3 Costing Systems

Actual – 3 product components (direct material, direct labor and factory overhead)
Normal – used dm and dl, but f.o uses predetermined f.o
Standard
Standard – a measure of acceptable performance established by management as a guide in making
economic decision. Can be a benchmark or a norm for measuring performance

Uses standards which specify the expected cost and quantities needed to manufacture a single
product or perform single service. WE DON’T ONLY DEVELOP STANDARD COST BUT WE SHOULD
INCLUDE THE STANDARD QUANTITY FOR THE 3 PRODUCT COMPONENTS.
1) Financial Management Planning – it would be easier to prepare the budget because
company already developed the standard price and standard quantity that will use in
preparing the material purchases budget, direct labor budget and Factory Overhead budget.
2) Promote Greater Economy by making employees more “COST-CONSCIOUS” – they can know
compare the actual cost of material that they will buy or they are using with the standard
price that should have been use. Employees will be more conscious of the amount or the
quantity of the raw materials that they use to produce product.
3) Useful in setting selling prices – Now easier to set-up the selling price of the product,
without actually waiting for the actual cost/actual quantity.
4) Contribute to management control by providing basis for evaluation of Cost Control – Would
be a benchmark or a norm, where we compare actual performance.
 5) Useful in highlighting variances in management by exception - If we compare actual cost
with standard cost, variances may result. This would enables management to use
management by exception, only those variances that is material or significant in amount,
whether favourable or unfavourable will be investigated by the management.
6) Simplify costing of inventories and reduce clerical costs

AS QUALITY RISE, THE PRICE ALSO RISES.

Ideal Vs. Practical Standards
- Ideal Standards are attainable only under the best circumstances. Also called THEORETICAL
OR MAXIMUM EFFICIENCY STANDARD. This would require perfect performance. No
allowances for made in Machine Breakdowns and the like. Company assumes that
employees work 24/7 and also with machines.
- Practical Standards are also called CURRENTLY ATTAINABLE STANDARDS. Tight but
attainable standards. Normally used for product costing and cash budgeting purposes.
- Can be use in the 3 cost component.
Standard Quantity = Actual Production (Actual Units Produced) x Standard Quantity per unit for M, L,
F.O
MPV = Actual Quantity Purchase (Actual Price – Standard Price)
Standard Quantity = Actual Quantity x Standard Quantity per unit