials Variance for the year ended 31 October 2011
analysing it into:
(i) Price Variance.
(ii) Usage Variance.
(d)
Prepare a Statement that shows the Budgeted contribution for the year ended 31
October 2011.
(e)
Examine the Variances calculated in (a), (b) and (c) above and give possible
reasons for each.
Tartan & Company uses a standard costing system. During the month of May 2011, the
following figures apply:
Standard Cost Per Unit
Actual Cost
based on a Budgeted
output of 12 000 Units
of 12 500 Units produced
Direct Material
6.1 metres @ $5.50 per metre
73 750 metres costing $427 750
Direct Labour
2.75 hours @$15 per hour
31 250 hours @ $16.20 per hour
Required:
(a)
Calculate the Cost of Materials Actually used to produce one unit.
(b)
Calculate the Actual Direct Labour Cost of producing 12 500 units.
(c)
Calculate the Standard Cost of the standard quality of materials required for the
12500 units produced.
STANDARD COSTING
Page 24

NOTES
11.
(d)
Calculate the Standard Cost of the standard labour hours to produce 12500 units.
(e)
Calculate the difference (Variance) between the Actual and Standard Direct
Material Costs of producing 12500 units and state whether the variance is
Favourable or Unfavourable.
(f)
Calculate the difference (Variance) between the Standard and Actual Direct Labour
Costs of producing 12500 units and state whether the variances is Favourable or
Unfavourable.
(g)
Calculate the Total Standard Cost of producing 12500 units, assuming that
Materials and Labour are the only cost of production.
(h)
Calculate the difference (Variance) between the Total Standard Cost and the Actual
cost of producing 12500 units.
(i)
State Two possible reasons for your answers to (e) and (f).
(j)
Explain why the cost accountant needs more information than is given by the
answer to (h).
(a) A company makes a digital measuring device known as Tontaw. The Standard Cost
per Tontaw is made up as follows:
Cost per unit
Direct material: 2 litres at $4 per litre
Direct labour: 40 minutes at $18 per hour
Production overheads: Direct (variable) $6 per Direct Labour hour
Indirect (Fixed) based on Overhead Absorption Rate
of $21 per Direct Labour hour
Further information for the three months ending 30 September 2002:
The budgeted amount for Direct Labour: $3000000.

Administration and Selling Overheads for the Budget period: $7500000.
STANDARD COSTING
Page 25

NOTES
Finished goods are transferred from the factory to the warehouse at cost plus a
mark up of 20 per cent.
Budgeted Selling price per Tontow: $104.
No stocks of raw materials, work in progress or finished goods are held.
Required:
(i)
Prepare a Budgeted Manufacturing, Trading and Profit and Loss Statement for the
three months ending 30 September 2002 based on the production of 250000
Tontows to show the Net Profit or Loss.
(ii)
Calculate, using the information in (i), the Break-even point and the Margin of
Safety as a Percentage.
(b) The Actual production of Tontows and related costs and revenue for the budget
period were as follows:
Tontaws produced
Materials used
Cost of materials
Direct labour
Labour cost
256 000
550 000 litres
$2 090 000
187 500 hours
$3 656 250
Overhead expenditure:
Production, Direct Fixed
Administration and Selling
Selling price per Tontaw
$3 650 000
$7 200 000
$107.50
The overhead absorption rate for variable production overhead was not affected. All
Tontaws produced were sold.
Required:
(i) A Flexed Manufacturing, Trading and Profit and Loss Statement based on the
production of 256000 Tontaws.
(ii) A Manufacturing, Trading and Profit and Loss Statement based on Actual results.
(c) Calculate the following Variances:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
Quantity i.e. the additional profit arising purely from the increased production.
Sales Volume.
Sales Price.
Direct Materials usage.
Direct Materials price.
Direct Labour Efficiency.
Direct Labour Rate.
(d) Calculate the Break-Even point based on Actual Revenue and Expenditure.
STANDARD COSTING
Page 26

NOTES
(e) Prepare a Financial Statement to Reconcile the Original Budgeted Profit with the
Actual Profit.
12.
Pembroke Ltd makes an item of furniture known as a Tripos. The Standard cost per
Tripos is as follows.
Direct Material: 2 kg at $7 per kg
Direct Labour: 3 hours at $10 per hour
Production Overhead: Direct (Variable) $14 per direct labour hour
Indirect (Fixed) based on Overhead Absorption Rate of $30
per direct labour hour
Further information for the three months ending 30 June 2011:
The Budgeted amount for Direct Labour: $120 000.

