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Unformatted text preview: 1 Standard costs and Variance Analysis Linda Chang Lecturer email@example.com Learning objectives 1. Explain how standard costing can be used to help control and manage resources 2. Describe and understand how to set standards 3. Understand how participation in standard setting, and the choice between perfection and practical standards can impact on behaviour 2 practical standards, can impact on behaviour 4. Develop standard costs for direct material and direct labour 5. Calculate and interpret Direct Material and Direct Labour variances 6. Understand how to determine the causes of variances, and when to take corrective actions 7. Describe some behavioural effects of standard costing systems Required Readings Langfield-Smith, Chapter 10 3 Lecture Outline 1. Cost control overview 2. Setting standards Direct materials standards 4 Direct labour standards 3. Variance analysis Direct materials variance Direct labour variance 4. Investigating and controlling variances Controlling costs Businesses are in control when operations proceed to plan and objectives are achieved Control systems provide regular information to assist in control, which is an essential part of 5 effective resource management Necessary requirements for control A predetermined or standard performance level A measure of actual performance; and A comparison between standard performance and actual performance Controlling costs Standard costing is a part of the budgetary control system A predetermined or standard cost is developed A standard cost is a budgeted cost of one unit of 6 product Includes cost of material, labour and overhead The actual cost incurred in the product process is measured The actual cost is compared to the standard cost to form a cost variance 2 Controlling costs Standard cost variances are used to evaluate actual performance and control costs Standard costs can be developed for direct material, direct labour and overheads 7 When cost variances are significant, the cause of the variance must be investigated May result in operations being changed to bring cost back in line with standards Management may reconsider whether the standard costs are appropriate benchmarks Investigate causes of variances Setting standards How do we set standards? Historical data Engineering method 8 Participative standard setting Benchmarking Setting standards Historical data Provide a good basis for predicting future costs May need to be adjusted to reflect expected 9 May need to be adjusted to reflect expected movements in price levels or technological changes in the product process Must be used with care as changes can make those costs irrelevant, and can include inefficiencies of the past Setting standards Engineering methods Focus is on what it should cost in the future Determine how much materials and labour hours is needed in the production process...
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- Spring '11