Cost and Management Accounting Fundamentals:

Chapter 10: Standard Costing

Questions

Q1: Complete the crossword:

Across
a. A variance that shows the organisation is doing something right.
4. A standard that is based on current performance levels.
7. A standard that is based on efficient operations, but allows for negative factors.
8. A useful place to obtain information about appropriate wage rates (2 words).
9. A variance that indicates something went wrong
10. Organisations that will supply you with information about material prices

Down
2. A table showing all the variances to see what effect it had on profit.
3. Labour that is not perfectly skilled and therefore cheaper
5. Understood to be the norm.
6. The difference between actual results and budgeted results to see where problems arise

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Q2: Match the information in column A with the relevant information in column B:

Column A Column B
2.1 A predetermined unit cost for any resource that an organisation
Ideal standard
uses to manufacture a product or deliver a service.
2.2 A standard that does not allow for any mistakes. Labour rate
2.3 A standard cost for which information is sourced from the Loss of key
human resources department. customers
2.4 A possible reason for an adverse material usage variance. Management by
exception
2.5 A possible reason for a favourable labour rate variance. Poor planning and
scheduling
2.6 A possible reason for an adverse overhead efficiency variance. Poor supervision
2.7 A possible reason for an adverse sales volume variance. Product design
2.8 A possible reason for an adverse sales price variance. Product
promotions
2.9 A source of information about expected material usage. Standard cost
2.10 Careful examination of standards can direct management to
Unskilled labour
areas where there are problems.

Q3: State whether the following statements are true or false.

3.1 Careful examination of standards that can direct management to areas where there
are problems is called management by exception.
3.2 One of the purposes of standard costing is to look at past costs to use it for decision
making.
3.3 The standard costs of a similar organisation can be used as a basis for setting
standards.
3.4 Standard costing is most appropriate for an organisation that performs a variety of
different services, e.g. a panel beater.
3.5 The human resources department is a good place to start when setting labour
standards.
Q4: Fill in the missing word/words in the following statements:

4.1 A standard that is based on efficient operations, but which allows for negative factors
is called an standard.
4.2 A is calculated for the difference between actual results and budgeted
results to see where problems arise.
4.3 A reduction in the selling pricing ( sales price variance) may cause a
higher sales demand from customers ( sales volume variance).
4.4 The source document for standard costing is a -and sets
out the standard usage and standard prices of resources used in the manufacture of a
product.
4.5 A material price variance that is due to purchasing a cheaper
material may result in an adverse material usage variance as there will be more
material wasted.

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Q5: Multiple-choice questions

5.1 A recent budgetary control report shows the following:

Fixed Flexible Actual
budget budget results
Total sales 200 000 204 000 212 050
Total variable cost 158 000 161 160 175 998
Total fixed cost 35 000 35 000 26 553
Total contribution 7 000 7 840 9 499

The expenditure variance for the period was:

a. R840 favourable
b. R840 adverse
c. R1 659 adverse
d. R1 659 favourable

Use the following information to answer Questions 5.2 to 5.6:

Beyoncia Ltd uses a standard costing system. The company makes and sells a single product
called a Kreoli. The following data is for the month of August:

• Actual cost of direct material purchased and used: R65 560

• Material price variance: R5 960 unfavourable
• Material usage variance: R16 400 unfavourable
• Standard cost per kilogram of material: R4
• Standard cost per direct labour hour: R5
• Actual direct labour hours: 6 500 hours
• Labour rate variance: R3 900 unfavourable
• Labour efficiency variance: R3 500 favourable
• Standard number of direct labour hours per unit of Kreoli: 2 hours

