Managerial Accounting Part - Standard costing and variance analysis

Managers focus on quantities and costs that deviate significantly from standards (a practice known as management by exception).

Take time to investigate only significant cost variances:

• Depends on the size of the organization
• Depends on the type of the organization
• Depends on the production process

'What did the product cost' --> Used in a mature production process.

Analysis of the process for the step that has changed, but usage of historical data for the steps that have not changed.

Perfection standards can only be attained under near perfect conditions: 

• Peak efficiency
• Lowest possible input prices
• Best-quality material
• No disruption in production

Practical or attainable standards are tight as practical, but still expected to be attained: 

• Occasional machine breakdowns
• Normal amounts of raw material waste

Usage of competitive bids for the quality and quantity desired.

Usage of wage surveys and labor contracts.

Use time and motion studies for each labor operation.

Jobs with repetetive task lend themselves to efficiency measures. Computing non-manufacturing efficiency variances requires some assumed relationship between input and output activity.

Standard cost variances are classified in:

1. Price variance; which is the difference between the actual price and the standard price
2. Quantitiy variance; which is the difference between the actual quantity and the standard quantity

• Size of variance (dollar amount, percentage of standard)
• Recurring variances
• Trends
• Controllability
• Favorable variances
• Cost and benefits of investigation

• They display variations in a process and help to analyze the variations over time
• Distinguish between random variations that should be investigated
• Provide a warning signal when variations are beyond a specific level

Gets the best prices available for purchased goods and services through skillful purchasing practices.

Skillful supervision and motivation of production employees, could with the careful use and handling of materials, contribute to minimal waste.

Generally results from using a different mix of employees than that anticipated when the standards were set.

Motivating employees toward production goals and effective work schedules improves efficiency.

Interaction among variances often occur, making it difficult to determine the responsbility for a particular variance. Variances in one part of the value chain can be due to root causes in another part of the chain.

• Sensible cost comparisons
• Management by exception
• Employee motivation
• Performance evaluation
• More stable product costs
• Less expensive than actual-or normal-costing systems

• Variances are often too aggregated. They are not tied to specific product lines, production batches, or to the flexibel management system
• Standard costing may not be applicable in flexibel manufacturing operations with short life-cycle products
• There is too much focus on cost minimization rather than increasing product quality or customer service
• There is too much focus on the cost and efficiency of direct labor 
• Automation reduces labor costs and the significance of labor variances
• Automated manufacturing processes tend to be more consistent in meeting production specifications
• Variance reports ar often provided too late to be useful to managers

Applications of standard costing have adapted to changes in the manufacturing environment and the resulting criticisms leveled at standard costing.

• Reduced importance of labor standards
• Less use of labor as a cost driver
• Automation means more overhead, less labor
• More emphasis on material and overhead costs

Automation:

• Reduces labor efficiency variance
• Reduces material quantity variance
• Reduces variation in quality and increases quality

Standard costing = the use of carefully predetermined product costs for budgeting and performance evaluation. Standard costs are typically used in established production processes.

Kaizen costing = the emphasis is on continuous reduction of production costs. Rather than standards or targets, the goal is current costs that are less than previous costs.

• Nearly all production processes require multiple materials and labor inputs
• A summary quantity variance for materials and labor would hide the individual effects of these inputs
• The quantity variances can be analyzed into two further variances: MIX AND YIELD
• Mix = the difference between actual and standard input proportions
• Yield = the difference between actual and standard input used
• The analysis assumes, that the inputs can be substituted for each other

Can only be attained under the best circumstances. No allowance for machine breakdowns or work interruptiions.

Tight but attainable standards. Allows for machine downtime and employee rest preiods.

The fact that a variance is favorable does not mean that it should not be investigated. Indeed, a favorable variance may be indicative of poor management decisions. Example: A favorable material price variance may be arisen from purchasing goods of inadequate quality for production.

Standard costing is a technique in which the standard cost is determined before starting the production and indicates what a product should cost considering all the situations ideal in nature.

A predetermined cost which is compared in advance of production on the basis of specification of all the factors affecting cost and used in standard costing.

• establish control
• set standards for various elements of cost
• fix responsibility
• make budgetary control more effective

• Cost control
• Pricing decisions
• Performance appraisal
• Cost awareness
• Management by objective

The deviation of actual cost from standard is called variance.

When the actual cost is less than standard cost or actual result is better than the standard set, it is known as favorable variance.

When actual costs exceeds standard cost or actual result is not up to standard, it is known as unfavorable or advers variance.