Standard Costing looks at the use of standard costs; outlines the methods that can be used to derive standard costs; explains the importance of flexing budgets and explains the principle of controllability in the performance management system.
a) Explain the use of standard costs.
A standard cost is “an estimated unit cost.” Standard costing is a system of accounting that is used to “value inventories, prepare cost budgets for production and provide control information (variances).”
Standard costing is used to:
- Value inventories
- Budget production costs
- Act as a control device
- Evaluate managerial performance
- Enable “management by exception”
- Predict future costs for use in decision making
- Motivate staff and management
- Provide guidance on how to improve efficiency
Note: Standard costing is most suited to mass production or assembly work
b) Outline the methods used to derive standard costs and discuss the different types of cost possible.
Standard costs can be set for labour costs, material usage and labour efficiency, overheads and sales price and margin.
The four types of standard are ideal, attainable, current and basic.
c) Explain and illustrate the importance of flexible budgets in performance management.
Flexible budgets change as output and sales change. To prepare a flexible budget, take the following steps:
- Step 1: Decide which costs are fixed, variable and semi-variable
- Step 2: Calculate the budget cost allowance for each cost item
Formula: Budget cost allowance = Budgeted fixed cost + (number of units x variable cost per unit)
In performance management, flexible budgets are used for budgetary control variance analysis.
d) Explain and apply the principle of controllability in the performance management
Controllability states that the “managers of responsibility centers should only be held accountable for costs over which they have some influence.”
A system of control should have the following features:
- A hierarchy of budget centres
- Clearly identified responsibilities for achieving budget target
- Responsibilities for revenues, costs and capital employed
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- Preparing for ACCA F5 Performance Management
- A1: Specialist Cost and Management Accounting Techniques | Activity Based Costing (ACCA F5)
- A2: Specialist Cost and Management Accounting Techniques | Target Costing (ACCA F5)
- A3: Specialist Cost and Management Accounting Techniques | Life Cycle Costing (ACCA F5)
- A4: Specialist Cost and Management Accounting Techniques | Throughput Accounting (ACCA F5)
- A5: Specialist Cost and Management Accounting Techniques | Environmental Accounting (ACCA F5)
- B1: Decision Making Techniques | Relevant Cost Analysis (ACCA F5)
- B2: Decision Making Techniques | Cost Volume Profit Analysis (ACCA F5)
- B3: Decision Making Techniques | Limiting Factors (ACCA F5)
- B4: Decision Making Techniques | Pricing Decisions (ACCA F5)
- B5: Make or Buy and Other Short Term Decisions | Pricing Decisions (ACCA F5)
- B6: Dealing With Risk and Uncertainty in Decision Making | Pricing Decisions (ACCA F5)
- C1: Budgeting and Control | Budgetary Systems and Types of Budget (ACCA F5)
- C2: Budgeting and Control | Quantitative Analysis in Budgeting (ACCA F5)