Administration and Selling Overheads for three months ending 30 June 2011 was
$32000.
Factory Profit is 20% of Cost of Production.
The Budgeted Selling Price per Tripos: $250.
No stocks of raw materials, work in progress or finished goods are held.
Required:
a) Prepare a Budgeted Manufacturing, Trading and Profit and Loss Statement for the
three months ending 30 June 2011 to show the Budgeted Net Profit or Loss.
b) Calculate, using the information in (a), the Break-Even Point and the Margin of
Safety as a Percentage.
The Actual production of Tripos and the related revenue and costs for the three months
ended 30 June 2011 were as follows.
No. of Tripos Produced
Materials used
Cost of materials
Direct labour hours
Direct labour cost
Fixed overhead expenditure:
Production
Administration and selling
Selling price per Tripos
4180
8990 kg
$61132
14 630
$138 985
$372 000
$42 000
$248
The Overhead Absorption Rate for Variable Production Overhead was not affected. All
Tripos produced were sold.
Required:
(c) Prepare;
STANDARD COSTING
Page 27

NOTES
(i)
(ii)
A Flexed budget based on the Actual number of Tripos produced and sold.
A Financial Statement based on Actual results.
(d) Calculate the following Variances:

(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
Quantity Profit Variance (the additional profit arising from increased

production.
Sales Volume.
Sales Price.
Direct Materials Usage.
Direct Materials price.
Direct Labour Efficiency.
Direct Labour Rate.
(e) Calculate the Break-even point based on Actual revenue and expenditure.
(f) Prepare a Financial Statement to Reconcile the Original Budgeted Profit with the
Actual Profit.
13.
Passbuck Ltd makes three products: Meenibuck, Teenibuck and Deluxibuck for
which the following details are given:
Product
Direct Material (kilos per unit)
Direct Labour (hours per unit)
Direct Expenses (per unit)
Selling Price per unit
Meenibuck
5
4
$7
$74
Teenibuck
7
6
$4
$85
Deluxibuck
10
8
$9
$115
Further information
All three products are made from material X.

Material X costs $3 per kilo.
All three products require the same type of Labour which is paid at $7 per hour.
Total Fixed costs amounted to $70 000.
Budgeted Production (based upon maximum demand) is:
Meenibuck
Teenibuck
Deluxibuck
2000 units
2400 units
1800 units
It has now been discovered that the supply of material X is limited to 38 000 kilos.
Required:
(a)
Calculate the Contribution per kilo of material X used for each product.
(b)
Prepare a Production Budget based on your calculation in (a) to give maximum

profit from the material available.
STANDARD COSTING
Page 28

NOTES
(c)
Calculate the following Variances:

(i) Total Direct Material Variance.
(ii) Total Direct Labour Variance.
(iii) Total Direct Expenses Variance.
(iv) Sales Volume Variance.
(d)
14.
Using the Variances calculated in (c), prepare an accounting Statement

Reconciling the profit which would have been obtained from the Original Budget
and the Profit expected from the budget in (b).
Brunswick Products uses a system of standard costing. The following details relate to
December 2011:
Direct Labour hours worked

Direct wages earned
Units produced
Standard hours per unit
Standard hourly wage rate
Departments
Blasting
Painting
3400
9200
$12648
$38272
900
2400
4
3
$3.70
$4.00
Required:
(a) For each department, you are required to calculate:
(i) The Standard Direct Labour Cost per unit.
(ii) The Total Direct Labour variance.
(iii) The Direct Labour Rate variance.
(iv) The Direct Labour Efficiency variance.
(b) What do the answers to (a) above indicate to the production manager of Brunswick
Products about the performance of the two departments and why?
15.
J. Wilkison Limited uses a system of standard costing. The following information

relates to the week ending January 2008 when standard output was achieved:
Standard
Price of materials (per litre)
Usage of materials (per litre)
Labour hours worked
Wages rate per hour
$1.50
220
45
$5.30
Actual
$1.60
200
48
$5.00
Required:
(a)
From the figures above calculate the following. In each case state clearly whether
the variance is Adverse or Favourable:
STANDARD COSTING
Page 29

NOTES
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(b)
In what circumstances is:

(i)
(ii)
16.
The Total Labour variance.

