SOUTH CHESHIRE WORKTOPS PLC

South Cheshire Worktops Plc

South Cheshire Worktops Plc

a) Brief Terms of References

Standard Costing:

Standard costs are realistic estimates of costs based on analysis of both past and projected operating costs and conditions.

Standard costing is a budgetary control technique

Standard costing has three components

A standard. (A predetermined performance level)

Actual performance

A variance (comparing actual to standard)

Standard costs are pre-determined based on past and projected performance.

In manufacturing it can be used in Job Order, Process costing or activity-based costing systems.

In service it can be used to measure and evaluate operating performance. A bank or insurance company, for example, can use standard costing. Service organization will not have a material inventory; however, standard levels of labor and overhead can be calculated.

Once standards are determined, management use them as a tool for cost planning and control.

Developing Standard Costing:

The computation of standard costs is more detailed than that of predetermined overhead cost. Whereas predetermined overhead rates are usually based on past cost, standard costs are based on engineering estimates, forecasted demand, worker input, time and motion studies, and type of quality of direct materials.

Computing Standard Costs:

A standard costing system uses all elements of product cost, that is, Direct Materials, Direct Labor, and Manufacturing Overhead.

Calculating Direct Materials Costs Standards:

Steps:

Calculate the Direct Material Price Standard. Direct Material Price Standard is an estimated of the cost of materials needed in the next accounting period. Typically the purchasing the department is responsible for developing this number.

Calculate the Direct Material Quantity Standard. Direct Material Quantity Standard is an estimate of all the materials needed to manufacture the budged number units. The production manager or accountants are responsible for developing this standard.

b) Introduction

South Cheshire Worktops plc manufactures kitchen worktops. The Finance Director is in the process of introducing a scheme to improve the firm's budgeting and budgetary control procedures. The firm is introducing standard costing as part of its improved procedures.

Leading up to the introduction of the new procedures, a number of staff training programmes are scheduled. One of the training programmes is for the senior managers. The Finance Director is anxious that new techniques and procedures are seen as part of a fully integrated system of budgeting and budgetary control. Further, there will be training sessions which will look at other management accounting techniques. However, these are not for consideration in this report.

The purpose of this report is to produce a document for this training programme in the form of a report. The report includes analysis of standard costing and variance.

c) Findings

1. Profit Variance

Profit variance is the difference between actual profit and budgeted profit.

Profit Variance = Actual Profit - Less standard profit

Actual Profit = (£10.38 × 7,800 units)

Less standard profit = (£8.72 × 7,800 units)

Profit Variance = £12,980 (Favourable)

1 (a). Total Cost Variance

Total Cost Variance is the difference between standard cost and budgeted cost.

Total Cost Variance = (Standard cost per unit × actual units) - (Less total actual cost)

Standard cost per unit × actual units = ...