STANDARD COSTING

PREPARED BY: RONNELSON PASCUAL, CPA,MBA,CTT,MRTAX

STANDARD

 A benchmark set by management in aid of performance measurement.

 When it comes to production, standards are classified as follows:
 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 o the quantity standards should be. This
is normally expressed per unit of input (e.g., ₱2.50 per pound).
ADVANTAGES OF USING THE STANDARD COST SYSTEM

1. Clerical efficiency – a company that uses standard costs to trace the flow of costs through its accounting
system usually discovers that less clerical time and effort are required than in an actual cost system.
2. Motivation – standards represent a technique of communication of management’s expectation of efficiency
of workers.
3. Planning – managers can use currently available standard costs to estimate future quantities and costs.
4. Controlling – the control begins with the establishment of standards which provide a basis against which
actual costs can be measured so variances may be computed.
5. Decision making – standard cost information availability facilitates many decisions.
6. Performance evaluation – summary variance reports focus attention top managers to determine when costs
were and were not controlled by which managers. Top management can then provide feedback to
subordinate managers.
STANDARD COSTS

 Systematically predetermined costs established by management to be

used as a basis for comparison with actual cost.
BUDGETS VS STANDARDS
BUDGETS STANDARDS
Purpose Statements of expected costs Pertains to what costs should be given
a certain level of performance

Emphasis Emphasizes cost levels that should not Emphasize the levels to which costs
be exceeded should be reduced
Coverage Set for all departments in the firm (e.g., Set only for the production or
sales, manufacturing, etc., manufacturing division of the firm

Analysis When actual data differ from the budget, The nature and cause of the significant
it may be an indication of either good or variance are investigated so that
bad performance. In short, that is a necessary corrective actions are taken
measure of performance. accordingly. In short, it imposes
responsibility.
SETTING STANDARDS

Material Standards – in developing material standards, you have to identify and list the specific
material components used to manufacture the product. Four things must be known about the
materials inputs:
 Type of material needed
 Quality (grade) of material needed
 Quantity of material needed and
 Price per unit of material (must be based on level of quality specified)
SETTING STANDARDS

Labor Standards – the development of labor standards requires the same basic procedures as
those under for materials. Each production operation performed by workers or by machinery
should be identified. When the time and rate information are available, job task times are
multiplied by wage rates to generate the total cost of each operation.
SETTING STANDARDS

Overhead Standards – Overhead should be assigned to separate cost pools based on the cost
drivers, and allocations to products are made using various activity drivers in order to provide the
most appropriate costing information. Both actual and standard costs are recorded in the
standard costing system. But the standard costs, rather than actual costs, are charged to Raw
material, Work in process, and Finished Goods inventory accounts with any differences between
actual and standard costs reported as variances.
VARIANCE ANALYSIS

 Variance is the difference between Actual Costs (AC) and Standard Costs.

ACTUAL COST > STANDARD COST ACTUAL COST < STANDARD COST

Unfavorbale / Adverse Variance Favorable / Desirable Variance

Debit Variance Credit Variance

Added to COGS Deducted to COGS

ANALYZING VARIANCES
Materials Materials
Total Price Quantity
Materials Variance Variance
Variance (MPV) (MQV)

Labor
Labor Rate
Total Labor Efficiency
Total Variance Variance
Variance Variance
(LRV)
(LEV)

Total Overhead Overhead

Overhead Controllable Volume
Variance Variance Variance
DIRECT MATERIALS

 DIRECT MATERIALS PRICE STANDARD – refers to the cost per unit of direct
materials that should be incurred. This standard should be based on the
purchasing department’s best estimate of the cost of the raw materials. This is
frequently based on current prices. The price standards should also include an
amount for related costs such as receiving, storing, and handling.
DIRECT MATERIALS

 DIRECT MATERIALS QUANTITY STANDARD – is the quantity of direct materials that

should be used per unit of finished goods. This standard is expressed as a
physical measure such as pounds barrels, or board feet. In setting the standard,
management should consider both the quality and quantity of materials required
to manufacture the product.
DIRECT MATERIAL VARIANCE

AQ x AP = XX
DM PRICE
VARIANCE
AQ x SP = XX

DM QUANTITY
VARIANCE
SQ x SP = XX

ACTUAL
PRODUCTION x STD. ACTUAL QTY. PURCHASED =
QUANTITY PER UNIT
ACTUAL QTY. USED
DIRECT MATERIAL VARIANCE
AQ x AP = XX
DM PRICE
VARIANCE
AQ(P) x SP = XX

AQ(U) x SP = XX
DM QUANTITY
VARIANCE
SQ x SP = XX

ACTUAL
PRODUCTION x STD. ACTUAL QTY. PURCHASED ≠
QUANTITY PER UNIT
ACTUAL QTY. USED
SELF CHECK 1
 JOYJOY company has the following information available for the current year:
Standard
Material 5 feet per unit @ P5.00 per foot
Labor 6.8 direct labor hours @ P4.00 per hour
Actual
Material 130,000 feet used (140,000 feet purchased @ P4.70 per foot)
Labor 161,000 direct labor hours incurred per unit @ P4.25 per hour
25,000 units were produced
COMPUTE for the direct material variances.
 FAVORABLE – when the actual price or quantity amounts are lower that
the standard amounts
UNFAVORABLE – when the actual price or quantity amounts are higher
SOLUTION that the standard amounts

