Budgeting and standard costing

ZIMSEC A Level · Accounting · Form 6

Financial plans for a future period: sales, production, purchases, labour, cash and master budgets.

Benefits: planning, coordination, control, motivation and performance measurement.
Limitations: time-consuming, can be inflexible, may cause budgetary slack or demotivation if imposed.
Flexible budgets adjust for actual activity so that comparisons are fair.

Show expected receipts and payments each month, including credit timings, and highlight shortages early.

A standard cost is the expected cost per unit. Variances compare actual with standard (F = favourable, A = adverse).

Material price variance = (standard price − actual price) × actual quantity.
Material usage variance = (standard quantity for actual output − actual quantity) × standard price.
Labour rate variance = (standard rate − actual rate) × actual hours.
Labour efficiency variance = (standard hours for actual output − actual hours) × standard rate.

Worked example: Standard: 4 kg at US$3/kg per unit. Actual output 500 units used 2 100 kg costing US$5 880. Find the price and usage variances.

Actual price = 5 880 ÷ 2 100 = US$2.80/kg

Price variance = (3.00 − 2.80) × 2 100 = US$420 F

Usage variance = (2 000 − 2 100) × 3.00 = US$300 A

Cheaper materials (favourable price) may be poorer quality, causing more waste (adverse usage) – variances are often linked.

Exam tip: Always label each variance F or A and suggest a possible cause.

Give two benefits of budgeting.
Standard labour rate US$5; actual rate US$5.50 for 1 000 hours. Find the rate variance.
Why use a flexible budget?

Show answers

Any two: planning, coordination, control, motivation, performance measurement.
(5.00 − 5.50) × 1 000 = US$500 A
To compare actual results with a budget adjusted to the actual level of activity.

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