Standard costing

STANDARD STANDARD COSTINGCOSTING

STANDARD STANDARD COSTINGCOSTING

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ABNER B. DOMINGOABNER B. DOMINGOABNER B. DOMINGOABNER B. DOMINGO

• The purpose of standard cost accounting is to control costs and promote efficiency.

• It is not another accounting method for accumulating manufacturing costs, but is used in conjunction with such methods as job order, process, or backflush costing.

•Standard costing is based on predetermination of what it should cost to manufacture a product, and the inventory accounts are debited for these standard costs.–•Types of Standards:

••Standard••Ideal standard••Attainable standard

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Standard CostingStandard CostingStandard CostingStandard Costing

Standard Cost ProceduresStandard Cost ProceduresStandard Cost ProceduresStandard Cost Procedures

•Standard cost accounting is based on the following procedures:–•Standard costs are determined for the three elements

of cost: direct materials, direct labor, and factory overhead.

–•The standard costs, the actual costs, and the variances between the actual and standard costs are recorded in the appropriate accounts.

–•Significant variance are analyzed and

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Standard Cost Procedures (contd..)Standard Cost Procedures (contd..)Standard Cost Procedures (contd..)Standard Cost Procedures (contd..)

•Materials cost standard is based on estimates of the quantity of materials required for a unit of product and the unit cost to purchase the materials used.

•Labor cost standard is based on estimates of the labor hours required to produce a unit of product and the cost of labor per unit.

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STANDARD COSTa budget for the

production of one unit of product or

service

STANDARD COSTa budget for the

production of one unit of product or

service

ACTUAL COSTused in the production of

the product or service

ACTUAL COSTused in the production of

the product or service

COST VARIANCE the differencebetween the

actual cost andthe standard cost

COST VARIANCE the differencebetween the

actual cost andthe standard cost

Using Standard-Costing Systems for Using Standard-Costing Systems for ControlControl

Using Standard-Costing Systems for Using Standard-Costing Systems for ControlControl

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Take the time to investigate only significant cost variancesTake the time to investigate only significant cost variances

What is significant?What is significant?

Depends on the Size of the

Organization

Depends on the Size of the

Organization

Depends on the Type of the

Organization

Depends on the Type of the

Organization

Depends on the Production

Process

Depends on the Production

Process

Management by ExceptionManagement by ExceptionManagement by ExceptionManagement by Exception

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Standard quantity:

Fabric in finished product 11 sq. metersAllowance for normal waste 1 sq. metersTotal standard quantity required per tent 12 sq. meters

Standard quantity:

Fabric in finished product 11 sq. metersAllowance for normal waste 1 sq. metersTotal standard quantity required per tent 12 sq. metersKoala Camp

Gear CompanyKoala Camp

Gear Company

DIRECT MATERIAL STANDARDSDIRECT MATERIAL STANDARDS

The total amount of material normally required to produce a finished product including allowances for normal waste

or efficiency

The total amount of material normally required to produce a finished product including allowances for normal waste

or efficiency

The total delivered cost, after

subtracting any purchase discounts

The total delivered cost, after

subtracting any purchase discounts

Cost Variance AnalysisCost Variance AnalysisCost Variance AnalysisCost Variance Analysis

DETERMINATION OF STANDARD COSTDETERMINATION OF STANDARD COSTDETERMINATION OF STANDARD COSTDETERMINATION OF STANDARD COST

•A variance represents the difference between the actual and the standard costs of materials, labor, and overhead.

•Variances measure efficiencies or inefficiencies in usage and price.

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Determination of VariancesDetermination of VariancesDetermination of VariancesDetermination of Variances

•A debit balance in a variance account indicates an unfavorable variance.

•A credit balance reflects a favorable variance, indicating that actual costs were less than the standard.

