Managing Financial Control

Standard Costing & Variance Analysis

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SCHOOL
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BUSINESS
SCHOOL
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SCHOOL
OF
BUSINESS

Learning Outcomes
Explain the characteristics of standard costing and its use in manufacturing
organisations Online Lecture, Independent Study, Discussion Forum
Prepare variances for sales, material, labour, variable overheads and fixed
overheads. Online Lecture, Seminar Activity 2, Formative Assessment 2.
Demonstrate reconciliation of budgeted profit to actual profit under marginal or
absorption costing using variance analysis Online Lecture, Seminar Activity 2
Prepare advanced variances and explain their importance in evaluating performance
Online Lecture, Seminar Activity 2, Discussion Forum, Formative Assessment 2.
Interpret variances in order to evaluate performance. Formative Assessment 1,
Seminar Activity 1.

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Standard Costing
What is a standard?
Predetermined Cost, Hour, Weight etc for a unit of output. It is suitable for
operations with common or repetitive production. They are used to value
inventory and act as a control device known as variance analysis.
Standard Cost Card (for one unit)

Direct Material 3kg x 2/kg 6

Direct Labour 2hrs x 4/hr 8
Variable Overheads 2 hrs x 2/hr
Fixed Overheads 2hrs x 3/hr 6
Absorption Cost Per Unit

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Setting Standards

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Ideal

Basic

Current

Expected

May 2012

Flexed Budget & Variance Analysis

Units

Bud 1,750

Sales

8,750

Materials 2,625
Labour

3,563

Act 1,750 Total Variance

9,625
2,800

3,400

875 F
175 A
163 F

Overheads

200

190

10 F

Profit

2,362

3,235

873 F

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Mat 2012

Basic Variances

Efficiency

Volume

Rate

Price

Expenditure
Expenditure
Usage

Efficiency

Price

Material
6

Volume

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Labour
May 2012

Variable
Overhead

Sales

Fixed
Overhead

Lecture Example 1

You should now pause the presentation

and watch Lecture Example 1 to recap
from your previous studies how basic
variances are calculated and budgeted
profit is reconciled to actual profit.

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Reasons for Variances

INTERDEPENDENCE
8

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Advanced Variances

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Materials Mix & Yield Variances

If a product has more than one material input which can be substituted for one another,
the Material Usage variance can be subdivided to further investigate performance.

Total
Materials
Variance

Material
Price
Variance

Material
Usage
Variance

Mix
Variance

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May 2012

Yield
Variance

Lecture Example 2

You should now pause the presentation

and watch Lecture Example 2 to watch a
demonstration on how mix and yield
variances are calculated.

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Sales Mix and Quantity Variance

When a company sells more than product the sales volume variance can be analysed
into a sales mix variance and a sales quantity variance

Sales
Volume
Sales
Mix
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Sales
Quantity

Lecture Example 3

You should now pause the presentation

and watch Lecture Example 3 to watch a
demonstration on how sales mix and
sales quantity variances are calculated.

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Planning and Operational Variances

Variances can be investigated further to look at the elements driven by a wrong
standard (planning variance) and the elements that were within the managers
control (operational variance).

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Lecture Example 4

You should now pause the presentation

and watch Lecture Example 4 to watch a
demonstration on how planning and
operational variances are calculated.

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Learning Outcomes
Explain the characteristics of standard costing and its use in manufacturing
organisations
Prepare variances for sales, material, labour, variable overheads and fixed
overheads.
Demonstrate reconciliation of budgeted profit to actual profit under
marginal or absorption costing using variance analysis
Prepare advanced variances and explain their importance in evaluating
performance
Interpret variances in order to evaluate performance.

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Next Steps..
Complete your independent study on the uses of standard costing
Attempt Formative Assessment 1 and watch the recorded debrief
Make a post in the discussion forums
Attend the seminar
Attempt Formative Assessment 2 and watch the recorded debrief
Ask the tutor if there are any problems with this topic.

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