# Standard Costing – Chapter 18

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```					Standard Costing – Chapter 18
Standard costing is a control system that enables deviations from budget to be analysed in detail thus enabling costs to be controlled more effectively. Standard costs are predetermined costs: they are target costs that should be incurred under efficient operating conditions. They are not the same as budgeted costs. A budget relates to an entire activity or operation: a standard presents the same information on a per unit basis. If the budget is for 10 000 units and the budgeted cost is R30 000, the standard cost will be R3 per unit. Distinguish between standard absorption costing and standard variable costing systems  Std VC use standard contribution margin and only fixed overhead expenditure variance  Std AC use standard profit and calculate two fixed overhead variances – expenditure and volume Summary of formulae for variances – pg 759 – 760 Identify causes why variances arise Q 13.23 – pg 243 Reconciliation of budgeted and actual net profit Budgeted net profit (given) 1 500 000 Sales margin vol

Standard profit A Sales margin price F

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Material price

Material usage

Labour rate

Labour expenditure

Variable OH expenditure

Variable OH efficiency

Fixed OH vol

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Fixed OH exp

Actual net profit (given)

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Risk and return – chapter 3 Risk – the expectation that the actual outcome may differ from the expected outcome Business risk – nature of the business itself. The degree to which a firm relies on fixed costs. Measured by degree of operating leverage (DOL). Hi DOL → hi fixed costs. Revise CVP. Pg 3-3 to 3-6 Financial risk – financing of the firm’s assets, i.e. fixed costs of financing. Measured by degree of financial leverage (DFL). Pg 3-6 to 3.8 Average returns: The historical record (ex post) To determine the average return and risk of a share over a period of time, the properties of a normal distribution are employed. Normal distribution – pg 3-13 defn

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Average return - arithmetic mean return Variance and Standard deviation – are measures of volatility. Example Historic dividend and price data Year end Price at y/end (R per share) 19x3 75.15 19x4 87.80 19x5 86.00 19x6 89.00 19x7 98.00 Required: Calculate -

Dividend (R per share) 4.10 4.30 6.00 6.70

expected return variance Standard deviation The probability of earning a return less than 5% Div 4.10 4.30 6.00 6.70 Return rands Return %age R - Re (R - Re)2

Year 19x3 19x4 19x5 19x6 19x7

Price 75.15 87.80 86.00 89.00 98.00

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Expected return (ex ante) Analyse returns and variances when the information concerns future possible returns and their probabilities. Example State of Economy Boom Moderate Zero growth Recession Required: Calculate -

Prob 25% 40% 30% 5%

Return on share 35% 21% 12% 5%

expected return Variance Standard deviation
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Coefficient of variation The probability that the expected return on share A will exceed 17% Prob 25% 40% 30% 5% RA RA - p RA - ER (RA - ER)2p

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