Management Accounting & Decisions II

N12401

Lecture 2
Standard Costing: Review
by Hung Woan-Ting

Lecture Objectives

1.

To revisit the purposes and functioning of

standard costing & variance analysis

2.

To understand the usefulness and criticisms of

standard costing and variance analysis

3.

To be familiar with the basic variance analysis

skills and understand the underlying reasons

1.0 Key Concepts Revisited

Standard costs, Standards and Budgets
Standard Costing System
Effective cost control Prices & Quantity
Planning (static) Budget
Flexible Budget

1.1 Concepts in Action (#1)

Hungs manicure salon has the following financial data
for the year ended 30/9/2014:
Static
Budget

Flexible
Budget

1,000

1,100

1,100

Revenue

$180K

$198K

$194K

Expenses

$163K

$168K

$173K

Net Profit

$17K

$30K

$21K

Client-visits

Actual
Results

How was the performance of the Hungs business?

4

1.1 Concepts in Action (#2)

Gymboree - U.S. based childrens clothing maker,
customer centric, reported earnings expected to top
market expectations.
Improved same-store sales
In line with fashion trends resonate with customers
Creating value-centric propositions (strong product
assortment; carefully-timed promotional events;
coupon scheme)
In Q2, 2009 G's same-store sales declined by 1% while
rival Children's Place dropped by 7%
Better cost and inventory control
done well in controlling inventory, managing their cost
structure and cash flow
cost-controls likely to be the greatest positive variance
Source: Reuters.com, August 2009
Further info: Bain pays $1.8b in 2010 for kids clothing firm
Gymboree; Gymboree Corporation Q1 2014 Financial Results

1.2 Standard Costing in Context

CHANGING BUSINESS ENVIRONMENT
ORGANISATION
(VALUE & STRATEGY)
PERFORMANCE MANAGEMENT
MANAGEMENT ACCOUNTING
STANDARD COSTING
&
VARIANCE ANALYSIS

1.2 Standard Costing in Context

Primary purposes
Management control (planning; controlling)
Performance measurement (feedback; motivate;
evaluation; manage)
Communication (coordinate; organise)

As good as the users

1.2 Standard Costing in Context

Functioning of Standard Costing System

Responsibility
centre

Differences
analysed

(standard costs
vs. actual costs)

(cost control;
accountability)

Investigation
and actions
(typically MBE
approach)

On-going
monitoring
(performance
gaps; standards
level)

2.0 Some Evidence in Practice

Survey in UK by Drury et al (1993):
76% organisations operated a SCS
Of these, 72% reported above average or of vital
importance for cost control & performance evaluation
Widespread use of standard costing in Ireland (Pierce & ODea,
1998), Singapore (Ghosh, et al, 1996)

In Malaysian, 70% of local firms and 76% of Japanese firms

surveyed are using standard costing (Sulaiman, et al, 2005)
Australian companies: standard costing more useful for product
costing, budgeting, inventory valuation, management control.
Japanese companies: standard costing for cost control at
production stage (Wijewardena & Zoysa, 1999)
9

2.1 Some Criticisms (be mindful!)

Developed in the last century usefulness in
todays business environment?

Delay in feedback reporting

Changing cost structure
Over-emphasizes importance of direct labour
Inconsistency with modern management approaches
Encourages conflicts, not cooperation

Some researchers predicting demise(!)

But WHY the overwhelming evidence of

practice adoption??
10

3.0 Basic Variance Analysis (Costs)

DIRECT
LABOUR
COST
DIRECT
MATERIAL
COST

FIXED
OH
VARIABLE
OH

VARIABLE
COSTS

FIXED
COSTS
ANALYSIS

ANALYSIS

11

3.1 Direct material cost variances

Example

Each unit of Product X is suppose to use 9g of direct

material costing $4/g.
In March, 100 units of X were made, consuming 825g
of material costing $5/g.
Find the variances and the possible causes for
1. Material price variance
2. Material usage variance
3. Total material cost variance

12

3.2 Direct labour cost variances

Example

Each unit of Product Y has a standard time of 9 hours

per unit at a standard rate of $4/hour.
In April, 100 units of Y were made, consuming 1000
hours of labour hours costing $5/hour.
Find the variances and the possible causes for
1.

Labour rate variance

2.

Labour efficiency variance

3.

Total labour cost variance

13

3.3 Variable MOH variances

Example

The company planned to make 120 units of Z in May and spend

$5400 on variable MOH. The companys policy is to absorb the
overhead using the direct labour hour basis.
Each unit of Product Z has a standard labour time of 9 hours per
unit at a standard labour rate of $4/hour.
In May, 100 units of Z were made, consuming 1000 hours of labour
hours. The variable MOH amounted to $5200.
Find the variances and the possible causes for
1. Variable MOH expenditure variance

2. Variable MOH efficiency variance

3. Total variable MOH variance

14

Readings
GNBCY Ch11, Ch12
D Ch17
Cheatham & Cheatham (1996) Re-designing Cost
Systems: Is Standard Costing Obsolete?, Accounting
Horizons, Dec, Vol 10(4): 23-31
Johnsen & Sopariwala (2000) Standard Costing is Alive
and Well at Parker Brass, Management Accounting
Quarterly, Winter, Vol 1(2): 1-9.

KPMG (2010) Standard costing: Insights from leading

companies, in association with CIMA.
1. Re-visiting the materials used in MAD1 at this stage would
definitely be useful!
End of Lecture

15

Exe.
Seminar 1 preparation
Attempt the Questions Set
(at the back of this handout)
Indicative solutions in Moodle.
Please refer before attending seminar.

16