Standard Costs in Management Accounting

Purpose of Standard Costing

Standard costing helps control operations by comparing predetermined costs with actual performance, identifying variances in price and efficiency (or usage) for labor and materials.

Key Calculations

Standard Cost

Budgeted cost of one unit of product including materials, labor, and overhead.

Standard Cost Variance

Difference between actual costs incurred and budgeted (standard) costs.

Efficiency (Usage) Variance

Measures how efficiently resources are used (e.g., meters of wood per table).

Price Variance

Relates to the cost per unit of input (e.g., cost per meter of wood).

Control Systems

Budgeting and standard costing provide regular information to assist in managing resources by setting a predetermined performance level, comparing it to actual performance, and adjusting accordingly.

Setting Standards

Historical Cost Data

Analysis of past costs, adjusted for expected price movements or technological changes.

Engineering Method

Focuses on what a product should cost in the future, using time and motion studies to determine labor requirements.

Bill of Materials

Budget for each product, including raw materials, labor, processes, and overhead allocation.

Behavioral Implications

Perfection Standards

Theoretical standards that may motivate or discourage employees depending on workplace dynamics.

Practical Standards

Attainable under normal operating conditions, encouraging positive attitudes but potentially fostering inefficiencies.

Benchmarking

Comparing costs to industry best practices, though accurate data can be difficult to obtain.

Direct Material Standards

Standard Material Quantity

Total direct material required per unit of product.

Standard Material Price

Total delivered cost of direct material per unit, considering order quantities and supplier.

Labor Standards

Standard Labor Hours

Number of labor hours needed per unit of product.

Standard Labor Rate

Hourly cost of wages including on-costs (superannuation, insurances).

Variance Analysis

Material Price Variance Calculation

$Purchase Quantity \times (Actual Price - Standard Price)$

Material Usage Variance Calculation

$Standard Price \times (Actual Quantity - Standard Quantity)$

Labor Rate Variance Calculation

$Actual Hours Worked \times (Actual Rate - Standard Rate)$

Labor Efficiency Variance Calculation

$Standard Rate \times (Actual Hours Worked - Standard Hours Worked)$

Investigating Variances

Management by Exception

Focus on significant variances, considering size, recurrence, trends, and controllability.

Variance Interaction Effect

A material price variance may affect material usage variance.

Statistical Approach

Using statistical control charts to identify outliers for investigation.

Costs and Benefits of Investigation

Expensive due to time, disruption, and implementation costs, but beneficial for reducing costs and improving processes.

Behavioral Impact of Standard Costing

Can influence behavior, motivating positive actions but also encouraging data manipulation.

Cost Control

Assigning responsibility for cost standards to managers, ensuring they have control and involvement in setting standards.

Accounting System

Inventories recorded at standard costs, with variances written off to cost of goods sold.