Standard Costing Summary

Standard Costing

Overview

  • Standard Costs: Planned costs set before production, providing goals and comparison for actual results.

  • Purpose: Cost control and efficiency promotion by quickly detecting deviations and pinpointing responsibility.

  • Adjustments: Standards should be adjusted if cost analyses or significant changes occur.

Comparison

  • Standard Cost vs. Budget: Standard cost is per unit, while budgets quantify total costs.

  • Standard Cost vs. Estimated Cost: Standard costs are what a unit should cost, while estimated costs are projections.

Uses of Standard Costs

  • Cost Control

  • Pricing Decisions

  • Performance Appraisal

  • Cost Awareness

  • Management by Objectives

Establishment of Standards

  • Direct Materials Price

  • Direct Materials Usage (Efficiency)

  • Direct Labor Price (Rate)

  • Direct Labor Efficiency

  • Factory Overhead

Possible Causes of Variances

  • Material Price Variance:

    • Market price fluctuations.

    • Purchasing from distant suppliers.

    • Failure to avail of cash discounts.

    • Inferior quality materials.

  • Material Quantity Variance:

    • Poor handling.

    • Defective materials.

    • Lack of proper tools/machines.

    • Spoilage due to inferior materials.

  • Labor Rate Variance:

    • Inexperienced workers.

    • Changes in labor rate.

    • Hiring workers at higher pay than standard.

  • Labor Efficiency Variance:

    • Lack of training.

    • Poor scheduling.

    • Lack of supervision.

    • Faulty Equipment.

  • Volume Variance:

    • Poor production scheduling.

    • Machine breakdowns.

    • Shortage of skilled workers.

    • Decreased customer demand.

    • Unused plant capacity.

  • Variable Efficiency Variance:

    • Efficiency in using overhead application bases.

Factory Overhead Variances

  • One-Factor Analysis: Total Variance

  • Two-Factor Analysis: Controllable Variance, Volume Variance

  • Three-Factor Analysis: Spending Variance, Efficiency Variance, Volume Variance

  • Four-Factor Analysis: Variable Spending Variance, Fixed Spending Variance, Efficiency Variance, Volume Variance

Variance Formulas and Examples

  • Material Price Variance: (Actual\ Price - Standard\ Price) \times Units\ Purchased

  • Material Usage Variance: (Actual\ Usage - Standard\ Usage) \times Standard\ Price

  • Labor Rate Variance: (Actual\ Rate - Standard\ Rate) \times Actual\ Hours

  • Labor Efficiency Variance: (Actual\ Hours - Standard\ Hours) \times Standard\ Rate

  • Factory Overhead: Total Variance = Actual Factory Overhead - Applied Factory Overhead

  • Two-Way Variance: Controllable Variance + Volume Variance = Total Variance

  • Volume Variance: (Actual\ Volume - Budgeted\ Volume) \times Standard\ Fixed\ Rate

  • Three-Way Variance: Spending Variance + Efficiency Variance + Volume Variance = Total Variance

  • Efficiency Variance: Actual\ Volume \times (Actual\ Hours - Standard\ Hours) \times Standard\ Variable\ Rate

  • Four-Way Variance: Variable Spending Variance + Fixed Spending Variance + Efficiency Variance + Volume Variance = Total Variance

  • Variable Spending Variance: Actual\ Hours \times (Actual\ Variable\ Rate - Standard\ Variable\ Rate)

  • Fixed Spending Variance: Actual Fixed FOH - Budgeted Fixed FOH