Economics and Management Notes > Oxford University Economics and Management Notes > Accounting Notes

Management And Cost Accounting Notes

This is a sample of our (approximately) 13 page long Management And Cost Accounting notes, which we sell as part of the Accounting Notes collection, a 1st Class package written at Oxford University in 2011 that contains (approximately) 347 pages of notes across 12 different documents.

Learn more about our Accounting Notes

The original file is a 'Word (Docx)' whilst this sample is a 'PDF' representation of said file. This means that the formatting here may have errors. The original document you'll receive on purchase should have more polished formatting.

Management And Cost Accounting Revision

The following is a plain text extract of the PDF sample above, taken from our Accounting Notes. This text version has had its formatting removed so pay attention to its contents alone rather than its presentation. The version you download will have its original formatting intact and so will be much prettier to look at.

'Management and cost accounting' Drury (Ch 17 &18) Chapter 17 Standard costing and variance analysis 1

Standard costs are predetermined costs; they are target costs that should be incurred under efficient operating conditions. They are not the same as budgeted costs. A budget relates to an entire activity or operation; a standard presents the same information on a per unit basis. A standard therefore provides cost expectations per unit of activity and a budget provides the cost expectation for the total activity.

Operation of a standard costing system o Standard costing is most suited to an organization whose activities consist of a series of common or repetitive operations and the input required to produce each unit of output can be specified o A standard costing system can be applied to organizations that produce many different products, as long as production consists of a series of common operations. Therefore possible that a large product range may result from a small number of common operations. o Actual product costs are not required
 Questionable...because standard costs represent future target cost, they are preferable to actual past costs for decision-making.

Establishing cost standards o Control over costs is best effected through action at the point where the costs are incurred. o Two approaches that can be used to set standard costs.
 Past historical records can be used to estimate labour and material usage.
 Standards can be set based on engineering studies. o If historical records are used to set standards, there is a danger that the latter will include past inefficiencies. o Disadvantage of this method is that, unlike the engineering method, it does not focus attention on finding the best combination of resources, production methods and product quality. o The standard cost for each operation is derived from multiplying the quantity of input that should be used per unit of output (i.e. the quantity standard) by the amount that should be paid for each unit of input (i.e. the price standard). o Direct material standards
 Material quantity standards are usually recorded on a bill of materials o Direct labour standards
 Possibly involving a time and motion study. Most efficient methods of production, equipment and operating conditions are then standardized.
 Unavoidable delays such as machine breakdowns and routine maintenance are included in the standard time. o Overhead standards
 Fixed overheads are largely independent of changes in activity, and remain constant over wide ranges of activity in the short term. Therefore inappropriate for short-term cost control purposes to unitize fixed overheads to derive a fixed overhead rate per unit of activity.
 Main difference with the treatment of overheads under a standard costing system as opposed to a non-standard costing system is that the product overhead cost is based on the hourly overhead rates multiplied by the standard hours rather than the actual hours used.

Types of cost standards o Standards are normally classified into three broad categories:
 Basic cost standards




o o


Constant standards that are left unchanged over long periods. Efficiency trends can be established over time. When changes occur in methods of production, price levels or other relevant factors, basic standards are not very useful.
 Ideal standards

Represent perfect performance.

Minimum costs that are possible under the most efficient operating conditions.

Have an adverse impact on employee motivation.
 Currently attainable standard costs

Costs that should be incurred under efficient operating conditions.

Difficult, but not impossible, to achieve.

Allowances made for normal spoilage, machine break-downs and lost time.

Provides the best norm to which actual costs should be compared. Purposes of standard costing. Different purposes
 Providing a prediction of future costs that can be used for decision-making purposes. Because standard costs represent future target costs based on the elimination of avoidable inefficiencies they are preferable to estimates based on adjusted past costs which may incorporate inefficiencies.
 Providing a challenging target
 Assisting in setting budgets and evaluating managerial performance
 Acting as a control device by highlighting those activities which do not conform to plan and thus alerting managers to those situations that may be 'out of control' and in need of corrective action.
 Simplifying the task of tracing costs to products for profit measurement and inventory valuation purposes. If actual costs are used a considerable amount of time is required in tracking costs so that monthly costs can be allocated between cost of sales and inventories. Inventories and cost of goods sold are recorded at standard cost and a conversion to actual cost is made by writing off all variances arising during the period as a period cost. Material variances This gives rise to the possibility that the actual cost will differ from the standard cost because the actual quantity of materials used will be different from the standard quantity and/or that the actual price paid will be different from the standard price. Material price variances The material price variance is equal to the difference between the standard price (SP) and the actual price (AP) per unit of materials multiplied by the quantity of materials purchased (QP): (SP - AP) x QP The normal procedure is to present the amount of the variances followed by symbols A or F to indicate either adverse or favourable variances. It is incorrect to assume that the material price variance will always indicate the efficiency of the purchasing department. Actual prices may exceed standard prices because of a change in market conditions that causes a general price increase for the type of materials used. Maybe beyond the control of the purchasing department. May reflect a failure by the purchasing department to seek the most advantageous sources of supply. Material usage variance

****************************End Of Sample*****************************

Buy the full version of these notes or essay plans and more in our Accounting Notes.