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State advantages of using standards costs in the manufacturing industry
1. Effective cost control: The most important advantage of standard costing is that it facilities the control of cost. Control is exercised by comparing actual performance with standards and taking corrective action.
2. Helps in Planning: Establishing standards is a very useful exercise in business planning which instills in the management a habit of thinking in advance.
3. Provides incentives: The standards provide incentives and motivate to work with greater effort. This increases efficiency and productivity.
4. Fixing prices and formulating policies: Standard costs are a valuable aid to management in determining prices and formulating production policies.
5. Facilitates delegation of authority: Delegation of authority and fixing responsibility for performance may be identified directly with the persons concerned.
6. Facilitates Co-ordination: While establishing standards, the performance of different departments such as production, sales, purchases etc is taken into account. Thus through the working of standard cost system, co-ordination of various functions is achieved.
7. Cost Reduction: By fixing standards, certain inefficiencies are reduced, such as material wastage, idle time, lost machine hours, etc.
8. Valuation of stocks: Standard costing simplifies the valuation of stock because the stock is valued at standard cost.
9. Management by exception: Reporting of variance is based on the principle of management by exception. Only variances beyond a predetermined limit may be considered by the management for corrective action. This also reduces the cost of preparing reports.
10. Economical and simple: Standard costing is an economical and simple means of cost accounting and generally results in a saving in the cost of costing system.
Other advantages of standard costing are:-
i) Standard costs are used to prepare the budget. The quantities to be produced or sold are multiplied by standard cost per unit and standard selling price per unit to find out the cost and sales. It helps to prepare budget accurately.
ii) Actual results are compared with standard or predetermined figures. If the actual costs are higher than standard cost, it shows unfavourable trend and vice versa. It can be determined whether the actual performance is satisfactory or not.
iii) When the variances are analyzed, the causes of these variances can be determined. If these variances are due to inefficiency of some employees then the disciplinary action can be taken against them. This procedure helps to improve the overall performance of the organization.
iv) Only the variances which exceed acceptable tolerance limits need to be investigated by management with a view to control action. In this way, the principle of “management by exception” is operated.
v) Standard costs can provide a valuable aid to management in determining prices and formulating policies. However, great care must be taken in this regard.
marto answered the question on February 26, 2019 at 08:06
- BCH Ltd produces a type of liquid fertilizer. The production of this liquid fertilizer requires three
different types of chemicals namely Exe, Wye and Zed. The...(Solved)
BCH Ltd produces a type of liquid fertilizer. The production of this liquid fertilizer requires three
different types of chemicals namely Exe, Wye and Zed. The chemicals are mixed in the
proportion of 0.4, 0.3 and 0.3 respectively and their standard costs are Sh.12 Sh.7 and Sh.5 per
litre respectively.
Additional information:
1. In the recent past, the standard yield has been at 80% on 100 litres of the chemicals mix.
2. The company maintains a policy of not carrying any raw materials, as storage space is
limited.
3. Annual production of the liquid fertilizer has been set at 8,320,000 litres.
4. In the month of April 2006, the company produced 150,000 litres of the fertilizer at a total
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chemicals were as follows:
Date posted: February 26, 2019. Answers (1)
- The standard mix of a product branded Max is as follows:(Solved)
The standard mix of a product branded Max is as follows:
Required:
i) Material price variance.
ii) Material mix variance.
iii) Material yield variance.
Date posted: February 26, 2019. Answers (1)
- Excel limited manufacturers a product branded Regular that uses three different ingredients
namely X, Y, and Z. The standard mix of product Regular is provided below;-(Solved)
Excel limited manufacturers a product branded Regular that uses three different ingredients
namely X, Y, and Z. The standard mix of product Regular is provided below;-
Required:
i. Material price variance
ii. Material mix variance
iii. Material yield variance
iv. Material usage variance
v. Material cost variance
Date posted: February 26, 2019. Answers (1)
- Hygiene products limited manufacturers a single product, a melamine kitchen sink with a standard
cost of sh. 8000 made up as follows:-(Solved)
Hygiene products limited manufacturers a single product, a melamine kitchen sink with a standard
cost of sh. 8000 made up as follows:-
Required:
a) In columnar form prepare
i. Actual income statement
ii. Flexible income statement
iii. A reconciliation statement using the reported variances
b) Computer the following variances
i. Material price variance
ii. Material usage variance
iii. Labour rate variance
iv. Labour efficiency variance
v. Material cost variance
Date posted: February 26, 2019. Answers (1)
- Highlight four disadvantages of standards costing.(Solved)
Highlight four disadvantages of standards costing.
Date posted: February 26, 2019. Answers (1)
- Viwandani company limited manufactures a single product branded Exe
The following data relate to actual output costs and variances for the month of March 2010.(Solved)
Viwandani company limited manufactures a single product branded Exe
The following data relate to actual output costs and variances for the month of March 2010.
Date posted: February 26, 2019. Answers (1)
- Briefly explain four applications of standard costing.(Solved)
Briefly explain four applications of standard costing.