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Direct Material Price VarianceDirect Material Price Variance

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Direct material price variance (also called the direct material spending/rate variance) is the product of actual quantity of direct material used and the difference between standard price and actual price per unit of direct material. It is calculated using the following formula: DM Price Variance = ( SP − AP ) × AQ

Where, SP is the standard unit price of direct material AP is the actual price per unit of direct material AQ is the actual quantity of direct material used

Example Calculate the direct material price variance if the standard price and actual unit price per unit of direct material are $4.00 and $4.10 respectively; and actual units of direct material used during the period are 1,200. Determine whether the variance is favorable or unfavorable.

Standard Price $ 4.00

− Actual Price 4.10

Difference Per Unit − 0.10

× Actual Quantity 1,200

Direct Material Price Variance − $ 120 Since the price paid by the company for the purchase of direct material is more than the standard price by $120, the DM price variance is unfavorable.

Direct Material Quantity VarianceDirect Material Quantity Variance

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Direct material quantity variance (also called the direct material usage/efficiency variance) is the product of standard price of a unit of direct material and the difference between standard quantity of direct material allowed and actual quantity of direct material used. The formula to calculate direct material quantity variance is:

DM Quantity Variance = ( SQ − AQ ) × SP

Where, SQ is the standard quantity allowed AQ is the actual quantity of direct material used SP is the standard price per unit of direct material Standard quantity allowed (SQ) is calculated as the product of standard quantity of direct material per unit and actual units produced.

Example Use the following information to calculate direct material quantity variance. Also specify whether the variance is favorable or unfavorable. Standard Price of a Unit of Direct Material $ 4

Standard Quantity of Direct Material Per Unit 2

Actual Units Produced During the Period 620

Actual Quantity Used During the Period 1,200

Solution

Actual Units Produced 620

× Standard Quantity of Direct Material Per Unit 2

Standard Quantity Allowed 1,240

Standard Quantity Allowed 1,240

− Actual Quantity 1,200

Difference 40

× Standard Price of a Unit of Direct Material $ 4

Direct Material Quantity Variance $ 160

In this case the production department performed efficiently and saved 40 units of direct material. Multiplying this by standard price per unit yields a favorable direct material quantity variance of $160.

Direct Material Mix VarianceDirect Material Mix Variance

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Direct material mix variance is the product of the standard price per unit of direct material and the difference between standard mix quantity and actual quantity of direct material used. Standard mix quantity is the quantity of a particular direct material which, if mixed with one of more different materials in a standard ratio, would have been consumed on the actual quantity of a product produced. Direct material mix variance can be calculated only for a product having two or more input materials. The formula is: DM Mix Variance = ( SM − AQ ) × SP Where, SM is the standard mix quantity of direct material AQ is the actual quantity of material used SP is the standard price per unit of direct material used

Example A product T is produced by mixing three materials: P, Q and R in a standard mix ratio of 1:2:2. Actual materials consumed during the month ended May 31, 20X2 were 4,670g, 8,450g and 8,390g respectively. Standard prices are $0.04/g $0.03/g and $0.02/g per gram respectively. Calculate the direct material mix variance. Solution Total Actual Quantity = 4,670 + 8,450 + 8,390g = 21,510g Material P's Standard Mix % = 1 ÷ (1 + 2 + 2) = 0.2 Material Q's Standard Mix % = 2 ÷ (1 + 2 + 2) = 0.4 Material R's Standard Mix % = 2 ÷ (1 + 2 + 2) = 0.4 Material P Q R

Total Actual Quantity (g) 21,510 21,510 21,510

× Standard Mix % 0.2 0.4 0.4

Standard Mix Quantity (g) 4,302 8,604 8,604

− Actual Quantity (g) 4,670 8,450 8,390

Difference (g) -368 154 214

× Standard Price ($/g) 0.04 0.03 0.02

Individual Material Mix Variance ($)

− 14.72

4.62 4.28

Total DM Mix Variance ($) − 5.82

Direct Material Yield VarianceDirect Material Yield Variance

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Direct material yield variance is the product of the standard price per unit of direct material and the difference between standard quantity of direct material allowed for actual production and the standard mix quantity of direct material. Standard mix quantity is the total quantity of two or more types of direct materials which, if mixed in the standard ratio, would have been consumed on the actual quantity of the product produced. Direct material yield variance can be calculated only for a product made from two or more direct materials. The formula is:

