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Standard Cost
Need for Standards
Purpose of Standard Costing
Difference between Standard Cost and Budget
Cost
Advantage of Standard Costs
Setting up of Standard Cost
Ideal Versus Attainable Standards
Standard Cost Per Unit
Variances from Standards
Sources of Variance
Analyzing the variance
Variance Relationship
Approach To Variance Analysis
Reporting Variance
Example
Definition of Standard Costing
• STANDARD COSTING may be defined as “a
technique of cost accounting which compares
the “standard cost” of each product or service
with the actual cost, to determine the efficiency
of the operation, so that any remedial action
may be taken immediately”.
• The “standard cost” is a predetermined cost
which determines what each product or service
should cost under given circumstances.
Standard Costs
1. Standard Cost refers to expected costs under
anticipated conditions.
2. Standard cost systems allow for comparison of
standard versus actual costs.
3. Differences are referred to as standard cost
variances.
4. Variances should be investigated if significant.
The Need for Standards
Standards
• Are common in business
• Are often imposed by government agencies (and
called regulations)
Standard costs
• Are predetermined unit costs
• Used as measures of performance
Purposes of standard costing
labour Manufacturing
materials Overheads
Variances from Standards
Variances from standards
• Differences between total actual costs and total
standard costs
• Unfavorable variances occur when too much is paid
for materials and labor or when there are
inefficiencies in using materials and labor
• Favorable variances occur when there are efficiencies
in incurring costs and in using materials and labor
– A variance is not favorable if quality control standards are
sacrificed
Sources of Variance
• Inefficient Operations
• Inaccurate Standards
• Incorrect actual costs (mistakes in bookkeeping)
• Implementation Breakdown (something went
structurally wrong in production)
• Variances normally happen
Analyzing variances
Variances must be analyzed to determine their
significance
• First, determine the cost elements that comprise the
variance
• For each manufacturing cost element, a total Rs.
variance is computed.
• This variance is analyzed into a price variance and a
quantity variance
Variance Relationships
Variance Analysis for a variable costing system
Profit variance
1. Direct Material:
– Materials Price Variance
– Materials Quantity Variance.
2. Direct Labor:
– Labor rate (price)
– Labor efficiency (quantity) variance.
3. Overhead:
– Overhead volume variance
– controllable overhead variance.
Material Variances
1. Differences between standard and actual
material costs:
a. Material price variance.
b. Material quantity variance.
Material Price Variance
1. Material price variance:(AP – SP) x AQp
(AP) = actual price per unit of material.
(SP) = standard price per unit of direct material.
(AQp) = actual quantity of material purchased.
Actual price > standard price: unfavorable.
Actual price < standard price: favorable.
Material Quantity Variance
Reporting variances
• All variances should be reported to appropriate levels of
management as soon as possible so that corrective
action can be taken
• The form, content, and frequency of variance reports
vary considerably among companies
• Variance reports facilitate the principle of “management
by exception”
• In using variance reports, top management normally
looks for significant variances