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KNGX NOTES
ACCT2522
Standard Cost: the budgeted cost, based on estimates of the cost of material, labour and overhead
resources, that should be used to make one unit of product
Planning and Control: ensure that plan and objectives are achieved:
- Control systems provide regular information to assist in control, which is an essential part of effective
resource management
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KNGX NOTES
ACCT2522
Most companies will use a combination of them as they all have different pros and cons
Pros Cons
Historical Experience Relevant and “economical” The past is not always a good
(e.g. regression) predictor of the future
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KNGX NOTES
ACCT2522
5.3 DEVELOPING STAND ARD COSTS FOR DIRECT MATERIAL AND DIRECT LABOUR
- The total amount of direct material required to produce one unit of product
- The total delivery cost of direct material required to produce one unit of product, less quantity
discounts
- Based on ordering a certain quality of material in specific order quantities from a specified supplier
Standard Cost Variance: the difference between the actual cost and the budgeted/standard cost
Variance analysis is used for cost control and compare actual against standard cost
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KNGX NOTES
ACCT2522
Price Variance:
Where:
PQ = Purchased quantity; (NOT AQ)
Price Variance = PQ(AP – SP)
AP = Actual price
SP = Standard price
Note: calculating price variance using Actual Quantity is also a method described in the textbook, but not used
in the ACCT2522 course
Quantity Variance:
Where
SP = Standard price
Quantity Variance = SP(AQ – SQ)
AQ = Actual quantity used
SQ = Standard quantity allowed given actual output
Note: the standard quantity is based on actual output (i.e. how much quantity should have been used given
the number of units sold)
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KNGX NOTES
ACCT2522
Rate Variance
Where
AH = Actual Hours Used
Rate Variance = AH(AR – SR)
AR = Actual Rate Per Hour
SR = Standard Rate Per Hour
Efficiency Variance
Where
SR = Standard Rate per hour
Efficiency Variance = SR(AH – SH)
AH = Actual Hours used
SH = Standard Hours allowed given actual output
INVESTIGATING VARIANCEES
Consider:
Steps:
1. Look at all interactions e.g. low quality DM are cheaper but may decrease DL efficiency
2. Draw on case information
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KNGX NOTES
ACCT2522
SIGNIFICANT VARIANCES
Management by exception: only significant cost variances are reported and investigated
- Size of variance: the relative size of the variance compared with the standard
- Recurring variances: whether the variance occurs repeatedly or only infrequently
- Trends: if there are any concerning trends in the larger picture
- Controllability: a manager is more likely to investigate variances that is controllable by someone in
the organization
- Both unfavourable and favourable: it is important to investigate both as favourable variances may
indicate new methods, more efficient processes that can be formally implemented etc.
- Statistical Control Chart: a plot of the standard cost variances across time compared with a
statistically determined critical value to highlight the variances that should be investigated
- Critical value: the point at which a variance should be investigated.
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KNGX NOTES
ACCT2522
- DM Price Variance:
o who influences material prices?
o E.g. Purchasing manager
- DM Quantity Variance:
o who determines quantity of materials used
o E.g. Production managers or supervisors
- DL Rate Variance:
o who determines wage rates of employees
o E.g. hiring manager or human resources team
- DL Efficiency Variance:
o who is responsible for the use of employee time?
o E.g. Project managers, supervisors or even employees themselves