5.2 The total number of units of Kreoli produced during August was:
a. 10 800
b. 14 400
c. 3 600
d. 6 500

5.3. The standard material allowed to produce one unit of Kreoli was:
a. 1 kg
b. 4 kg
c. 3 kg
d. 2 kg

5.4. The actual material cost per kilogram was:

a. R4.00

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 b. R3.67
c. R3.30
d. R4.40

5.5. The actual direct labour rate per hour was:

a. R 5.60
b. R 5.00
c. R10.00
d. R 4.40

5.6. If a company shows a favourable material price variance and an unfavourable material
usage variance, the reason is most likely:
a. labour efficiency problems
b. machine efficiency problems
c. the purchase and use of higher than standard quality material
d. the purchase and use of lower than standard quality material

5.7 The variable overhead efficiency variance is most effective in measuring:

a. The difference between actual variable overhead costs incurred during the period
and the budgeted overhead based on actual input.
b. The difference between actual variable overhead costs incurred during the period
and the budgeted amount based on the time that should have been used in
producing at the given level of activity.
c. The difference between actual hours used in production and the standard hours
allowed at a certain level of output.
d. Excessive usage of overhead resources.

5.8 Hello Ltd manufactures tables with wooden tops. The standard material cost per table
is R70.80 (6 square metres x R11.80 per square metre). A production run of 1 000
tables in January used 6 400 square metres of wood at a cost of R11.20 per square
metre. The material usage variance was:
a. R4 720 favourable
b. R4 720 unfavourable
c. R3 840 unfavourable
d. R3 840 favourable.

Use the following information to answer Questions 5.9 to 5.10:

See-Through Glass Works uses a standard cost system in which manufacturing overhead is
applied to units of product on the basis of direct labour-hours. Each unit requires two
standard hours of labour for completion. The activity for the year was based on budgeted
production of 200 000 units. Total overhead was budgeted at R900 000 for the year, and the
fixed overhead rate was R1.50 per unit. The actual data pertaining to the manufacturing
overhead for the year is presented below:

Actual production 198 000 units

Actual direct labour-hours 440 000 direct labour-hours

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 Actual variable overhead R352 000
Actual fixed overhead R575 000

5.9. The standard hours allowed for actual production for the year total:
a. 247 500
b. 400 000
c. 396 000
d. 495 000

5.10. Franklin's variable overhead spending variance for the year is:
a. R20 000 unfavourable
b. R22 000 favourable
c. R22 000 unfavourable
d. R20 000 favourable

Short Questions

Q6

Claystor Ltd uses a standard costing system where manufacturing overhead costs are applied
to units of the company’s single product on the basis of direct labour hours. The standard
cost card for the product is as follows:

Standard cost card per unit of product: R

Direct material (4 metres) 14
Direct labour (1.5 direct labour hours) 12
Variable manufacturing overheads (1.5 direct labour hours) 3
Fixed manufacturing overheads (1.5 direct labour hours) 9
Standard cost per unit 38

The following information relates to the previous year’s activities:

▪ The company manufactured 18 000 units of the product during the year. A total of
70 200 meters of material was purchased during the year at a cost of R3.75 per metre. All
of this material was used to manufacture the 18 000 units.
▪ The company worked 29 250 direct labour hours during the year at a cost of R7.80 per
hour.
▪ The budgeted activity level was 22 500 direct labour hours.
▪ Budgeted fixed manufacturing overheads were R135 000 while actual fixed
manufacturing overheads were R133 200.
▪ Actual variable manufacturing overheads were R61 425.

Required:
6.1 Calculate the direct material price and quantity variances for the year.

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6.2 Calculate the direct labour rate and efficiency variances for the year.
6.3 Calculate the following variances for overheads:
a. The variable overhead spending and efficiency variances for the year.
b. The fixed overhead budget and volume variances for the year.

Q7

Hanover Ltd manufactures handcrafted beach bags. The company has set the following
standards:

Variable
Direct
Direct labour manufacturing
materials
overhead
Standard quantity or hours per bag ? metres 3 hours ? hours
Standard price or rate ? per metre R15 per hour R2 per hour
Standard cost per bag ? R45 R6

During the past month, the company purchased 700 meters of direct material at a cost of R26
250. All of this material was used in the production of 1 300 handbags. Direct labour cost
totalled R55 125 for the month. Variable manufacturing overhead is based on direct labour
hours. Actual variable manufacturing overhead per handbag was R2.20.

