(a) Explain the following types of standards, stating one advantage and one disadvantage of each:

(i) Basic cost standard

• Explanation: Basic cost standard represents constant standards that are unchanged over a long period.
• Advantage: A base is provided for comparison with actual cost through a period of years with the same standard, and efficiency trends can be established over time.
• Disadvantage: When changes occur in the method of production, price levels, or other relevant factors, basic standards are not very useful since they do not represent current targets.

(ii) Ideal standards

• Explanation: This represents perfect performance. Ideal standards are minimum costs that are possible under the most efficient operating conditions.
• Advantage: They set a high target that can motivate employees to achieve optimal performance.
• Disadvantage: They are unlikely to be used because they may have a negative impact on employee performance due to their unattainable nature.

(iii) Currently attainable standards

• Explanation: This standard represents those costs that should be incurred under efficient operating conditions. They are difficult but not impossible to achieve. Allowances are made for normal spoilage, machine breakdowns, and idle cost.
• Advantage: They provide a realistic and challenging target that encourages efficiency without being demotivating.
• Disadvantage: They can be difficult to set accurately, requiring detailed knowledge of operations.

(b) State five purposes of standard costing:

(i) Prediction of future costs that can be used for decision making.
(ii) Provide a challenging target that can serve as a motivation for employees.
(iii) Assist in setting targets.
(iv) Act as a control device by highlighting exceptions.
(v) Simplifying the task of tracing costs to products for measuring profitability and inventory valuation.

(c) State seven problems of standard costing in a modern manufacturing environment:

(i) Variance analysis concentrates on only a narrow range of costs and does not give sufficient attention to issues such as quality and customer satisfaction.
(ii) Standard costing pays too much emphasis on direct labour cost. Direct labour is only a small proportion of cost in modern manufacturing environments, and so this emphasis is not appropriate.
(iii) Many of the variances in a standard costing system focus on the control of short-term variable costs. In modern manufacturing environments, the majority of costs, including direct labour costs, tend to be fixed in the short run.
(iv) The use of standard costing relies on the existence of repetitive operations and relatively homogeneous output. Nowadays, many organizations are forced to continually respond to customers’ changing requirements, with the result that output and operations are not so repetitive.
(v) Standard costing systems were developed when the business environment was more stable and less prone to change. The current business environment is more dynamic, and it is not possible to assume stable conditions.
(vi) Standard costing systems assume that performance to standard is acceptable. Today’s business environment is more focused on continuous improvement.
(vii) Most standard costing systems produce control statements weekly or monthly. The modern manager needs much more prompt control information to function efficiently in a dynamic business environment.

(d) From the information provided, calculate the following:

(i) Sales price and sales volume variances

• Sales price variance:
  (Actual contribution – standard contribution) × actual quantity
  ($55 – $50) × 9,000 = $45,000 (F)
• Sales volume variance:
  (Actual volume – standard volume) × standard contribution
  (9,000 – 10,000) × $50 = $50,000 (A)
• Total sales variance:
  | Sales margin price variance | $45,000 (F) |
  | Sales margin volume variance | $50,000 (A) |
  | Total | $5,000 (A) |

(ii) The total material variance

• Material price variance + material usage variance
  $22,250 (A) + $66,250 (A) = $88,500 (A)

(iii) The total wage variances

• Wage rate variance + labour efficiency variance = total wage variance
  $42,750 (A) + $33,750 (A) = $76,500 (A)

(iv) Total manufacturing overhead variances

• Fixed overhead expenditure variance + variable overhead expenditure + variable overhead efficiency variance
  $10,000 (F) + $12,500 (F) + $7,500 (A) = $15,000 (F)

(v) Reconciliation of budgeted profit to actual profit