ACCA Applied Knowledge · Management Accounting
Standard Costing System for ACCA Management Accounting
A standard costing system sets a planned cost per unit for materials, labour and overheads, then compares it with actual cost. The differences are variances. To solve questions, build the standard cost card, flex the budget to actual output, compare like with like, and label each variance adverse or favourable.
What this chapter covers
This chapter explains how a business plans what a unit of product should cost and then checks whether it did. You start with why standards are used and how they are set. You then see how the standard cost card pulls together the standard quantity and price of each input. Next comes flexing the budget to the actual output level. Last is the overview of variance analysis and how variances are reported.
The chapter links to several other parts of the Management Accounting paper. Cost classification and cost behaviour help you understand fixed and variable costs on the card. Absorption and marginal costing decide which overheads sit in the standard. Budgeting gives you the fixed budget you must flex.
It also feeds Section B. Standard costing and variances are one of the three areas tested in the ten-mark multi-task questions, so this chapter is your base for the calculation-heavy part of the paper. Later work on performance measurement also uses the ideas of comparing actual with plan.
Management Accounting is a two-hour computer-based exam out of 100 marks. Section A has 35 two-mark objective test questions. Section B has three ten-mark multi-task questions, one of which covers standard costing. Variance questions are also common in Section A as number entry and multiple choice. The method is mechanical, so careful practice turns this chapter into reliable marks. The pass mark is 50%, and strong marks here give you a cushion against weaker areas.
Standard costing system: topics in the order to study them
- 1Standard Costing: Purpose and Setting StandardsYou need to know what a standard is, why it is used and how it is set before you can build or use one.
- 2Standard Cost CardThe card turns the ideas into numbers: the standard quantity and price per unit that every variance is measured against.
- 3Flexed Budgets and Standard CostingYou must flex the budget to actual output so that you compare like with like before you calculate any variance.
- 4Variance Analysis Overview and ReportingThis brings it together: you calculate variances, decide adverse or favourable, and understand what they tell management.
How to prepare Standard costing system
Treat this chapter as one method applied in order: standard, card, flex, compare. Practise it until the steps are automatic.
- Read the purpose of standard costing and list the types of standard in your own words, so you can answer short theory questions quickly.
- Build several standard cost cards from raw data. Always show quantity, price and cost per unit for each input, then the total standard cost.
- Practise flexing a budget. Write down actual output first, then restate the variable costs at that level and keep fixed costs unchanged.
- Learn the sign rule: a cost higher than standard is adverse, lower is favourable. For sales, higher than standard is favourable.
- Do timed objective questions on phone or computer. Practise number entry, where you must give the figure and often the correct sign or label.
- Work one full ten-mark style question under time pressure, then check every step, not just the final answer.
- Finish by explaining a variance report aloud: what happened, a possible cause and who is responsible.
Common mistakes in Standard costing system
Comparing actual cost with the original fixed budget instead of the flexed budget.
Fix: First write actual output. Restate variable costs for that output. Only then compare.
Flexing fixed costs along with variable costs.
Fix: Label each cost fixed or variable before flexing. Fixed costs stay as budgeted within the relevant range.
Getting the adverse or favourable label wrong.
Fix: Ask one question: did this make profit lower or higher than expected? Lower is adverse, higher is favourable.
Using budgeted units instead of actual units to find the total standard cost.
Fix: Standard cost for variance work is standard cost per unit multiplied by actual output.
Mistakes on the standard cost card, such as omitting an input or mixing up quantity and price.
Fix: List every input in a small table first. Check that quantity multiplied by price gives each cost line.
Ignoring what the question asks for in the answer format.
Fix: Read the final line first. For multiple response, select exactly the stated number of options.
Last-day revision: Standard costing system
- A standard cost is a planned unit cost made of standard quantity and standard price for each input.
- Standards help with planning, control, performance measurement and motivation.
- Standard types include ideal, attainable, current and basic. Attainable standards are usually the most motivating.
- The standard cost card lists each input, its quantity, price and cost per unit, and gives the total.
- A variance is the difference between actual and standard (or flexed budget) results.
- Cost higher than standard is adverse. Cost lower than standard is favourable.
- Revenue or profit higher than standard is favourable. Lower is adverse.
- A fixed budget does not change with activity. A flexed budget is restated for actual output.
- In flexing, variable costs change with output and fixed costs stay the same.
- Always compare actual results with the flexed budget, not the original fixed budget, for cost control.
- Variances should be reported to the manager who can control them, and investigated where they are significant.
- In number entry questions, check units, rounding and whether the sign (A or F) is asked for.
Standard costing system practice questions
- Which of the following is a recognised advantage of using a current standard rather than a basic standard when setting standards?
- A company sets its standard labour rate using a standard that assumes all staff are paid at grade B, $12 per hour. Production in the period …
- Budgeted sales were 1,000 units at a standard selling price of $50 and standard cost of $35 per unit (absorption costing). Actual sales were…
- Mortlake Co makes a single product. The standard for each unit is: direct labour 3 hours at $14.00 per hour; variable overhead 3 hours at $2…
- Kelp Co budgeted sales of 1,000 units at a standard selling price of $50 and a standard contribution of $20 per unit. Actual sales were 1,10…
- Marlow Co has a standard direct material cost of 4 kg per unit at $5 per kg. In March it produced 2,000 units and used 8,400 kg of material,…
- Which type of standard is most likely to motivate employees while remaining realistic for a standard cost card?
- Budgeted output was 2,000 units with a standard variable overhead of $5 per labour hour and 2 hours per unit. Actual output was 1,900 units,…
Standard costing system in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Standard costing system: frequently asked questions
What is a standard costing system?
It is a system in which you set planned costs per unit for inputs such as materials, labour and overheads. You then compare actual costs with those standards. The differences are variances that managers can investigate.
Why do I flex the budget before finding variances?
Actual output usually differs from budgeted output. If you compare costs at different activity levels, the variance is misleading. Flexing restates the budget to actual output so the comparison is fair.
How is this chapter tested in the MA exam?
It appears in Section A as objective test questions, including number entry and multiple choice. It also forms the basis of one of the ten-mark Section B multi-task questions on standard costing.
Which type of standard is best?
Attainable standards are often seen as the most useful. They are demanding but achievable, so they can motivate staff. Ideal standards assume perfect conditions and often produce adverse variances.