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Standard Costs and Variances
Standard Costs and Variances
Costs and
Variances
P R E PA R E D B Y: H A F S A
(0938), ADEEL, ARUSHMA,
RAJAB
Q: Why us it necessary to set standards?
Ans: The standards which relate to the quantity and
acquisition price of inputs are used by managers in
What is Q: manufacturing goods and providing services.
Standard ?
A standard is the Quantity standard specify how much of an input should
benchmark or norm Quantity be used to make a product or provide a service.
that are used to standard
measure the
performance of the
various departments of • Price standard specify how much should be paid for each
the company in order to Price unit of input.
monitor the actual Standard
results and controlling
cost for increasing
profit. Q: How is setting standard useful?
Ans: If the quantity and acquisition price of input departs
from the standard, managers investigate the discrepancy to
Q find the cause of problem and eliminate it.
Setting Direct Material Standard
Production
Production Purchasing
Purchasing
manager
manager will
will The standard
The standard price manager
help
help in
in setting
setting quantity per unit will help in
S.Q.U
S.Q.U defines the amount of per unit defines the its
its setting.
setting.
direct materials that price that should be
should be used for paid for each unit of
each unit of finished direct materials and it
product, including an should reflect the
allowance for normal final, delivered cost of
inefficiencies such as those material.
scrap and spoilage.
Production
Production TTime
ime and
and Production
Production
Manager
Manager motion
motion manager
manager
consultation+
consultation+ study.
study. Tight
Tight consultation
consultation
allowances
allowances for
for and
The standard
and attainable
attainable
breaks,
breaks,
employers The standard standards
standards are
are rate per hours
employers
needs,
needs, cleanup
cleanup
hours per unit
used
used defines the
and
and machine
machine
downtime
downtime.. defines the amount companies expected
of direct labor hours direct labor wage
that should be used rate per hour,
to produce one unit including
of finished goods. employment taxes
and fringe benefit.
Setting Variable Manufacturing
Standard
The standard
hours per unit for
The standard
variable overhead
rate per unit that a
measures the
company expects to
amount of the
pay for variable
allocation base from
overhead equals the
the company’s pre-
variable portion of
determined overhead
the predetermined
rate that is required
overhead rate.
to produce one unit
of finished goods.
Standard Cost Card
A standard cost card shows the standard quantity (or hours) and standard
price ( or rate) of the inputs required to produce a unit of a specific product.
The standard cost per unit for all three variable manufacturing cost is
computed by the same way.
Input Standard Standard price or Standard Cost
quantity or rate
hours 2 1×2
1
D.M
D.L
Variable MOH
Total Standard Cost
per Unit
Using Standard in Flexible
Budgeting
ABC COMPANY
Flexible Budget Performance Report– Variable Manufacturing Cost
Actual Spending Variance Flexible Activity Variance Planning
Results (Actual-spending) Budget (flexible-planning) Budget
Quantity
Produced
D.M
D.L
Variable
MOH
Spending
Spending Variance
Variance Activity Variance
Variance
Variance
Variance Favorable----------Actual
Favorable----------Actual cost
cost << Standard
Standard Cost
Cost Variance
Variance Favorable----------Actual
Favorable----------Actual level
level of
of activity
activity << Planned
Planned level
level of
of activity
activity
Variance Unfavorable------Actual Cost > Standard Cost
Variance Unfavorable------Actual Cost > Standard Cost Variance Unfavorable-------Actual level of activity > Planned level of activity
Variance Unfavorable-------Actual level of activity > Planned level of activity
Q: Why are standard separated Raw Material Raw Material
into two categories? Buying Using
Ans: Because price variances and
A General Model quantity Variances have different Purchasing
Purchasing Production
Production
Analysis
price material
used
used in
in product
product
Actual Purchase Price < Standard Purchase Actual Quantity of Material Used < Standard
Price (Favorable) Quantity of Material Used(Favorable)
Actual Purchase Price > Standard Purchase Actual Quantity of Material Used > Standard
Price (Unfavorable) Quantity of Material Used(Unfavorable)
Labor Rate Labor Efficiency
Variance Variance
of pay. inefficient.
Variable OH Efficiency is same as D.L Efficiency except the fact that the rate
should be in dollars to translate variance.
The difference between actual hours worked and standard hours worked is
multiplied with the variable portion of the predetermined OH rate.