AQ x AP = XX 140T x 4.70 = 658,000

DM PRICE VARIANCE
42,000 F
AQ(P) x SP = XX 140T x 5.00 = 700,000

AQ(U) x SP = XX 130T x 5.00 = 650,000

DM QUANTITY
VARIANCE 25,000U
125T x 5.00 = 625,000
SQ x SP = XX

ACTUAL
PRODUCTION (25T) x
STD. QUANTITY PER ACTUAL QTY. PURCHASED ≠
UNIT (5) ACTUAL QTY. USED
VARIANCES EXPLAINED…
VARIANCE DEFINITION RESPONSIBILITY
Material PRICE VARIANCE Indicates whether the amount Purchasing Manager
paid for material was less than
or more that standard price
Material QUANTITY VARIANCE Indicates whether the actual Production Manager
quantity used was less than or
more that the standard quantity
for the actual output achieved
Total Material Variance The summation of the N/A
individual variances or can also
be calculated by subtracting the
total cost from the total actual
cost (not applicable in point of
purchase material variance
model)
DO-IT-YOURSELF (DIY)
 ABC Company produced and sold 23,400 units. For production, it purchased and used
260,000 ounces of ingredients that costs a total of P10,400. The standard cost for direct
materials is : (1) 10 oz. per unit and (2) P0.05 per oz.

Required:
1. Determine the direct materials price variance
2. Determine the direct materials quantity variance
3. Answer the first two items assuming that ABC Company purchased 260,000 ounces and
used only 240,000 ounces.
DIRECT LABOR

 DIRECT LABOR PRICE STANDARD – is the rate per hour that should be incurred for
direct labor. This standard is based in current wages rates adjusted for anticipated
changes such as cost of living allowance (COLA).
DIRECT LABOR

 DIRECT LABOR HOUR STANDARD – is the time that should be required to make
one unit of the product. This standard is especially critical in labor intensive
companies.
DIRECT LABOR VARIANCE

AH x AR = XX
DL RATE
VARIANCE
AH x SR = XX

DM EFFICIENCY
VARIANCE
SH x SR = XX

ACTUAL
PRODUCTION x STD.
HOURS PER UNIT
SELF CHECK 2
 JOYJOY company has the following information available for the current year:
Standard
Material 5 feet per unit @ P5.00 per foot
Labor 6.8 direct labor hours @ P4.00 per hour
Actual
Material 130,000 feet used (140,000 feet purchased @ P4.70 per foot)
Labor 161,000 direct labor hours incurred per unit @ P4.25 per hour
25,000 units were produced
COMPUTE for the direct labor variances.
SOLUTION

AH x AR = XX 161T x 4.25 = 684,250

DL RATE VARIANCE
40,250U
AH x SR = XX 161T x 4.00 = 644,000
DM EFFICIENCY
VARIANCE 36,000 F
SH x SR = XX 170T x 4.00 = 680,000

ACTUAL
PRODUCTION (25T) x
STD. HOURS PER
UNIT (6.8(
VARIANCES EXPLAINED…
VARIANCE DEFINITION
Labor RATE VARIANCE The difference between the actual wages paid
to labor for the period and the standard cost of
actual hours worked

Labor EFFICIENCY VARIANCE Indicates whether the amount of time worked

was less than or more than the standard
quantity for the actual output

TOTAL LABOR VARIANCE The summation of the individual variances or

can also be calculated by subtracting the total
standard cost from the total actual cost
DO-IT-YOURSELF (DIY)

 DEF Company produced 25,200 units. Direct labor hours used during the production was
2,800 hours and the Company incurred total direct labor cost of P28,700. The standard rate
for labor was P10 per hour and the standard hours needed to finish one unit was 0.10 hours.

Required:
1. Determine the direct labor rate variance
2. Determine the direct efficiency variance
OVERHEAD CONTROLLABLE VARIANCE

 It shows whether overhead costs were effectively controlled. To compute for this
variance, actual overhead costs incurred are compared with budgeted costs for
the standard hours allowed.
OVERHEAD VOLUME VARIANCE

 Is the difference between normal capacity hours and standard hours allowed times the fixed
overhead rate. The overhead volume variance relates to whether fixed costs were under or over
applied during the year,
2 WAY ANALYSIS

ACTUAL OVERHEAD (AH x AR) XX

BASH (Budget allowed for

standard hours) Controllable
Variance
Budgeted Fixed OH (NC x SR) XX

Variable OH (SH x Std. VOH rate) XX

XX
Volume Variance
STANDARD OVERHEAD (SH x SR) XX
SELF CHECK 3
 Calamba Company uses a standard cost system. The following budget at normal capacity and the actual
results are summarized for the month of December:
Direct Labor Hours 24,000
Variable FOH P48,000
Fixed FOH P108,000
Total FOH per DLH P6.50

Actual data for December as follows:

Direct Labor Hours worked 22,000
Total FOH P147,000
Standard DLHs allowed for capacity attained 21,000

 Under two way analysis of Overhead Variance, what is the controllable & volume variance?
SOLUTION

ACTUAL OVERHEAD (GIVEN) 147,000

BASH (Budget allowed for

standard hours) Controllable
Variance 3,000 F
Budgeted Fixed OH (GIVEN) 108,000

Variable OH (21,000 x 2*) 42,000 150,000

Volume Variance
STANDARD OVERHEAD (21,000 13,500 U
x 6.50) 136,500

*48,000 / 24,000
- END OF SLIDE –

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