Definition
Standard Cost Allowance is a concept within a standard costing system that defines the permissible level of expenditure for variable costs based on the actual levels of activity achieved. It acts as a benchmark to measure and control costs, making it easier to identify variances between actual and standard costs.
Examples
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Direct Materials Cost: If the standard cost to produce one unit of a product is established at $5, and the actual production for a period is 1,000 units, the standard cost allowance for direct materials would be $5,000.
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Labor Cost: Assume the standard labor cost per hour is $10, and the expected number of hours to complete a task is 50 hours. If during a period, 55 hours were required, the standard cost allowance for labor would be 50 hours x $10 = $500.
Frequently Asked Questions (FAQs)
Q1: What is the purpose of standard cost allowance?
A1: The purpose of standard cost allowance is to aid in budgeting, cost control, and variance analysis, ultimately helping to ensure that resources are used efficiently and costs are kept within predefined limits.
Q2: How is standard cost allowance calculated?
A2: It is calculated by multiplying the actual number of units produced or activities completed by the standard cost per unit or activity.
Q3: How does standard cost allowance help in variance analysis?
A3: By comparing actual costs with standard cost allowances, companies can identify variances and understand whether they are favorable or unfavorable, thus taking corrective actions if necessary.
Q4: Can standard cost allowance be used for fixed costs?
A4: Generally, it is used for variable costs because fixed costs do not change with the level of production or activity.
Q5: What are some limitations of standard cost allowance?
A5: It may not account for unexpected costs or changes in market conditions, and creating accurate standards requires thorough analysis and frequent updates.
- Standard Costing: A cost accounting method that uses standard costs to value products and measure performance.
- Direct Materials: Raw materials that are traceable directly to the finished product.
- Standard Direct Materials Cost: Pre-established cost of raw materials required to produce one unit of a product.
- Variance Analysis: The process of analyzing the differences between standard costs and actual costs.
Online References
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- “Managerial Accounting” by Ray H. Garrison, Eric W. Noreen, and Peter C. Brewer
- “Accounting: What the Numbers Mean” by David H. Marshall, Wayne W. McManus, and Daniel F. Viele
Accounting Basics: “Standard Cost Allowance” Fundamentals Quiz
### What is the primary objective of standard cost allowance?
- [ ] To increase production
- [x] To control costs and measure performance
- [ ] To determine market prices
- [ ] To enhance marketing efforts
> **Explanation:** The primary objective of standard cost allowance is to control costs and measure performance against established standards.
### How do you calculate the standard cost allowance for direct materials?
- [ ] Actual units produced x actual direct materials cost
- [ ] Standard units x actual cost
- [x] Actual units produced x standard direct materials cost
- [ ] Standard units x standard cost
> **Explanation:** The standard cost allowance for direct materials is calculated by multiplying the actual number of units produced by the standard direct materials cost per unit.
### Which costs are typically analyzed using standard cost allowances?
- [ ] Fixed costs
- [ ] Sunk costs
- [x] Variable costs
- [ ] Opportunity costs
> **Explanation:** Standard cost allowances are typically used to analyze variable costs, which change with production levels.
### What term describes the difference between actual costs and standard cost allowances?
- [ ] Budget deviation
- [x] Variance
- [ ] Forecast discrepancy
- [ ] Financial gap
> **Explanation:** The difference between actual costs and standard cost allowances is referred to as variance.
### What is one benefit of using standard cost allowance in accounting?
- [ ] It reduces production time
- [ ] It aligns marketing strategies
- [x] It helps in setting benchmarks for cost control
- [ ] It predicts future sales precisely
> **Explanation:** One benefit of using standard cost allowance is that it helps in setting benchmarks for cost control, thereby facilitating better financial management.
### In which scenario would standard cost allowance NOT be appropriate?
- [ ] When measuring variable production costs
- [ ] When budgeting for future production
- [ ] When performing variance analysis
- [x] When calculating sunk costs
> **Explanation:** Standard cost allowance is not appropriate for calculating sunk costs, as these do not change with production levels.
### Can standard cost allowances be applied to direct labor?
- [x] Yes, by calculating the standard cost per hour and actual hours worked
- [ ] No, it can only apply to direct materials
- [ ] Yes, but only for salaried employees
- [ ] No, as labor costs are always fixed
> **Explanation:** Yes, standard cost allowances can be applied to direct labor by calculating the standard cost per hour and actual hours worked.
### What must be established for an effective standard cost allowance system?
- [ ] Standard sales price
- [ ] Expected warranty costs
- [x] Accurate and realistic standard costs
- [ ] Fixed overhead allocation
> **Explanation:** For an effective standard cost allowance system, accurate and realistic standard costs must be established.
### Why is regular review necessary for standard cost allowances?
- [ ] To update sales forecasts
- [ ] To adjust for market price changes
- [ ] To revise the budget deficit
- [x] To maintain accuracy and relevance
> **Explanation:** Regular review is necessary for standard cost allowances to maintain accuracy and relevance, as market conditions and production processes can change over time.
### What role do standard cost allowances play in management accounting?
- [ ] Predicting market trends
- [ ] Setting sales quotas
- [x] Providing benchmarks for cost control and performance measurement
- [ ] Determining loan requirements
> **Explanation:** In management accounting, standard cost allowances provide benchmarks for cost control and performance measurement.
Thank you for learning about standard cost allowance and completing the related quizzes. This knowledge will help you better manage and understand financial performance through effective cost control techniques.
