Standard Costing and Variance Analysis

What is a standard cost?

* a predetermined target cost which should be attained under efficient operating conditions.

What is the difference between the standard and actual cost called?

the variance

What are the main purposes of standard costing?

* cost control using variance analysis
* gauging performance of a business unit
* promotion of cost consciousness
* provision of information for pricing
* provision of product costs for inventory valuation
* facilitates management by exception

What is the standard costing system?

1. establish standard cost
2. measure actual performance
3. comparison of actual vs standard
4. variances established
5. investigation of variances


1. what is the problem?
2. who is responsible?
3. what corrective action is required?

Possible causes of variances? (materials)

* material price variances
* unanticipated change in market conditions
* extra quantity discounts may be received
* purchase of inferior quality materials
* material quantity variances
* wastage due to use of inferior quality materials
* use of higher quality materials than allowed for
* higher/lower level of worker efficiency than expected.

Possible causes of variances? (labour)

* labour rate variances
* use of higher/lower grade of labour than that specified in the standard
* wage rate increase
* Labour efficiency variance
* use of inferior quality materials
* use of higher quality materials than that specified in the standard
* machine breakdowns
* change in work practices

Possible causes of variances? (overheads)

* variable overhead spending variance
* change in market prices
* using a different grade of indirect labour than that included in the standard
* Variable overhead efficiency variance
* this variance is a measure of the extra (or savings) incurred because actual labour hours differ from standard hours.

Possible causes of variance? (misc)

* inaccurate budget estimates
* unanticipated changes in cost (eg insurance)

Problems with standard costing?

* standards can quickly become outdated
* factors beyond the control of the manager may affect a variance
* difficult to demarcate management responsibilities
* no incentive to achieve beyond the standard
* standards may create perverse incentives