Date posted: February 26, 2019. Answers (1)
- Explain four factors to consider in deciding whether to investigate variances revealed by a standard
costing system.(Solved)
Explain four factors to consider in deciding whether to investigate variances revealed by a standard
costing system.
Date posted: February 26, 2019. Answers (1)
- XYZ Ltd. produces a product branded Zec, The company operates a standard costing system.
The budgeted product information for the month of October 2011 was as...(Solved)
XYZ Ltd. produces a product branded Zec, The company operates a standard costing system.
The budgeted product information for the month of October 2011 was as follows:
Required:
Prepare an operating statement which reconciles budgeted and actual profits using variances
approach.
Date posted: February 26, 2019. Answers (1)
- Benefits that would accrue to an organisation that operates a standard costing system.
(Solved)
Benefits that would accrue to an organisation that operates a standard costing system.
Date posted: February 26, 2019. Answers (1)
- ABC Ltd produces a single product branded Zed. The standard cost per unit for the month of
April 2012 was as follows:(Solved)
ABC Ltd produces a single product branded Zed. The standard cost per unit for the month of
April 2012 was as follows
Budgeted production was 2,000 units while the actual production was 1,800 units.
Required
i) Material price variance and material usage variance.
ii) Labour rate variance and efficiency variance.
iii) Fixed overhead volume variance and capacity variance.
iv) Variable overhead expenditure variance and efficiency variance.
Date posted: February 26, 2019. Answers (1)
- Explain why investigations of variances are important in a standard costing system.(Solved)
Explain why investigations of variances are important in a standard costing system.
Date posted: February 26, 2019. Answers (1)
- Describe the following types of standards in the context of standard costing.
i) Ideal standards
ii) Attainable standards.(Solved)
Describe the following types of standards in the context of standard costing.
i) Ideal standards
ii) Attainable standards.
Date posted: February 26, 2019. Answers (1)
- Eval Ltd. manufactures a product branded SCQ that uses three different ingredients namely;
Exe, Wye. and Zed. The standard prime cost is as follows:(Solved)
Eval Ltd. manufactures a product branded SCQ that uses three different ingredients namely;
Exe, Wye. and Zed. The standard prime cost is as follows:
Additional information:
1. During the month of September 2013, Eval Ltd. manufactured and sold 6,000 units.
2. The actual material costs were as follows:
3. During the month of September 2013, the company worked for 17,500 direct labour hours of
which 2,500 hours were paid at the rate of Sh.12 per hour. The rest were paid at a standard rate.
Required:
i) Materials price variance.
ii) Materials usage variance.
iii) Labour rate variance.
iv) Labour efficiency variance.
Date posted: February 26, 2019. Answers (1)
- Varb Ltd. manufactures a product branded QM
The standard cost per unit of QM is given below:(Solved)
Varb Ltd. manufactures a product branded QM
The standard cost per unit of QM is given below:
Additional information:
1. For the month of April 2014, the budgeted production of product QM was 24,000 units.
2. Fixed overheads are absorbed on a labour hour basis.
3. The actual results for the month of April 2014 were as follows:
Required:
i) Materials price variance.
ii) Materials usage variance.
iii) Labour rate variance.
iv) Labour efficiency variance.
v) Fixed overheads expenditure variance.
vi) Fixed overheads volume variance.
Date posted: February 26, 2019. Answers (1)
- Explain three differences between standard costs and estimated costs.(Solved)
Explain three differences between standard costs and estimated costs.
Date posted: February 26, 2019. Answers (1)
- To manufacture a standard product, 10 units of material are required at a standard price of Sh.80
per unit. The actual production for the period was...(Solved)
To manufacture a standard product, 10 units of material are required at a standard price of Sh.80
per unit. The actual production for the period was 10,000 units. From the cost records it was
found that 105,000 units of materials were actually consumed at a price of Sh. 75 per unit.
Required;-
i) Calculate the material cost variance.
ii) Reconcile material cost variance with material price variance and material usage variance.
Date posted: February 26, 2019. Answers (1)
- Kuuda Limited manufactures one standard product. Currently, it is operating at a normal level of
activity of 70% with an output of 6,300 units, although the...(Solved)
Kuuda Limited manufactures one standard product. Currently, it is operating at a normal level of
activity of 70% with an output of 6,300 units, although the sales director believes that a realistic
forecast for the next budget period would be at a level of activity of 50%.
Required:
(i). Prepare a flexible budget based on a 50% level of activity.
(ii). State three problems which may arise from such a change in the level of activity.
Date posted: February 26, 2019. Answers (1)
- Identify the limitations of using budgeting systems to regulate business activities.(Solved)
Identify the limitations of using budgeting systems to regulate business activities.
Date posted: February 26, 2019. Answers (1)
- State the objectives of budgetary planning and control systems.(Solved)
State the objectives of budgetary planning and control systems.
Date posted: February 26, 2019. Answers (1)