STANDARD COSTING and Variance Analysis (YT discussion)

Standard – a measure of acceptable performance established by management as a guide in making

decisions. (Benchmark; the usual norms; the expected performance)

Standard cost – expected cost; predetermined or target unit cost of production which should be
attained under efficient conditions; planned cost; it is determined beforehand.

Target unit cost of production = is the amount and costs of DM, DL, and FOH required to produce one
unit of a finished good.

Standard cost systems – an accounting system that uses standard costs rather than actual costs to
account for units as they flow through the manufacturing process.

USES OF STANDARD COST: (simplified bookkeeping = advantage) PIM PIM B

a. Planning and controlling costs: standard cost is being compared with actual cost and the
difference is the variance.
b. Instrument of coordination: related to all areas of management functions (a and b)
c. Measurement of performance: you need to meet the target costs at the end of the day by the
production department of the company.
d. Price setting: magpapatong ka ng tubo; cost + profit = selling price
e. Inventory valuation
f. Motivating employees: which is salary (if within pa ba or hindi na sa budgeted cost if not
mawawala yung bonus)
g. Budget preparation: Budgeting is part of planning function.

ADVANTAGES

- Standard costs serve as a key element in the application of management by exception.

Management by exception: the practice of giving attention only to those (focuses on exception or
deviation that pertains to variances) situations in which large variances occur, so that management may
have more time for more important problems of the business, not just routine supervision of
subordinates.

- Standard costs promote economy and efficiency among employees (bcz it is an instrument of
coordination)
- The use of standard costs simplifies bookkeeping and costing procedures.

DISADVANTAGES

- Difficulty in determining which variances is material. (Materiality is based on judgment)

- Other useful information may not be noticed since attention is focused on variances.(ex: ang tao
ang madalas mapansin is yung MALI in which hindi napupuna na hindi naman TOTALLY MALI
lahat; standard costing is being evaluated by a person; if its natural information hindi na ganung
napapahalagahan)
- Subordinates may be tempted to cover up unfavorable exceptions or not report them at all.
 - Costly to implement. (dahil sa pag set ng standard cost = using information other than
accounting and finance; time consuming ang pag set ng standard cost)

USERS OF STANDARD COST (Standard cost system may be used in BOTH job-order and process costing
systems)

1. Manufacturing firms
2. Service firms
3. Non-profit organizations

TYPES OF STANDARDS

1. Basic – unchanged year after year

(ex: elementary nakaset na sayo yung ideal boyfriend mo which is mayaman, matalino, mabait,
mabango. Highschool: mayaman, matalino, mabait. College: mayaman at matalino. Working: Mayaman
nalang pala. In relation sa basic standard from elem to working stage what remained constant is yung
mayaman characteristic)

2. Perfect/Ideal/Theoretical Standard – highest and optimum level of performance under perfect

operating conditions. (WALANG MALI; PERFECTIONISTS; employees become less motivated
under this type)
3. Currently attainable/normal standard – efficient level of performance that is attainable under
expected operating conditions. (Suggested one to be used by behavioral science; yung kayang
mameet; allows mistakes which are those that are tolerable lang as adjustments should be
made)

STANDARD SETTING

To set standard costs, the following are its components:

Standard price or rate = the amount that should be paid for one unit of input factor (DM, DL, MOH)

Standard quantity = the amount of input factor that should be used to make a unit of product (gaano
karami o gaano katagal if labor ang gagastusin para makabuo ng unit)

STANDARD COSTS PER UNIT = PRICE STANDARDS X QUANTITY STANDARDS

STANDARD COSTS / UNIT = STANDARD COST/INPUT X INPUT / UNIT

Price standards – summation of all inventoriable costs or product costs (dapat pareho ang unit of
measurement ng price at quantity standards)

Quantity Standards – stated in Bill of Materials or yung recipe (net quantity) (ilang quantity ang
kailangan para makabuo ng isang finished goods)

Net quantity is net of evaporation (applies only for DM), rejection (applies to both DM and DL), idle
time (applies only to DL) GOAL is to CONVERT IT TO GROSS QUANTITY.

VARIANCE ANALYSIS

Nagkakaron ng variance kapag ang standard at actual cost mo ay hindi equal.

Actual > Standard results in unfavorable variance known as debit variance (by nature it is expense)
(disposition is added to COGS)

Actual < Standard results to favorable variance known as credit variance (by nature it is income)
(disposition is deducted from COGS)

DIRECT MATERIAL VARIANCES

AQ = actual quantity SQ = standard quantity

AP = actual price SP = standard price

(1) AQ x AP = xx
(2) AQ x SP = xx
(3) SQ x SP = xx

SQ = actual production x standard quantity per unit

Difference between the (1) and (2) is DM PRICE VARIANCE

Difference between (2) and (3) is DM QUANTITY VARIANCE

Three layers can be used if the actual quantity purchased = actual quantity is used

AND IF NOT EQUAL it would be:

AQ x AP = xx

AQ(P) X SP = xx

AQ(U) X SP = xx

SQ X SP = xx

DIRECT LABOR VARIANCES

Lahat ng hired laborers mo is gagawa dapat.

AH = actual hours SQ = standard hours

AR = actual rate SP = standard rate

(1) AH x AR = xx
(2) AH x SR = xx
(3) SH x SR = xx

SH = actual production x standard hours per unit

Difference between the (1) and (2) is DL RATE VARIANCE [if (1) is greater than (2) amount it is
unfavorable; if (2) is greater than (1) amount it is favorable]

Difference between (2) and (3) is DL EFFICIENCY VARIANCE

MIX AND YIELD VARIANCES

- SUB VARIANCE FOR DM QUANTITY VARIANCE AND DL EFFICIENCY VARIANCE

(1) AQ x AP = xx
(2) AQ x SP = xx
(3) AQ x WASP = xx
(4) SQ x SP = xx

WASP  WEIGHTED AVERAGE STANDARD PRICE

Difference between (1) and (2) DM PRICE VARIANCE

Difference between (2) and (3) DM MIX VARIANCE

Difference between (3) and (4) DM YIELD VARIANCE

Yield  output

WASP = TOTAL STANDARD COST / TOTAL STANDARD QUANTITY

*The same process if questioned for DL

*(4) can also be computed as TOTAL STANDARD COST / TOTAL STANDARD YIELD X ACTUAL YIELD