Page 4 - CIMA MCS Workbook February 2019 - Day 2 Suggested Solutions

CIMA FEBRUARY 2019 – MANAGEMENT CASE STUDY

TASK 2 – STANDARD COSTING AND ABC

To: Senior financial manager
From: Financial manager
Date: Today
Subject: Costing

Standard costing

Standard costing involves setting standards for each cost type that we incur and then measuring
and comparing actual costs to the standard.

Standards are set, not just for purchase prices, but for times taken to perform our services and
the quantities of material used in the production of those services.

So, for instance, if we wanted to set standards for a filling procedure, we could use the following:

Standard time taken for the procedure

Standard salary cost per hour for those involved in the procedure, e.g. dentist and dental nurse.

Combining these two standards would give us a standard salary cost per filling.

Standard quantity of each of the materials used in the filling, such as anaesthetic, mercury
amalgam or polymer resin, mouthwash used, padding used in the mouth, etc.

Each of these materials could also have a standard price per unit set, e.g. price per gram of
polymer resin. In combination with the standard quantities, this would give a standard material
cost per filling.

Other costs such as variable overheads could have standards set. For instance, a standard time
for the use of the drill, which could lead to a standard electricity cost for the drill.

Standard times could also be used to help the breakdown of fixed costs into standards, such as
the standard cost of heating and lighting the room during the procedure.

The purpose of setting standards is so that actual expenditure can be tracked and analysed, with
variance analyses produced to aid the investigation. Crowncare does currently produce some
variances but at a high level, so they are limited in their usefulness. The business could then focus
on areas where variances are significant or are tending to move adversely, so that these cost
areas can be put under better control.

The difficulties in implementing standard costing would include the following:

Even very common procedures such as a filling may not always conform to a standard set of
parameters. A filling of a back molar might be different to one of the premolars. Some cases may
be more difficult to deal with, leading to longer times spent on them.

94 KAPLAN PUBLISHING