F6 ACCOUNTING

ST. JOHN’S HIGH

SCHOOL
PRESENTER
MR. G. KANYOZA
1
Standard costing
What is standard costing?
Setting of predetermined estimates of the
costs of products and then compare them
with the actual costs incurred.
A standard cost is a predetermined cost
Standard costing involves use of budgeting
principles which related to individual cost
units.
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Types of standards
Ideal standards
Maximum performance under perfect working
conditions.
No wastages of Material and no idle time.
Not realistic and can not be attained.
Do not motivate workers because they can not
be attained.
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Types of standards
Current standards
Actual performance and current working
conditions.
Do not provide incentive for improvement of
current performance and efficiency.
Less useful for the future.

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Types of standards
Attainable standards
Common standards that can be achieved under
normal working conditions.
Take into account normal losses and idle time.
Motivating as they are based on normal
efficient operating conditions.

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Purpose of standard costing
Facilitates preparation of more realistic budgets
Can be used for pricing decisions
Can help in calculating costs for quotations and orders
Essential for responsibility accounting
Provides basis for calculating variances
Standard costing can be used to control costs
Standard costs are acceptable for inventory valuation
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Advantages of standard costing
Acting as a control device in variance analysis
Assisting in budget setting
Evaluating managers performance
Predicting future costs to aid decision making
Providing targets to motivate staff
Suggesting ways to improve efficiency
Enabling more accurate inventory valuation
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Disadvantages of standard costing
Time consuming to collect data
Standards based on estimates
Unrealistic standards can demotivate staff
Factors causing variances are outside his control

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Variance analysis
Variance is the difference between standard costs and actual costs.
Variance analysis is the calculation of variances so as to explain
the causes of such variances.
The following are the main variances to be covered:
Material variances
Labour variances
Sales variances
Fixed overhead variances

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 Causes of material usage variances
Material usage variance – favourable
Less wastage due to better quality material.
Less wastage due to better skilled/experienced workforce.
Improved production methods
Material usage variance – adverse
wastage due to poor quality material.
wastage due to unskilled/ less experienced workforce.
poor production methods/ abnormal losses
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 Causes of material price variances
Material price variance – adverse
Unexpected price increase.
Loss of previous discount from supplier.
Better quality materials purchased.
Material price variance – favourable
Unexpected fall in the price of materials
Purchase of poor quality material
Discounts on bulk purchase from suppliers
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