STANDARD COSTING

STANDARD - a benchmark or “norm” set by management in aid of performance measurement.

- a measure of acceptable performance established by management as a guide in
making economic decisions.

In management accounting, standards relate to the cost and quantity of inputs used in
manufacturing goods or providing services (outputs). When related to production,
standards are classified into two categories:

QUANTITY STANDARDS - indicate the quantity of raw materials or labor time

required to produce a unit of product. This is normally
expressed per unit of output (e.g 3 pounds per unit)

COST STANDARDS - indicate what the cost of the quantity standards should be.
This is normally expressed per unit of input ( e.g P2.50
per pound).

STANDARD COSTS – systematically pre-determined costs established by management to be used as

a basis for comparison with actual cost. This is used as a measure of
performance.

BUDGET vs. STANDARD

BUDGETS STANDARDS
Purpose Budgets are statements of expected Standards pertain to what costs should be
costs. given a certain level of performance.
Emphasis Budgets emphasize cost levels that Standards emphasize the levels to which
should not be exceeded. costs should be reduced.
Coverage Budgets are set for various Standards are set only for the production or
departments in the firm (e.g. sales, manufacturing division of the firm.
administration, manufacturing).
Analysis When actual data differ from the When actual costs differ from standards, the
budget, it may be an indication of nature and cause of the significant variance
either good or bad performance. are investigated so that necessary corrective
actions are taken accordingly.
Similarity Pre-determined costs Pre-determined costs
Primary It is total amount It is a unit amount
difference
Note:
Standard may be regarded as the budgeted
cost per unit of product.
In accounting: Budget data are not journalized in cost Standard costs may be incorporated into
accounting systems. cost accounting systems.

ADVANTAGES OF STANDARD COSTS

Standard costs:
1. facilitate management planning
2. promote greater economy and efficiency by making employees more “ cost-conscious”
3. are useful in setting selling prices
4. contribute to management control by providing basis for evaluation and cost control
5. are useful in highlighting variances in management by exception
 Management by Exception – the practice of giving attention only to those situations in which
large variances occur, so that management may have more time for more important problems of
the business, not just routine supervision of subordinates.
6. Simply costing of inventories and reduce clerical costs

STANDARD COSTING PROCEDURES USES OF STANDARD COSTS

1. Establishing standards 1. Cost control
2. Measuring actual performance 2. Pricing decisions
3. Comparing actual performance with standards 3. Motivation and performance appraisal
4. Taking corrective action when needed 4. Cost awareness and cost reduction
5. Revising standards, if necessary 5. Preparation of budgets
6. Costing of inventories
7. Preparation of cost report
8. Management by exception

Page | 1
 STANDARD COSTING

SETTING STANDARD COSTS

Standards should be set so that they encourage efficient operations.

Ideal vs. Normal Standards:

Ideal Standards – based on the optimum level of performance under perfect operating
conditions

Normal Standards – based on the efficient level of performance that are attainable under
expected operating conditions

STANDARD COST COMPONENTS

1. Standard Price or Rate – the amount that should be paid for one unit of input factor.
2. Standard Quantity – the amount of input factor that should be used to make a unit of product.

 Both standards relate to the input factors (materials, direct labor, and factory
overhead)

Materials:
Price Standard - based on the delivered cost of materials plus an allowance for
receiving and handling.
Quantity Standard - establishes the required quantity plus an allowance for waste and
spoilage

Labor:
Price Standard - based on the current wage rates and anticipated adjustments (e.g.
Cost of Living Adjustments or C.O.L.A.)
Quantity Standard - based on required production time plus an allowance for rest periods,
clean-up, machine setup, and machine downtime

Manufacturing
Overhead
- A standard pre-determined overhead rate is used based on an expected standard activity
index such as standard direct labor hours or standard direct labor cost

VARIANCES:

Static budget variance = actual results – static (master) budget amounts.

Static budget refers to the budget that is set at the beginning of a budgeting period and
that is geared to only one level of activity – the budgeted level of activity.

Flexible budget variance = actual results – budgeted amounts for the actual level of activity

Flexible budget is geared to all levels of activity within the relevant range and is used to
plan and control spending. The flexible budget will show the cost formula for each
variable cost and total cost (possibly including fixed costs) at various levels of activity.

