Management Accounting (MA) Standard Costing and Variance Analysis Flashcards

What is a standard cost?

Answer: A predetermined cost for a unit of output based on expected conditions

A standard cost is a predetermined cost calculated in advance of production, based on expected levels of efficiency and prices.

Which type of standard assumes perfect operating conditions with no wastage or inefficiency?

Answer: Ideal standard

Ideal standards assume perfect conditions with no waste, idle time, or inefficiency, making them rarely achievable in practice.

The direct material price variance measures the difference between:

Answer: The standard price and actual price paid for the actual quantity purchased

Material price variance = (Standard price – Actual price) × Actual quantity purchased, isolating the effect of price differences on cost.

A company has a standard material usage of 5 kg per unit at £3/kg. Actual production was 100 units using 520 kg. What is the material usage variance?

Answer: £60 adverse

Standard quantity for actual output = 100 × 5 = 500 kg; variance = (500 – 520) × £3 = £60 adverse.

The direct labour rate variance is calculated as:

Answer: (Standard rate – Actual rate) × Actual hours worked

Labour rate variance = (Standard rate – Actual rate) × Actual hours worked, measuring the cost impact of paying more or less per hour than standard.

If workers complete actual output in fewer hours than the standard allows, the direct labour efficiency variance will be:

Answer: Favourable, as fewer hours were used than the standard allows

Labour efficiency variance = (Standard hours – Actual hours) × Standard rate; when actual hours are less than standard hours allowed, the variance is favourable.

An adverse variance indicates that:

Answer: Actual costs were higher or actual revenues were lower than standard

An adverse variance means actual costs exceeded standard costs or actual revenue fell below standard, both of which reduce profit.