STANDARD COSTS

1. Standards – anything used as a basis of evaluation. It may be qualitatively or quantitatively

expressed. Qualitative standards may be expressed in terms of laws, policies, rules, order,
promulgations, and the like. Quantitative standards may be expressed in pesos or in any unit or
measurement such as meters, pounds, grams, frequency, hours, and other units of measurement.
2. Why is standard needed?
 Primarily, standards are established to systematically manage people by defining order,
harmony and normalcy.
 Standards-setting in business has the following uses:
 Motivation – to set objectives, reward system, recognition, and models for performance
evaluation
 Planning – predicting the future based on normal conditions; planning could also be done
through scenario or simulation analysis; it follows the process of predicting the future event
given the changes in its relevant variables or parameters
 Monitoring or controlling – on-line evaluation of activities in relation to plans to maintain
operating normalcy and to institute corrective measures in times of unnecessary deviations
from plans
 Evaluation – end-of-line evaluation of results in relation to standards
3. Considerations in establishing standards
 Appropriateness – applicability or suitability of a given standard in a given environment
 Attainability – achievability under the best possible operating conditions
4. Types of standards
 Ideal (or Theoretical) standards – highest performance (i.e., 100%) without allowances for
errors, mistakes, delays, inefficiencies, et al
 Practical standards – highest standards less normal allowances for errors, mistakes, delays, et al
 Boogey (or lax) standards – highest standards less maximum allowances for errors, mistakes,
delays, et al
 Expected standards – predetermined level of capacity based on actual performance
 Normal standard – the average performance of the firm over the long-term under normal
business condition
5. Types of variances
Variance If Treatment Other label
Unfavorable Actual costs ˃ Standard Costs Added to standard COGS Debit variance
Favorable Actual costs ˂ Standard Costs Deducted to standard COGS Credit variance
 An unfavorable variance is also called underabsorbed or underapplied variance. A favorable
variance is also called overabsorbed or overapplied variance
 Formulas
 Materials Price Variance = (AP – SP) x actual quantity purchased*
*or used or requisitioned
 Materials Quantity Variance = (AQ – SQ) x standard price

 Material Price Variance: Using more than one direct materials

DM 1 P xx
DM 2 (AP – SP) x usage xx
DM 3 xx
Net variance P xx
 Materials Usage Variance = Mix Variance + Yield Variance
o Mix Variance
Actual quantity (per raw material) x standard price
Less: Total actual input x average standard price
Variance
o Yield Variance
Total actual input x average standard price
Less: Total actual output x standard materials cost
Variance
 Labor Rate Variance = (AR – SR) x actual hours
 Labor Efficiency or Time Variance = (AH – SH) x standard labor rate
 Labor Rate Variance
Actual payroll
Less: Actual hours x standard rate
Variance
 Labor Efficiency Variance
Actual hours x standard rate
Less: Standard hours based on actual input x standard rate
Variance
 Labor Yield Variance
Standard hours based on actual input x standard rate
Less: Standard hours based on actual outputx standard rate
Variance

 Two-way analysis
Controllable variance:
Actual factory overhead
Less: Budget allowed based on standard hours
Fixed
Variable
Variance
Volume variance:
Budget allowed based on standard hours
Less: std hrs x std OH rate
Variance
Net or Total variance
 Three-way analysis
Spending variance:
Actual factory overhead
Less: Budget allowed based on actual hours
Fixed
Variable
Variance
Variable Efficiency variance:
Budget allowed based on actual hours
Less: Budget allowed based standard hours
Variance
Volume variance:
Budget allowed based standard hours
Less: std hrs x std OH rate
Variance
Net or Total variance
  Four-way analysis
Spending variance:
Actual factory overhead
Less: Budget allowed based on actual hours
Fixed
Variable
Variance
Variable Efficiency variance:
Budget allowed based on actual hours
Less: Budget allowed based standard hours
Variance
Fixed Efficiency variance:
Actual hours
Less: standard hours
Difference
x fixed OH rate
Variance
Idle capacity variance
Normal capacity hours
Less: Actual hours
Difference
x fixed OH rate
Variance
Net or Total variance

 Controllable Variance
Actual factory overhead
Less: Budget for standard hours based on actual input
Variance
 Volume Variance
Budget for standard hours based on actual input
Standard hours based on actual input x standard rate
Variance
 Yield Variance
Standard hours based on actual input x standard rate
Standard hours based on actual output x standard rate
Variance
6. Allocation of Variances
 If the variances are relatively small, they may be closed to COGS
 Although inventory may be valued at standard cost for internal reporting purposes, the
standard costs must be adjusted to actual costs for financial reporting purposes. This will
require prorating the variances to each and every account that has been charged or credited
with specific standard cost that is now being adjusted to actual. These accounts may be COGS,
raw materials inventory (for materials price variance), WIP inventory, and FG inventory.