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Standard Costing: Output (Eg. Pieces Per Unit)

Standard costing involves establishing quantity and cost standards to measure performance. There are two types of standards: quantity standards which indicate materials or labor per unit, and cost standards which indicate what costs should be. Standard costs are used for cost control, pricing, costing inventories, motivation, cost awareness, budgeting, and variance analysis. Variance analysis involves comparing actual costs to standards to identify differences and take corrective actions. Common variances include materials, labor, and factory overhead variances which are analyzed to improve performance.

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187 views

Standard Costing: Output (Eg. Pieces Per Unit)

Standard costing involves establishing quantity and cost standards to measure performance. There are two types of standards: quantity standards which indicate materials or labor per unit, and cost standards which indicate what costs should be. Standard costs are used for cost control, pricing, costing inventories, motivation, cost awareness, budgeting, and variance analysis. Variance analysis involves comparing actual costs to standards to identify differences and take corrective actions. Common variances include materials, labor, and factory overhead variances which are analyzed to improve performance.

Uploaded by

glcpa
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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Standard Costing - a benchmark set by management in aid of performance measurement.

In
manufacturing companies, standards are classified into 2 categories:

*Quantity Standard- indicates the quantity of raw materials or labor time required to
produce a unit of product. This is normally expressed per unit of
output (eg. pieces per unit)

*Cost Standard- indicates what the cost of the quantity standard should be. This is
normally expressed per unit of input (eg. P2.00 per piece)

Budgets vs Standards

BUDGETS STANDARDS
Purpose Are statements of expected costs Pertain to what costs should be given a certain
level of performance
Emphasis Emphasize cost levels that should not Emphasize the levels to which costs should be
be exceeded reduced
Coverage Are set for all departments Are set only for the production or manufacturing
division of the firm
Analysis When actual data differ from the Material amounts of variance are reviewed and
budget, it may be an indication of investigated so that necessary corrective actions
either good or bad performance are implemented

Uses of Standard costs


-Cost control
-Pricing decisions
-Costing of inventories
-Motivation and performance appraisal
-cost awareness and cost reduction
-Preparation of budgets
-Preparation of cost report
-Management by exception (variance)

Standard costing procedures


-Establish standards
-measure actual performance
-compare actual performance with standards
-take corrective actions when needed
-Revise standards when needed
Standard cost variance analysis

TOTAL Variance = Actual costs (AC) – Standard Costs (SC)

if, AC>SC: UNFAVORABLE (Debit balance/adverse)


AC<SC: FAVORABLE (credit balance/desirable)

1. Direct materials Variance

Actual material Cost------------- Actual Quantity (AQ) x Actual Price (AP)


- AQ x SP
- Standard material cost--------Standard Quantity (SQ) x Standard Price (SP)
Materials cost variance

Analysis:

Quantity variance: change in Q x SP = Difference in Quantity x Standard price


Price variance: change in P x AQ = Difference in Prices x Actual Quantity

2. Direct labor variance

Actual labor Cost------------- Actual hours (AH) x Actual Rate (AR)


- Standard labor cost--------Standard hours (SH) x Standard Rate (SR)
labor cost variance

Analysis:

Efficiency variance: change in H x SR = Difference in hours x Standard rate


Rate variance: change in R x AH = Difference in rates x Actual hours

Important notes on material and labor variance analysis


1. Material price variance is also known as: material spending variance, material money variance,
material rate variance

2. Material Quantity variance is also known as Material usage variance, material efficiency variance

3. Material usage variance is a QUANTITY variance while Material price usage variance is a price
variance

4. Labor rate variance is also known as Labor price variance, Labor spending variance, Labor money
variance

5. Labor efficiency variance is also known as Labor hours variance, labor usage variance, labor time
variance
6. labor effiency variance excludes idle time spent in the production. If any, idle time is separately
explained through the idle time variance, which is regarded as UNFAVORABLE

Idle time variance= Idle time x Standard labor rate

3. Factory Overhead (FOH) variance

1. One way variance analysis


FOH variance= Actual FOH cost- Standard FOH cost

2. Two-way variance analysis


Controllable variance= Actual FOH cost -Budget Adjusted for Standard Hours (BASH)*
Volume variance= BASH cost- Standard FOH cost

*BASH= Budgeted Fixed FOH + (SH x Variable FOH rate)

3. Three-way variance analysis


Spending variance= Actual FOH cost – Budget Adjusted for Actual hours(BAAH) cost
Efficiency variance= BAAH cost- BASH cost
Volume Variance= BASH cost- Standard FOH cost

4. Four-way variance analysis


Variable spending variance= Actual FOH (variable) – BAAH (Variable)
Fixed spending variance= Actual FOH (fixed)- BAAH (fixed)
Efficiency variance (variable)= BAAH- BASH
Volume Variance (fixed)= BASH - Standard FOH cost

Important Notes on FOH variance analysis


1. Standard FOH = Standards Hours x Standard FOH Rate. Under standard costing, SFOH is likewise
referred to as the Applied Factory Overhead

2. If AFOH is > SFOH (Applied), then FOH is said to be underapplied; hence, under application
indicates an UNFAVORABLE variance, while over application indicates FAVORABLE variance

3. The term CAPACITY variance is also used to mean the volume variance

4. Budget variance= Actual Cost- Budgeted cost= Actual FOH- Budgeted FOH (BFOH)
*Under 2-way analysis where BASH is deducted from AFOH, budget variance is controllable variance
*Under 3-way analysis where BAAH is deducted from AFOH, budget variance is spending variance

5. Volume variance is actually the FIXED volume variance, there is no such thing as a variable volume
or variable capacity variance

6. Under the 3-way approach, the FOH efficiency variance is actually the Variable Efficiency variance.
Other than BAAH-BASH, variable OH efficiency variance may also be computed based on:
Change in hours x variable FOH rate = (AH-SH) VR
7. FOH Variances may classified into:
*Variable FOH variances= Variable spending variance + Variable efficiency variance
*Fixed FOH Variances= Fixed spending variance + Fixed Volume variance

8. Alternatively, another FOH variance analysis may include the following variances:
*Idle capacity variance: BAAH - (AH x SR)
*Total Efficiency variance= change in Hours x Standard rate
*Fixed efficiency (effectiveness) variance= change in Hours x Fixed FOH rate

9. The manufacturing efficiency variance incorporates the effect of both FOH efficiency variance and
labor efficiency variance. In some cases, material quantity variance may also be included

10. DM variance + DL Variance + FOH Variance = Production/ Manufacuring cost variance

4. Material Price, Mix and Yield Variances

Mix and yield variances are normally calculated when production requires combining several materials
to produce a unit of product.

Material variance= Actual material cost- Standard material cost

Analysis:
Price variance: AQ x change in Price
Mix variance: (AQ X SP) – Total Actual Quantity at Average Standard price (TAQASP)
Yield variance: TAQASP – Standard Cost

Note:
Mix and yield may also apply to direct labor, specially in situations where various labor skills are
required to produce units of products.

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