CHAPTER 15: STANDARD COSTING – SETTING 5.
5. Break down the variance for each element into its component parts in order
STANDARDS AND ANALYZING VARIANCES
ACTUAL COST SYSTEM – product costs are recorded when they are incurred
- Acceptable for recording DM and DL because they are easily traced to
specific jobs (job order costing) or department (process costing)
NORMAL COSTING – modification of actual costing it is such that MOH is applied to
production on the basis of actual inputs multiplied by a predetermined overhead
application rate.
STANDARD COSTING – all costs attached to products are based on standards or
predetermined amounts.
- Costs of every product are computed at the start of the period.
- Standard cost – is the predetermined cost of manufacturing a single unit of
product
USES OF STANDARD COSTING:
1. Controlling Costs – to aid management in the production of a unit of product
or service at the lowest possible cost in accordance with predetermined
quality standards.
2. Costing Inventories – eliminates complex computations for inventories and
CGS (no adjustments to be made)
3. Planning Budgets – standard is unit amount while budget is a total amount
4. Pricing Products – setting prices is greatly enhanced by the availability of
reliable standards and the continuous review of standard costs
SETTING STANDARDS:
- Management must choose a level of operating efficiency with which to work
1. IDEAL STANDARDS – represent goals that could be attained only by
achieving perfection, no provision for lost or idle time, breakdowns, and
other factors reducing efficiency.
2. NORMAL STANDARDS – represent goals that can be met under reasonably
efficient operating conditions because they provide for idle time,
breakdowns, and common operating problems.
IMPLEMENTING A STANDARD COST SYSTEM:
1. Establishing standards for each cost element (materials, labor, and OH)
2. Record actual costs incurred
3. Determine the standard costs for the number of units produced
4. Compute variances by comparison of actual costs and standard costs
to determine the cause of variances.
6. Record production costs and variances
APPLICATION:
- Considering the standard quantity and standard price
a. Material Price Standards – purchase price, related costs (receiving, storing,
and handling ex. Freight costs)
b. Material Quantity Standards – quantity required to be consumed, and
materials spoilage or waste
c. Labor Rate Standards (price) – wage rate, payroll taxes, fringe benefits (ex.
paid holidays)
d. Labor Efficiency Standards (quantity) – required time to finish 1 unit and
allowances such as rest periods, machine setup and machine downtime.
e. Predetermined OH Rates (price) – fixed and variable costs
f. Standard OH rate (quantity) – equal the DLH or machine hours
- Actual costs include: DM, DL, VARIABLE OH, AND FIXED OH
- Actual costs less standard costs = total variance
 If Actual > Standard – unfavourable
 If Actual < Standard – favorable
COMPUTING AND ANALYZING VARIANCES:
Total Variance = TMV (MPV+MQV) + TLV (LRV +LEV) +TOV (OCV +OVV)
TV = TMV (Materials Price Variance + Materials Quantity Variance) + TLV (Labor
Rate Variance + Labor Efficiency Variance) + TOV (Overhead Controllable Variance
+ Overhead Volume Variance)
1. DIRECT MATERIALS VARIANCE
TMV = Standard Qty x Standard Price – Actual Qty x Actual Price
Material Price Variance = Actual Qty x Standard Price – Actual Qty x Actual Price
Materials Quantity Variance = Standard Qty x Standard Price – Actual Qty. x Standard Price
2. DIRECT LABOR VARIANCES
TLV = Standard Hrs. x Standard Rate – Actual Hrs. x Actual Rate
Labor Rate Variance = Actual Hrs. x Standard Rate – Actual Hrs. x Actual Rate
Labor Efficiency Variance = Standard Hrs. x Standard Rate – Actual Hrs. x Standard Rate
3. OVERHEAD VARIANCES
TOV = Actual Overhead – Applied (Standard) Overhead