STANDARD COST VARIANCE ANALYSIS

VARIANCE = ACTUAL COSTS (AC) – STANDARD COSTS (SC)

Unfavorable Variance (Debit Balance): AC > SC

Favorable Variance (Credit Balance): AC < SC

1. Materials Variance
Formula:
Actual Materials Cost  Actual Quantity (AQ) X Actual Price (AP)
Less: Standard Materials Cost  Standard Quantity (SQ) X Standard Price (SP)
Total Materials Cost Variance

Page | 2
 STANDARD COSTING

Materials Cost Variance Analysis:

AQ x AP Legend:
MPV = AQ x (AP - SP) MPV = Material Price Variance
AQ x SP TMV = (AQ x AP) – (SQ x SP) MQV = Material Quantity Variance
MQV = (AQ - SQ) x SP TMV = Total Material Variance
SQ x SP

2. Labor Variance
Formula:
Actual Labor Cost  Actual Hours (AH) X Actual Rate (AR)
Less: Standard Labor Cost  Standard Hours (SH) X Standard Rate (SR)
Total Labor Cost Variance

Labor Cost Variance Analysis:

AH x AR Legend:
LRV = AH x (AR - SR) LRV = Labor Rate Variance
AH x SR TLV = (AH x AR) – (SH x SR) LEV = Labor Efficiency Variance
LEV = (AH - SH) x SR TLV = Total Labor Cost Variance
SH x SR

Important Notes:

1. Material PRICE variance is also known as (Material Spending Variance, Material Money
Variance, Material Rate Variance)

2. Material QUANTITY variance is also known as (Material Usage Variance, Material Efficiency
Variance)
3. Material USAGE variance is a quantity variance while Material PRICE USAGE variance is a
price variance.
4. Labor RATE variance is also known as ( Labor Price Variance, Labor Spending Variance,
Labor Money Variance)
5.
6. Labor EFFICIENCY variance is also known as ( Labor Hours Variance, Labor Usage Variance,
Labor Time Variance)
7. Labor efficiency variance excludes idle time spent in the production. If any, idle time is
separately IDLE TIME variance = Idle Time x Standard Labor Rate

3. Factory Overhead Variance

Formula:
Actual FOH Cost  Actual VFOH + Actual FxFOH  (AH x AR) + Actual FxFOH
Less: Standard FOH Cost  Standard VFOH + Standard FxFOH  (SH x SVR)+ (SH x SFxR)
Total FOH Cost Variance

Factory Overhead Cost Variance Analysis:

VOH FxOH
AFOH = (AH x AR) + Actual FxFOH
BAAH = (AH x SVR) + Budgeted FxFOH
BASH = (SH x SVR) + Budgeted FxFOH
SFOH = (SH x SVR) + (SH x SFxR)

VOH FxOH
(AH x AVR) + Actual FxFOH
Variable Overhead Fixed Overhead
Spending Variance Spending Variance
(AH x SVR) + Budgeted FxFOH
Efficiency Variance
(SH x SVR) + Budgeted FxFOH
Volume Variance
(SH x SVR) + (SH x SFxR)

Variable overhead variances

Page | 3
 STANDARD COSTING

a. Variable overhead spending variance

Variable overhead spending variance = AH x (AVR – SVR)

b. Variable efficiency variance

Variable efficiency variance = (AH – SH) x SVR

Fixed overhead variances

a. Fixed overhead spending variance

Fixed overhead spending variance = Actual FxFOH – Budgeted FxFOH

b. Volume Variance

Volume variance = (SH allowed for the normal capacity – SH allowed for the actual capacity) x SFxR

4. Under and Overapplied Overhead

If material, close to COGS, WIP, and FG.

If immaterial, close to COGS only.

Important Notes:

1. Standard Factory Overhead (SFOH) = Standard Hours x Standard FOH Rate. Under standard
costing, SFOH is likewise referred to as the Applied Factory Overhead.
2. If AFOH is more than SFOH, then factory overhead is said to be under-applied; hence, under-
application indicates an unfavorable variance, while over-application indicates a favorable
variance.
3. The term capacity variance is also used to mean the volume variance.
4. Budget variance = Actual Cost – Budgeted Cost = Actual FOH(AFOH) – Budgeted FOH(BFOH)

 If BFOH is adjusted based on standard hours (BASH), then budget variance is controllable
variance
 If BFOH is adjusted based on actual hours (BAAH), then budget variance is spending
variance

5. Volume variance is actually the Fixed Volume Variance; there is no such thing as a variable
volume or variable capacity variance.
6. Under the 3-way approach, the FOH Efficiency Variance is actually the Variable Efficiency
Variance. Variable overhead efficiency variance may also be computed based on:

Variable overhead efficiency variance = (AH-SH) x SVOR

7. FOH variances may be classified into:

 Variable FOH Variances = Variable Overhead Spending Variance + Efficiency Variance
 Fixed FOH Variances = Fixed Spending Variance + Volume Variance

8. DM Variance + DL Variance + FOH Variance = Production or Manufacturing Cost Variance

Page | 4