STANDARD COSTING AND VARIANCE ANALYSIS

1. STANDARD COSTING
a. A valuation method that uses predetermined norms for direct materials, direct labor and overhead
to assign costs to the various inventory accounts and cost of goods sold.
2. STANDARD
a. A benchmark set by management in aid of performance measurement.
b. A model or budget against which actual results are compared and evaluated.
c. In manufacturing companies, standards can be:
i. Quantity standard
1. Quantity of raw materials or labor time required to produce a unit of product.
2. Expressed in per unit of output
ii. Cost standard
1. Cost of the quantity standard
2. Expressed in per unit of input
3. STANDARD COSTS
a. Systematically pre-determined costs established by management to be used as a basis for
comparison with actual costs
b. A budgeted or estimated costs to manufacture a single unit of product or perform a single service
c. Management tool to help control costs and may be used for either job order or process costing, in
mass production industries or service industries
d. Categorized into either:
i. Practical Standards -set with allowance for breakdown and normal lost time; tight but
attainable
ii. Ideal standards – can be attained only by working at top efficiency 100% oft the time; no
allowance for machine breakdowns or lost time
4. STANDARD COSTS FOR MATERIALS
a. Direct materials standards are set for both the price and quantity of inputs that go into units of
product.
b. Price standards typically include delivered cost of materials, freight, handling and other directly
attributable costs to get material into a condition ready for use, and also reflect any cash discounts
allowed.
c. Quantity standards reflect the amount of materials going into each finished product, as well as
allowances for unavoidable waste, spoilage, and other normal inefficiencies.
5. STANDARD COSTS OF DIRECT LABOR
a. Direct labor price and quantity standards are usually expressed in terms of labor rate and labor
hours.
b. The standard direct labor rate per hour would include not only wages earned but also an allowance
for fringe benefits, employment taxes, and other labor-related costs.
c. The standard labor hours per unit should include allowance for breaks, clean-up and machine
downtime.
6. STANDRD COSTS OF MANUFACTURING OVERHEAD
a. As with direct labor, the price and quantity standards for variable overhead are generally expressed
in terms of a rate and hours. The rate represents the variable portion of the predetermined overhead
rate. The quantity is usually expressed in terms of direct labor hours.
b. The price and quantity standards for materials, labor and overhead are summarized on a standard
cost card.
c. Essentially, the standard cost per unit represents the budgeted variable production cost for a single
unit of product
7. VARIANCE ANALYSIS
a. Variances are differences between actual and standard costs.
b. The total variance is generally sub-divided into sub-variances to further pinpoint the causes of the
variance.
c. Variance analysis is a form of input/output analysis.
d. A variance is the difference between standard prices and quantities on the one hand and actual
prices and quantities on the other hand.
i. Price variance is the difference between the actual quantity of inputs (ordinary refers to the
actual quantity of inputs purchases) at the actual price and the actual quantity of inputs at
the standard price.

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STANDARD COSTING AND VARIANCE ANALYSIS

ii. Quantity variance is the difference between the actual quantity of inputs used at the
standard price and the standard quantity of inputs allowed for the actual output at the
standard price. The standard quantity allowed for the actual output means the amount of
the input that should have been used to produce the actual output of the period. It is
computed by multiplying the standard quantity of input per unit of output by the actual
output.
8. STANDARD COST VARIANCE ANALYSIS
a. VARIABLE COSTS VARIANCES = Actual Costs (AQ*AP) – Standard Costs (SQ*SP)
i. Price/Rate/Spending Variance
1. Formula: AQ(AP-SP)
ii. Quantity/Usage/Efficiency Variance
1. Formula: SP(AQ-SQ)
iii. If using more than one material or labor, quantity variance will be divided into: Mix and
Yield Variances
1. Mix Variance = (AQ x SP) – Total Actual Quantity at Average Standard Price
(TAQASP)
2. Yield Variance = TAQASP – Standard Cost
b. FIXED OVERHEAD VARIANCES
i. Actual FOH – known at the end
ii. Budgeted FOH – determined from the standard
iii. Applied FOH – applied during production process
iv. Actual FOH – Budgeted FOH = FOH Spending (Budget) Variance
v. Budgeted FOH – Applied FOH = FOH Volume/Capacity/Denominator-level Variance
(Uncontrollable)
c. Factory Overhead Variance Analysis
i. One-Way Variance
1. Total Overhead Variance
a. Formula = Actual - Standard
ii. Two-Way Variance
1. Controllable Variance
a. Formula: Actual - BASH (Budgeted Allowed Based on Standard Hours)
2. Uncontrollable (Volume Variance)
a. Formula: BASH – Standard
iii. Three-Way Variance
1. Spending Variance
a. Formula: Actual – BAAH (Budgeted Allowed Based on Actual Hours)
2. Efficiency Variance
a. Formula: BAAH – BASH
3. Volume Variance
a. Formula: BASH – Standard
iv. Four-Way Variance
1. Variable Spending Variance
a. Formula: (AVR*AH) – (SVR*AH)
2. Fixed Spending Variance
a. Formula: (AFR X AH) – BFC
3. Efficiency Variance
a. Formula: BAAH – BASH
4. Volume Variance
a. Formula: BASH – Standard

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