Summary of "Final Paper 5: SCM & PE | Topic: Standard Costing | Session 1 | 15 Sep, 2023"

Summary of Video: Final Paper 5: SCM & PE | Topic: Standard Costing | Session 1 | 15 Sep, 2023

Main Ideas, Concepts, and Lessons

1. Importance of Standard Costing

Standard costing is a crucial chapter with likely exam questions.
Emphasis on understanding both calculation and analysis of variances.

2. Material Variances Case Study

Scenario: Company manufacturing biodegradable plastic bags.
Details include standard cost, actual cost, quantities, and reasons for price changes such as:
- Raw material price inflation due to potato prices.
- Government regulations increasing bag size.
Key variances to calculate:
- Material Price Variance (MPV)
- Material Quantity/Usage Variance (MQV)
- Total Material Cost Variance
Formulas:
- MPV = (Standard Price − Actual Price) × Actual Quantity
- MQV = (Standard Quantity − Actual Quantity) × Standard Price
Variance analysis to assign responsibility:
- Planning variance: Due to external factors (government regulations, inflation).
- Operational variance: Due to internal factors (production efficiency).
Strategic managers responsible for planning variances; production managers responsible for operational variances.
Just-in-time inventory system impacts variance analysis.

3. Determining Favorable vs. Adverse Variances

Favorable variance: Actual cost/quantity less than standard (for costs); actual sales or price higher than standard (for revenue).
Adverse variance: Opposite of favorable.
Interpretation should be based on business impact, not just algebraic sign.

4. Sales Variances

Sales variances include:
- Sales price variance
- Sales quantity variance
Sales quantity variance further broken down into:
- Mix variance (change in sales mix)
- Volume variance (change in sales volume)
Use contribution margin for sales margin variances.
Operational variances calculated based on revised market demand.
Distinguishing planning and operational variances is important to evaluate sales managers’ performance.

5. Direct Labor Variances

Formulas:
- Labor Rate Variance = (Standard Rate − Actual Rate) × Actual Hours
- Labor Efficiency Variance = (Standard Hours − Actual Hours) × Standard Rate
Interpretation:
- Rate variance reflects wage negotiation effectiveness.
- Efficiency variance reflects worker productivity.
Favorable variances indicate paying less or higher efficiency; adverse variances indicate the opposite.

6. Reconciliation of Budgeted vs. Actual Profit

Variances explain why actual profit differs from budgeted profit.
Variances include sales price and volume variances, material, labor, and overhead variances.
Planning and operational variances help identify responsibility.
Detailed data needed for sales variances; summarized data sufficient for costs.

7. Learning Curve Application

Learning curve theory: Repeated production reduces labor time and cost.
Two formulas for learning curve:
- When production doubles: Time for next batch = Previous time × Learning rate
- General formula: ( Y = A \times X^b ) where ( b = \frac{\log(\text{learning rate})}{\log 2} )
Use learning curve to estimate labor time/cost for batches.
Labor cost reduces up to a point (e.g., 8th batch), then stabilizes.
Calculate average and total costs using learning curve data.
Application in variance analysis to adjust standard hours/rates.

Methodologies and Instructions

Material Variance Calculation

Convert grams to kilograms where necessary.
Calculate standard quantity for actual output.
Calculate actual quantity consumed.
Use formulas for price and quantity variances.
Sum variances to get total material cost variance.
Analyze variances into planning and operational components:
- Adjust standard quantity and price for revised conditions (e.g., size increase, price inflation).
- Calculate planning price and quantity variances using revised standards.
- Calculate operational price and quantity variances using actual data.
Assign responsibility based on variance type.

Sales Variance Calculation

Calculate sales price variance: (Standard price − Actual price) × Actual quantity sold.
Calculate sales quantity variance: (Standard quantity − Actual quantity) × Standard price.
Break sales quantity variance into:
- Mix variance = (Actual quantity − Revised actual quantity) × Standard contribution.
- Yield variance = (Revised actual quantity − Standard quantity) × Standard contribution.
Use contribution margin rather than sales price for margin variances.
Adjust for revised market demand to calculate operational variances.
Evaluate sales manager’s performance based on variances.

Labor Variance Calculation

Calculate labor rate variance using standard and actual rates and actual hours.
Calculate labor efficiency variance using standard hours for actual output and actual hours worked.
Interpret variances in terms of wage control and labor productivity.

Budget Reconciliation

Compare budgeted and actual profits.
Identify causes of variance: sales price, sales volume, variable costs, fixed costs.
Calculate planning and operational variances for volume.
Use reconciliation to explain profit differences.

Learning Curve Calculations

For doubled production batches: multiply previous time by learning rate (e.g., 90%).
For intermediate batches, use formula ( Y = A \times X^b ).
Calculate average time per unit and total time for batches.
Use learning curve-adjusted times to compute labor cost.
Apply labor cost reductions in variance and cost analysis.
Calculate contribution over product life considering learning curve impact.

Speakers and Sources Featured

Primary Speaker: Female instructor leading the session, explaining concepts, solving examples, and answering student queries.
Students: Named participants include Biraj and Janvi, who interact with the instructor.
Scenario Companies Mentioned:
- HE company manufacturing biodegradable plastic bags.
- T-Tech (Taiwan-based audio equipment firm).
- NZSCO Limited (manufacturing single product with standard costing).
- DK International (new product development with learning curve application).

This summary captures the core teaching points, methodologies, and examples covered in the video session on standard costing, variance analysis, and learning curve applications in managerial accounting.