The Wage Rate variance.
The Labour Efficiency variance.
The Total Material variance.
The Material Price variance.
The Material Usage variance.
A Favourable Labour variance; and

A Favourable Materials variance not always desirable?
Pensive Products Ltd manufactures and sells a single product. The company uses a
Standard cost system for the control of Direct Material and Direct Labour. The following
information was available for the month of May 2011:
Direct Labour:
Budget 11300 hours at $6.00 per hour
Actual 11840 hours at $6.20 per hour
Direct Material usage:
Budget 9400 kgs at $2.40 per kg
Actual 9650 kgs at $2.10 per kg
Other Costs:
Repairs: Plant and machinery
Factory supervisory staff salaries
Factory heating and lighting
Factory rent and rates
Depreciation of plant and machinery
General factory expenses
$
1250
8500
2400
3500
4800
8400
Additional information:
(i)
The company transfer finished products to the warehouses at a transfer price of

150% of prime cost.
(ii)
During the month of May the target production levels were achieved.
Required:
(a) A manufacturing account for the month of May 2011 showing clearly the
appropriate classification of costs and the manufacturing profit.
(b)
A calculation of the following Cost variances for the month of May 2011:
(i) Direct Labour: Rate and Efficiency.
(ii) Direct Materials: Price and Usage.
(c)
Comment on the Direct Labour Cost variances and give possible reasons for the
variances.
STANDARD COSTING
Page 30

NOTES
(d)
17.
If the Direct Labour and Direct Material Total Cost variances had been 50%
above Standard cost, explain what significance this ought to have for the
management of Pensive Products Ltd.
Borrico Ltd manufactures a single product and they had recently introduced a system of
budgeting and variance analysis. The following information is available for the month of
July 2011:
(i)
Direct Materials
Direct Labour
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Variable Sales Overhead
Administration Costs
Budget
$
200000
313625
141400
64400
75000
150000
Actual
$
201285
337500
143000
69500
71000
148650
(ii) Standard Costs were:

Direct Labour 48,250 hours at $6.50 per hour.
Direct Materials 20000 kilograms at $10 per kilogram.
(iii) Actual Manufacturing Costs were:
Direct Labour 50000 hours at $6.75 per hour
Direct Materials 18,900 kilograms at $10.65 per kilogram.
(iv) Budgeted Sales were 20000 units at $50 per unit.
Actual Sales were:
15000 units at $52 per unit, and 5200 units at $56 per unit
(v) There was no work-in-progress or stock of finished goods.
Required:
(a)
A Profit statement showing the Budgeted and Actual Gross and Net Profits or
Losses for July 2011.
(b)
The following variances for July 2011:

(i)
Direct Material Cost variance, Direct Material Price variance and Direct
Material Usage variance.
(ii)
Direct Labour Cost variance, Direct Labour Rate variance and Direct Labour
Efficiency variance.
STANDARD COSTING
Page 31

NOTES
(c)
What use can the management of Borrico Ltd make of the variances calculated in
(b) above?
STANDARD COSTING
Page 32

NOTES
18.
The directors of Relham Ltd plan to introduce a new product. A machine costing
$125000 will be required. It will be sold at the end of five years for $30000. Machinery is
depreciated using the Straight-line method. The new product will earn $90000 revenue
annually and incur expenditure of $60000 each year. The purchase of the new machine
will be financed by a loan of 8% p.a. The following discounting factors are given:
Year 1
Year 2
Year 3
Year 4
Year 5
8%
0.926
0.857
0.794
0.735
0.681
14%
0.877
0,769
0.675
0.592
0.519
Required:
(a) Calculate for the new product (i) the Net Present Value (NPV), (ii) Internal Rate of
Return (IRR) and (iii) Accounting rate of return (ARR).
The budget for the new product is based upon the production and sale of 1000 units
each year at $90 per unit. The standard cost of production of each unit is made up a
follows:
Direct Material: 4 kilos at $5.50 per kilo.
Direct Labour: 1.75 hours at $12 per hour.
The balance of the additional expenditure consists of administration expenses. 10% is
added to the cost of production for factory profit.
Required:
(b)
Prepare Manufacturing Trading and profit and Loss Accounts in as much detail as
possible to show the products budgeted additional annual profit. 1000 units of the
product were made and sold. The actual expenditure per unit was as follows:
Direct Material: 4.2 kilos at $5.25 per kilo.
Direct Labour: 1.5 hours at $12.60 per hour.
Required:
(c) Calculate the following Variances:
(i) Direct Materials Usage ; (ii) Direct Materials Price ; (iii) Direct Labour Efficiency ;
and (iv) Direct Labour Rate.
Page 33 of 34