DM Yield Variance = ( SQ − SM ) × SP

Where, SQ is the standard quantity of direct material SM is the standard mix quantity of material used SP is the standard price per unit of direct material used

Example Using the same example which we used in calculating the direct material mix variance: A product T is produced by mixing three materials: P, Q and R in a standard mix ratio of 1:2:2. Actual materials consumed during the month ended May 31, 20X2 were 4,670g, 8,450g and 8,390g respectively. Standard prices are $0.04/g $0.03/g and $0.02/g per gram respectively whereas standard quantities allowed are 4,310g, 8,620g and 8,620g respectively. Calculate the direct material yield variance. Solution Total Actual Quantity = 4,670 + 8,450 + 8,390g = 21,510g Material P's Standard Mix % = 1 ÷ (1 + 2 + 2) = 0.2 Material Q's Standard Mix % = 2 ÷ (1 + 2 + 2) = 0.4 Material R's Standard Mix % = 2 ÷ (1 + 2 + 2) = 0.4

Material P Q R

Total Actual Quantity (g) 21,510 21,510 21,510

× Standard Mix % 0.2 0.4 0.4

Standard Mix Quantity (g) 4,302 8,604 8,604

Material P Q R

Standard Quantity (g) 4,310 8,620 8,620

− Standard Mix Quantity (g) 4,302 8,604 8,604

Difference (g) 8 16 16

× Standard Price ($/g) 0.04 0.03 0.02

Individual Material Yield Variance ($)

0.32 0.48 0.32

Total DM Yield Variance ($) 1.12

Direct Labor Rate VarianceDirect Labor Rate Variance

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Direct labor rate variance (also called direct labor price/spending variance or wage rate variance) is the product of actual direct labor hours and the difference between the standard direct labor rate and actual direct labor rate. Direct labor rate variance is similar to direct material price variance. The following formula is used to calculate direct labor rate variance:

DL Rate Variance = ( SR − AR ) × AH

Where, SR is the standard direct labor rate AR is the actual direct labor rate AH are the actual direct labor hours

Example Calculate the direct labor rate variance if standard direct labor rate and actual direct labor rate are $18.00 and $17.20 respectively; and actual direct labor hours used during the period are 800. Is the variance favorable or unfavorable? Solution

Standard Rate $ 18.00

− Actual Rate 17.20

Difference Per Hour 0.80

× Actual Hours 130

Direct Labor Rate Variance $104 Since the actual labor rate is lower than the standard rate, the variance is positive and thus favorable.

Direct Labor Efficiency VarianceDirect Labor Efficiency Variance

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Direct labor efficiency variance (also called direct labor quantity/usage variance) is the product of standard direct labor rate and the difference between the standard direct labor hours allowed and actual direct labor hours used. The basic concept of direct labor efficiency variance is similar to that of direct material quantity variance. The following formula is used to calculate direct labor efficiency variance: DL Efficiency Variance = ( SH − AH ) × SR

Where, SH are the standard direct labor hours allowed AH are the actual direct labor hours used SR is the standard direct labor rate per hour

Example Use the following information to calculate direct labor efficiency variance. State whether the variance is favorable or unfavorable. Standard Rate Per Hour of Direct Labor $ 18

Standard Direct Labor Hours Required Per Unit

0.2

Actual Units Produced During the Period 620

Actual Direct Labor Hours Used During the Period

130

Solution


× Standard Direct Labor Hours Per Unit 0.2

Standard Direct Labor Hours Allowed 124


− Actual Direct Labor Hours Used 130

Difference − 6

× Standard Direct Labor Rate $ 18

Direct Labor Efficiency Variance − $ 108

Since the direct labor efficiency variance is negative, it is unfavorable.

