Performance Management

C3: Budgeting and Control | Standard Costing (ACCA F5)

C3- Standard Costing

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.

Standard Costing

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
system.

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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