NOTES
Page 34 of 34

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AL WADI INTERNATIONAL SCHOOL STANDARD COSTING GRADE 12

all machines will work non-stop without breaking down;

AL WADI INTERNATIONAL SCHOOL STANDARD COSTING GRADE 12

AL WADI INTERNATIONAL SCHOOL STANDARD COSTING GRADE 12

Direct Labour cost

AL WADI INTERNATIONAL SCHOOL STANDARD COSTING GRADE 12

Standard cost per unit

Sales revenue (28000 x $6.70)

AL WADI INTERNATIONAL SCHOOL STANDARD COSTING GRADE 12

Fixed overheads Production overheads

Figure 1: Variance within a business -

AL WADI INTERNATIONAL SCHOOL STANDARD COSTING GRADE 12

Standard cost of Product A

AL WADI INTERNATIONAL SCHOOL STANDARD COSTING GRADE 12

VARIABLE COST VARIANCES

Flexed material cost (1000 units x $47)

materials might be purchased at special discount prices for a period;

a new, lower priced supplier might be found;

AL WADI INTERNATIONAL SCHOOL STANDARD COSTING GRADE 12

unexpected inflation might increase prices;

a price war might break out between suppliers;

cheaper, inferior materials might be purchased.

If an adverse materials price variance occurs, it might be possible for a purchasing

(Standard usage (flexed) Actual usage) x Standard Price

[(1000kg x 4.7 per kg) 4850 kg)] x $10

poor stock control or pilferage could cause materials to be lost;

materials might be wasted due to a machine malfunction.

AL WADI INTERNATIONAL SCHOOL STANDARD COSTING GRADE 12

Flexed Labour cost (1000 units x $20)

= (Standard Wage Rate Actual Wage Rate) x Actual Hours

a pay rise caused by trade union pressure;

a shortage of skilled labour;

government legislation such as raising the minimum wage;

(Standard hours (Flexed) Actual hours) x Standard Wage Rate

[(1000 hrs x 4 per hr) 4200] hrs x $5

greater or reduced reliability of machinery used by workers, perhaps caused by

improvements or reductions in the quality of raw materials and components;

changes in the productivity of workers, possibly due to changes in the level to

AL WADI INTERNATIONAL SCHOOL STANDARD COSTING GRADE 12

a) Variable Production Overhead Variance

Flexed standard variable overhead (1000 units x $8)

changes in the price of variable overheads such as fuel, cleaning

changes in the amount of variable overheads used;

changes in the efficiency of staff providing overhead services;

AL WADI INTERNATIONAL SCHOOL STANDARD COSTING GRADE 12

changes in the price of fixed overheads such as rent, rates or insurance;

changes in the efficiency of staff providing overhead services.

Actual sales revenue (1100 x $140)

AL WADI INTERNATIONAL SCHOOL STANDARD COSTING GRADE 12

discounts for bulk buying customers.

(Actual Sales Standard Sales) x Standard Price

competitors action, for example a new advertising campaign;

sudden changes in consumer tastes, perhaps caused by health scares;

government policy, such as a change in VAT, income tax or interest rate;

changes in the quality of the product;

changes in marketing techniques, for example a new direct mail campaign to

AL WADI INTERNATIONAL SCHOOL STANDARD COSTING GRADE 12

If the purchasing department obtains cheaper materials and components, the

Management control - By calculating variances, a business can identify areas of

Business planning - Predetermined standards can be used in budgets to calculate

AL WADI INTERNATIONAL SCHOOL STANDARD COSTING GRADE 12

Cost of implementation - Standard costing requires a business to gather a large