Costing
Costing
Costing
standard
operating
RELEVANT to CAT Qualification paper 7
The CAT Paper 7 syllabus requires candidates to be able Budgeted sales and production for the period were 50,000
to prepare a reconciliation of standard and actual costs units. Standard selling price was $20 per unit and standard
and profits under both absorption and marginal costing cost was $12 per unit, giving a standard profit of $8 per
systems. This brief article illustrates the layout of these unit. Actually only 40,000 units were produced and sold and
reconciliations by the use of an example. actual profit was $322,000
Standard costing is a control system for comparing A reconciliation of budgeted and actual profits could be
the planned costs and revenues with actual results in presented as shown in Figure 1 opposite. Throughout this
order to report variances for the purpose of performance article the text in italics is for information only and would
measurement and control. Cost variances are usually not be necessary in the actual statement. Note that the
reported to management in cost reconciliation statements. statement clearly distinguishes between the effect of sales
When sales variances are included the reconciliation is volume on profit, and operational expenditure and efficiency
usually in the form of a standard cost operating statement. effects on profit.
The format of the reconciliation is different under marginal For a cost centre a reconciliation of budgeted and actual
and absorption costing. cost would be more appropriate. This could be presented as
shown in Figure 2 on page 2.
Absorption costing Note that because we are dealing with costs, adverse
Suppose the following variances had been calculated for the variances increase actual cost whereas favourable variances
most recent period. reduce actual cost.
$
Sales volume profit 80,000 adverse Marginal costing
Sales price 10,000 favourable Marginal costing draws a distinction between fixed and
Direct material price 6,000 adverse variable cost. Assume in our example that standard variable
Direct material usage 2,000 favourable cost was $11.30 per unit and standard fixed cost was $0.70
Direct labour rate 8,000 adverse per unit, resulting in a standard contribution of $8.70 per
Direct labour efficiency 3,000 adverse unit. Under marginal costing principles two changes occur
Variable overhead expenditure 6,000 favourable in the reported variances. First, the sales volume variance
Variable overhead efficiency 4,000 adverse would be based upon contribution per unit rather than profit
Fixed overhead expenditure 12,000 favourable per unit. In our case it would change to $87,000 adverse
Fixed overhead volume 7,000 adverse (10,000 units × $8.70).
costing
statements
A clear reconciliation of budgeted and actual costs and revenues
is important to help focus management attention on variances.