CHAPTER 5: STANDARD COSTS

AND DIFFERENTIAL ANALYSIS

 An accounting system that accumulates costs using
standard unit prices + quantities is a standard
costing system
 A standard cost is the per-unit cost expected to be
incurred under normal (but efficient) operating
conditions
 Standards costs are estimated separately for the
materials, direct labour, + overhead relating to each
type of product that the company produces
 Standard costs can be used for pricing, budgeting,
controlling + evaluating
 Differences b/w actual + standard input price or
quantites are variances
 A variance is favourable if actual input costs or
quantities are less than standard.
 If actual input costs or quantities exceed
standard, the variances are unfavourable
 Standard costs are established + revised each
period, during the budgeting process
 Standard costs are continually reviewed +
periodically revised if significant changes occur in
production methods in prices paid for materials,
labour + overhead
 Setting of direct material standards involves both
the cost + quantity of each material used
 Direct labour standard:
 The specific direct labour requirements to produce
each product must be specified
 The wage rate + the amount of time allowed to
produce each unit
DIFFERENTIAL/VARIANCE ANALYSIS

 Material cost variance = material price variance

+ material quantity variance
 = (standard price – actual price)*actual quantity
of materials used + (standard quantity – actual
quantity)*standard price
 Possible causes??
 Direct labour cost variance = labour rate variance +
labour efficiency variance
 = (standard rate – actual rate)*actual labour hours
+ (standard hours – actual hours)*standard hourly
rate
 Possible causes??
 Manufacturing overhead variance = spending
variance + volume variance
 = (standard VOR – actual VOR)*actual output +
(standard output – actual output)*standard VOR
 Possible causes??
 Revenue variance = sales price variance + sales
volume variance
 = (standard price – actual price)*actual sales
volume + (standard sales volume –actual
volume)*standard sales price
 Profit variance = budgeted profit – actual profit =
revenue variance – cost variances
 Possible causes???
 Exercise 24.13 p. 1063
 Exercise 24.14 p. 1063