The following variances have been calculated:

Materials price variance R1 750 Favourable

Total materials variance R250 Unfavourable
Labour efficiency variance R6 000 Favourable

Required:

7.1 For direct materials, calculate the following:

a. the standard price per meter,
b. the standard quantity allowed for materials in total for the month's production,
and
c. the standard quantity per handbag.

7.2 For direct labour, calculate the following:

a. the actual direct labour cost per hour for the month, and
b. the labour rate variance.

7.3 For variable manufacturing overhead, calculate the following:

a. the spending variance,
b. the efficiency variance, and
c. the total variance.

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7.4 The management of Hanover Ltd has noticed that even though the materials price
variance is favourable, the total materials variance is unfavourable. Explain to them how
this is possible and provide them with a possible reason.

Q8
SG Ltd manufactures and sells speciality sports gear and accessories. The production manager of the
Water Bottle Department of SG has limited financial knowledge, but is very impressed with the
performance of the department during the past month. The business was able to work more labour
hours and as a result produced and sold more units than budgeted. Therefore the business generated
a higher profit. The budgeted and actual figures for the month are shown below:

Budgeted Actual
Hours worked 35 000 45 000
Sales R 770 000 R 945 000
Variable expenses:
Materials R 175 000 R 247 500
Labour R 70 000 R 90 000
Variable overhead R 35 000 R 33 750
Sales expenses R 105 000 R 157 500
Fixed expenses:
General overhead R 150 000 R 146 800
Administrative overhead R 80 000 R 78 000
Net profit R 155 000 R 191 450

Required:
8.1 Prepare a flexed budget with efficiency variances for variable costs only for SG (use the format
given below).
Actual costs Flexed budget
Cost per Budget based Efficiency
Cost item for 45 000 based on ?
hour on 35 000 hours variance
hours hours

8.2 Why is it better to compare actual figures with a flexible budget instead of with an original
budget?

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Solutions
Q1: Crossword

1. Standard
2. Attainable
3. Variance
4. Unskilled
5. Adverse
6. Favourable
7. Reconciliation
8. Trade union
9. Suppliers
10. Current

Q2: Match the column

2.1 Standard cost

2.2 Ideal standard
2.3 Labour rate
2.4 Poor supervision
2.5 Unskilled labour
2.6 Poor planning and scheduling
2.7 Loss of key customers
2.8 Product promotions
2.9 Product designs
2.10 Management by exception

Q3: True or false

3.1 True
3.2 False. It provides a prediction of future cost that can be used for decision-making.
3.3 True
3.4 False. A standard costing system is most appropriate for an organisation that
performs repetitive operations
3.5 True

Q4: Fill in the missing word/words in the following statements:

4.1 attainable
4.2 variance
4.3 adverse, favourable
4.4 standard cost card
4.5 favourable

Q5: Multiple-choice questions

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5.1 d
5.2 c
5.3 c
5.4 d
5.5 a
5.6 d
5.7 c
5.8 b
5.9 c
5.10 c

Short questions

Q6

6.1 Direct material price variance:

AQ (AP – SP)
70 200 (R3.75 – R3.50)
R17 550(U)

Direct material usage variance:

SP (AQ – SQ)
R3.50 (70 200 – 72 000)
R6 300 (F)

6.2 Direct labour rate variance:

29 250 (R7.80 – R8.00)
R5 850 (F)

Direct labour efficiency variance:

R8.00 (29 250 – 27 000)
R18 000 (U)

6.3 a. Variable overhead spending variance:

R61 425 – (29 250 x R2)
R2 925 (U)

Variable overhead efficiency variance:

(29 250 x R2) – (27 000 x R2)
R4 500 (U)

b. Fixed overhead variances:

Budget variance:
R133 200 – R135 000
R1 800 (F)

Volume variance:

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 R6 (22 500 DLH – [18 000 units x 1.5 DLH per unit])
R27 000 (F)

Q7
Actual Quantity of Inputs, at Actual Quantity of Inputs, at Std Quantity allowed for
Actual Price Standard Price Output, at Std Price
(AQ x AP) (AQ x SP) (SQ x SP)
(700 x R37.50**) (700 x R40*) (650 x R40)
= R26 250 = R28 000 (R26 000+2 000) = R26 000
or (R26 250 + 1 750)

Price Variance, Quantity Variance,

R1 750 F R1750 + R250 = R2 000 U
Total Variance, R250 U
* R28 000 / 700 = R40.
** R26 250 / 700 = R37.50.

7.1
a. The actual cost of material per m for the month was:
R26 250  700m = R37.50 per m.
AQ (AP - SP) = Materials Price Variance
700 m (R3.75 - SP) = R1 750 F
R26 250 – 700 SP = R1 750 F
700 SP = R28 000
SP = R40.00

b. SP (AQ - SQ) = Materials Quantity Variance

R4.00(700m - SQ) = R2 000 U *
R28 000 - R40.00 SQ = R2 000 U
R40.00 SQ = R26 000
SQ = 650m
*R2 000 U = R1 750 + R250

c. 650 kg  1 300 units = 0.5 kg per unit.

b.
Actual Hours of Input, at Actual Hours of Input, at Standard Hours allowed for
Actual Price Standard Rate Output, at Std Rate
(AH x AR) (AH x SR) (SH x SR)
(3 500h x R15.75****) (***3 500h x R15) (3 900h* x R15)
=R55 125 = R52 500** = R58 500

Rate Variance, Efficiency Variance,

R2 625 U # R6 000F

* 3 x 1300 = 3900h
** R58 500 – R6 000 = R52 500

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***R52 500 / R15 = 3 500h
**** R55 125 / 3 500h = R15.75 ph
# R55 125 – R52 500 = R2 625 U

7.2
a. SR (AH - SH) = Labour Efficiency Variance
R15 (AH - ((1 300 units x 3 hours)) = R6 000 F
R15 AH - R58 500 = R6 000 F
R15 AH = R52 500
AH = 3 500 hours
Therefore, R55 125 total actual labour cost  3 500 hours =
R15.75 per hour.

b. AH (AR - SR) = Labour Rate Variance

3 500 hours (R15.75 - R15.00) = R2 625 U.

7.3
Actual Hours of Input, at Actual Hours of Input, at Standard Hours allowed for
Actual Rate Standard Rate Output, at Std Rate
(AH x AR) (AH x SR) (SH x SR)
(3 500* x R2.20) (3 500* x R2) (3 900* x R2)
=R7 700 = R7 000 = R7 800

i. Spending Variance, ii. Efficiency Variance,

R700 U R800F
Total variance = R800 F + R700 U = R100 F
* per direct labour calculation

OR:
a. AH (AR - SR) = Variable Overhead Spending Variance
3 500 hrs (R2.20 – R2) = R700 U

b. SR (AH - SH) = Variable Overhead Efficiency Variance

R2 (3 500h – 3 900h) = R800 F.

Total variance = R800 F + R700 U = R100 F

c.
Total materials variance = R250 U
Materials price variance = R1 750 F,
Therefore materials quantity variance = R2 000 U.

7.4 Total variance is unfavourable because of the large unfavourable materials quantity
variance. The reason for this may be because cheaper, inferior quality materials were
purchased in order to economize on price, but that the materials were not satisfactory
in production (due to poor quality), therefore resulting in waste and an unfavourable
materials quantity variance

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Q8
8.1
(SQ x SR) (AQ x AR) (AQ x SR)