Variable Overhead Spending VarianceVariable Overhead Spending Variance

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Variable Overhead spending variance (also called variable overhead rate variance) is the product of actual units of the allocation base of variable overhead and the difference between standard variable overhead rate and actual variable overhead rate. The formula to calculate the variable overhead spending variance is:

VOH Spending Variance = ( SR − AR ) × AU

Where, SR is the standard variable overhead rate AR is the actual variable overhead rate AU are the actual units of allocation base The standard variable overhead rate is the same as variable overhead application rate. The allocation base is usually the number of labor hours used. The above formula can also be stated alternatively as follows:

VOH Spending Variance = ( SR × AU ) − Actual Variable Overhead Cost

Example Calculate variable overhead spending variance if actual labor hours used are 130, standard variable overhead rate is $9.40 per direct labor hour and actual variable overhead rate is $8.30 per direct labor hour. Also specify whether the variance is favorable or unfavorable. Solution Standard Variable Overhead Rate $ 9.40

− Actual Variable Overhead Rate − 8.30

Difference Per Hour $ 1.10

× Actual Labor Hours 130

Variable Overhead Spending Variance $143 The variable overhead variance calculated above is favorable.

Variable Overhead Efficiency VarianceVariable Overhead Efficiency Variance

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Variable overhead efficiency variance is the product of standard variable overhead rate and the difference between the standard units allowed of the variable overhead application base and actual units used of the variable overhead application base. Assuming that variable overhead application base is direct labor hours, the formula to calculate variable overhead efficiency variance will be: VOH Efficiency Variance = ( SH − AH ) × SR

Where, SH are standard direct labor hours allowed AH are the actual direct labor hours SR is the standard variable overhead rate

Example Calculate the variable overhead efficiency variance using the following figures: Number of Units Produced 620

Standard Direct Labor Hours Per Unit 0.2

Actual Direct Labor Hours Used 130

Standard Variable Overhead Rate $9.40

Solution


× Standard Direct Labor Hours Per Unit 0.2


Standard Hours Allowed 124

− Actual Hours Used 130

Difference − 6

× Standard Variable Overhead Rate $9.4

Direct Labor Efficiency Variance − $56.4

The variance calculated above is negative and thus unfavorable.

Actual & Applied Factory OverheadActual & Applied Factory OverheadActual & Applied Factory OverheadActual & Applied Factory Overhead

•Actual FOH = Applied FOH, no over or under applied FOH exist in the FOH account and no variance

•Actual FOH > Applied FOH, unfavorable variance

•Actual FOH < Applied FOH, favorable balance

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LIMITATIONS OF STANDARD COST SYSTEMLIMITATIONS OF STANDARD COST SYSTEMLIMITATIONS OF STANDARD COST SYSTEMLIMITATIONS OF STANDARD COST SYSTEM

(1) Setting of standard is a very difficult task and it involves a high degree of technical skill. Therefore it is costly and will be expensive from the point of view of small concern.

(2) Conditions of the business are charging. Hence , standard must be revised from time to time otherwise they lose importance.

(3) Fixation of standard is not possible for every type of work or operation. It cannot be implemented in those industries which do not produce any standard product.

(4) Sometimes it creates adverse psychological effects. if the it is set at a high level its non-achievement results in frustration and builds up resistance. It acts as a discouragement rather than incentive for better efficiency.

(5) It is partly determined on the basis of past experience and partly on the basis of forecast of future expenses. Thus uncertainties are around standard and determination of correct standard is very difficult.

(6) Too much care and attention are required to introduce as well as to keep up-to-date the system otherwise the very purpose of the system will be frustrated. 8–29

SUMMARY EXAMPLESUMMARY EXAMPLESUMMARY EXAMPLESUMMARY EXAMPLE

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QUESTIONSQUESTIONSQUESTIONSQUESTIONS

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THANK YOUTHANK YOUTHANK YOUTHANK YOU

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Standard costing

Business

Transcript of Standard costing