Cost Accounting: Standard Costing & Variance Analysis

• Cost accounting estimates a business’s expenses considering raw materials, labor, and overhead.
• It determines the cost of products, processes, and projects.
• Cost accounting is used for inventory valuation.
• Cost accounting data is used to control costs.
• Cost accounting information helps in managerial decision-making.

Standard Costing

• Standard costing involves setting predetermined costs for materials, labor, and overhead.
• Standards act as benchmarks.
• Standard costs are compared to actual costs and variances are analyzed.
• Standard costing simplifies bookkeeping.
• Standard costing helps in budgeting and performance evaluation.
• Standard costs set sales prices.
• Standard costing helps in cost control by highlighting deviations.

Variance Analysis

• Variance analysis compares actual costs to standard costs to identify variances.
• Favorable variances mean actual costs are lower than standard costs.
• Unfavorable variances mean actual costs are higher than standard costs.
• Material price variance is the difference between the actual and standard cost of materials.
• Material quantity variance is the difference between the actual and standard quantity of materials used.
• Labor rate variance is the difference between the actual and standard labor rate.
• Labor efficiency variance is the difference between actual and standard labor hours worked.
• Overhead variance is the difference between actual and standard overhead costs.
• Variances are analyzed to understand cost differences.
• Variance analysis helps in identifying inefficiencies.
• Variance analysis informs corrective actions.

Cost Allocation

• Cost allocation assigns costs to different cost objects.
• Direct costs are easily traced to a cost object.
• Indirect costs must be allocated.
• The allocation base should have a cause-and-effect relationship with the cost.
• Common methods include direct, step-down, and reciprocal methods.
• The direct method allocates service department costs directly to production.
• The step-down method allocates costs sequentially among service and production departments.
• The reciprocal method recognizes reciprocal services among service departments.
• Cost allocation provides a more accurate cost of products or services.
• Cost allocation supports decisions regarding pricing, profitability analysis, and performance evaluation.

Budgeting Techniques

• Budgeting creates a financial plan for the future.
• A master budget is a comprehensive budget including all individual budgets.
• An operating budget focuses on income-generating activities.
• A financial budget focuses on cash and capital expenditures.
• A static budget is based on a single level of activity.
• A flexible budget adjusts to different levels of activity.
• Zero-based budgeting requires all expenses to be justified each period.
• Activity-based budgeting (ABB) budgets costs based on activities.
• Incremental budgeting bases the budget on the previous period, adjusted for factors like inflation.
• Budgeting allows for planning and coordination of activities.
• Budgeting sets performance targets.
• Budgeting enables cost control.
• Budgeting facilitates decision-making.

Activity-Based Costing

• Activity-based costing (ABC) assigns overhead costs based on activities that consume resources.
• Activities are identified and costs are assigned to them.
• Cost drivers are factors that cause activities to occur.
• Costs are assigned based on consumption of activities.
• ABC provides a more accurate cost compared to traditional methods.
• ABC improves decisions about pricing, product mix, and process improvement.
• ABC helps identify and eliminate non-value-added activities.
• ABC consists of identifying activities, assigning costs to cost pools, and calculating activity rates.
• Cost pools are groupings of related costs.
• Activity rate equals the cost pool total cost divided by total activity level.
• The steps in ABC are: identify activities, assign costs to cost pools, calculate activity rates, then assign costs to products/services.
• ABC can be complex and costly to implement.