Budget Flexed
Cost per Efficiency
Cost item based on Actual costs budget
hour variances
35 000 for 45 000 based on
hours hours 45 000
hours
Variable expenses:
Materials R5 R 175 000 R 247 500 R 225 000 R 50 000 U
Labour R2 R 70 000 R 90 000 R 90 000 R20 000 U
Variable overhead R1 R 35 000 R 33 750 R 45 000 R10 000 U
Sales expenses R3 R 105 000 R 157 500 R 135 000 R30 000 U
Total variable R 11 R 385 000 R 528 750 R 495 000 R 110 000 U

8.2 It is better to compare actual figures with a flexible budget instead of with an original
budget because a flexible budget provides information about what the costs in a
department should be for a certain activity level instead of what was budgeted for
another level of activity. Obviously costs will be higher or lower if activity levels differ
to what was budgeted for. To see whether there were any negative or positive
variance related to cost, one need to eliminate the effect of changed activity levels.

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 Align to SAICA competencies:
C1.2 Decision-making based on budgeting and expenditure forecasting

Understand the budgeting and expenditure forecasting processes which translate the organisation’s
a) business strategy into financial targets and tactical plans and that can be executed in a risk-
controlled manner
Use effective and consistent modelling, planning and forecasting processes across business unit(s)
b)
to benchmark performance and trends for decision-making
Analyse the organisation’s actual performance (using financial and non-financial information)
C) against the budgeting and expenditure forecasting information to interpret variances for decision-
making
C1.3 Decision-making based on internal cost allocation and transfer pricing options

Evaluate key business processes with regard to costs and income allocation to identify
a)
performance issues
Evaluate costing methods (e.g., standard, marginal and absorption methods) to inform decision-
b)
making
Interpret material, labour, variable/fixed overhead and associated variances to inform decision-
c)
making
Evaluate how costing methods could be adapted to promote sustainability in the organisation’s
d)
value creation process
e) Apply an appropriate basis to allocate indirect costs across business units
Y1 Analytical/critical thinking
Source, select and manage information (quantitative as well as qualitative) from multiple sources
b)
and perspectives through research, analysis, synthesis and integration
c) Conceptualise, apply, analyse, synthesize, and evaluate information gathered
Use critical analysis and reasoning strategies or techniques to uncover key and/or underlying
e)
issues, and identify connections or patterns across diverse situations
Recognise causes, implications and consequences of actions/events to facilitate informed decision-
f)
making
Y2 Integrated thinking
Synthesise and make sense of ideas and information from a variety of sources to create a design,
a) formulate a plan, arrive at a viable solution to a problem, obtain a broader understanding of an
issue etc.
Apply the above (a) in the interpretation, analysis and evaluation of financial and non-financial
b)
information for impactful decision-making
Y3 Problem solving
a) Use a questioning mind-set during problem identification and analysis
Use reasoning, critical analysis and innovative thinking to identify likely impacts of different issues
c)
and the implications of corresponding courses of action
Demonstrate flexibility, creativity and innovation in generating solutions and identifying new
d)
opportunities
Make decisions and recommendations on a rational and timely basis, supported by facts and
e)
research
Y4 Judgement and decision-making
Only exercise judgement and make decisions when a sound and logical solution is found which
a)
addresses root causes of problems in collaboration with affected stakeholders

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 Use evidence, experience and technical competencies to make insightful decisions through an
interrelated process that includes the following steps:
(i) Determine the scope of the matter/problem
(ii) Collect and verify relevant financial and non-financial information
(iii) Apply accumulated knowledge and experience and make use of appropriate concepts,
principles, and procedures while also responding appropriately to statutory and professional
requirements, regulations and policies (with due recognition of stakeholder interests, and protection
c)
of public interest), to investigate a context-based course of action
(iv) Negotiate and reconcile differing views to find acceptable compromises leading to agreement
where possible
(v) Recommend, justify and prioritise the decision, solution, conclusion or course of action based on
degree of urgency or some other criterion
(vi) Recognise the wider potential impact of decisions and the potential internal and external
responses
d) Remain aware of the impact of personal biases on decision-making
e) Consider alternative viewpoints, objections, and different frames of reference

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