Upload
douglas-leong-jian-hao
View
30
Download
0
Tags:
Embed Size (px)
Citation preview
Management Accounting & Decisions II N12401
Lecture 2
Standard Costing: Review
by Hung Woan-Ting
2
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
3
1.0 Key Concepts Revisited
Standard costs, Standards and Budgets
Standard Costing System
Effective cost control Prices & Quantity
Planning (static) Budget
Flexible Budget
Static Budget
Flexible Budget
Actual Results
Client-visits 1,000 1,100 1,100
Revenue $180K $198K $194K
Expenses $163K $168K $173K
Net Profit $17K $30K $21K
4
1.1 Concepts in Action (#1)
How was the performance of the Hungs business?
Hungs manicure salon has the following financial data for the year ended 30/9/2014:
5
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
6
1.2 Standard Costing in Context
CHANGING BUSINESS ENVIRONMENT
ORGANISATION (VALUE & STRATEGY)
PERFORMANCE MANAGEMENT
MANAGEMENT ACCOUNTING
STANDARD COSTING &
VARIANCE ANALYSIS
Primary purposes
Management control (planning; controlling)
Performance measurement (feedback; motivate; evaluation; manage)
Communication (coordinate; organise)
As good as the users
7
1.2 Standard Costing in Context
8
Functioning of Standard Costing System
1.2 Standard Costing in Context
Responsibility centre
(standard costs vs. actual costs)
Differences analysed
(cost control; accountability)
Investigation and actions (typically MBE
approach)
On-going monitoring (performance
gaps; standards level)
9
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)
10
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??
11
3.0 Basic Variance Analysis (Costs)
VARIABLE COSTS
ANALYSIS
DIRECT MATERIAL
COST
DIRECT LABOUR COST
VARIABLE OH
FIXED COSTS
ANALYSIS
FIXED OH
12
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
3.1 Direct material cost variances
13
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
14
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
15
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
Readings
16
Seminar 1 preparation
Attempt the Questions Set (at the back of this handout)
Indicative solutions in Moodle.
Please refer before attending seminar.
Exe.