Wham Berhad operates a standard costing system and analysis of variances is made every month. The standard cost card is as follows for a unit of product: RM Direct materials 0.5kg at RM 4/kg 2.00 Direct labour 2 hours at RM 2/hour 4.00 Variable overheads 2 hours at RM 0.30/hour 0.60 Fixed overhead 2 hours at RM 3.70/hour 7.40 Standard cost 14.00 Standard profit 6.00 Standard selling price 20.00 Budgeted output for the month of January 2021 was 5,100 units. Actual results were as follows: Production of 4,850 units were sold for RM95,600 Materials consumed in production amounted to 2,300 kgs at a total cost of RM9,800 Labour hours paid amounted to 8,500 hours at a cost of RM16,800 Actual hours worked amounted to 8,000 hours Variable overheads amounted to RM2,600 Fixed overheads amounted to RM42,300 1.Critically evaluate the importance of setting standards in management accounting.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Wham Berhad operates a
RM
Direct materials 0.5kg at RM 4/kg 2.00
Direct labour 2 hours at RM 2/hour 4.00
Variable
Fixed overhead 2 hours at RM 3.70/hour 7.40
Standard cost 14.00
Standard profit 6.00
Standard selling price 20.00
Budgeted output for the month of January 2021 was 5,100 units. Actual results were as follows:
Production of 4,850 units were sold for RM95,600
Materials consumed in production amounted to 2,300 kgs at a total cost of RM9,800
Labour hours paid amounted to 8,500 hours at a cost of RM16,800 Actual hours worked amounted to 8,000 hours
Variable overheads amounted to RM2,600 Fixed overheads amounted to RM42,300
1.Critically evaluate the importance of setting standards in management accounting.
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