STANDARD COSTING

Lecture # 18
STANDARD COST ACCOUNTING
 Primary purpose is to control costs and promote
efficiency.
 This system is used in conjunction with other
costing methods.
 It is based on predetermined rates.
 Any deviation can be quickly detected and
responsibility pinpointed so that appropriate
action may be taken.
STANDARD COST SYSTEMS
A standard cost variance
is the amount by which
an actual cost differs from
the standard cost.

Standard cost
Amount

Direct
Material
Direct Manufacturing
Labor Overhead

Type of Product Cost

STANDARD COST SYSTEMS
This variance is unfavorable because This variance is
the actual cost exceeds the standard favorable because
cost. the actual cost
is less than the
standard cost.

Standard cost
Amount

Direct
Material
Direct Manufacturing
Labor Overhead

Type of Product Cost

CONTROL OF COSTS
 Stability of costs does not necessarily indicate
efficiency.
 Comparison of actual costs to standard, rather than to
historical cost, will help control costs and promote
efficiency.
 Standard costs are usually determined for a period of
one year and are revised annually.
SETTING THE STANDARDS
 Analysis of Historical data
 Task Analysis
 A Combined Approach
TYPES OF STANDARDS
 A standard is a norm against which the actual
performance can be measured.
 Ideal standard / Perfection Standard – a standard that a
company sets in which they meet their maximum degree of
efficiency. Does not take inefficient conditions into
consideration.
 Attainable standard / Practical Standards– includes factors such
as lost time and normal waste and spoilage.
ESTABLISHING AND REVISING
STANDARD COSTS

Normal standards should be

set at levels that are currently
Should we use attainable with reasonable and
normal standards efficient effort.
or ideal standards?

Production Managerial
manager Accountant
Engineer
ESTABLISHING AND REVISING
STANDARD COSTS

I agree. Ideal standards, that are based on

perfection, are
unattainable and therefore discouraging to
most employees.

Human
Resources
Manager
STANDARD COST PROCEDURES
1. Standard costs are determined for the three elements of
cost – direct materials, direct labor, and factory
overhead.
2. The standard costs, the actual costs, and the variance
between the actual and standard costs are recorded in
appropriate accounts.
3. Significant variances are analyzed and investigated and
appropriate action is taken.
DETERMINING STANDARDS – MATERIALS AND LABOR

 Materials cost standard

 Determined based on the production engineering department’s
estimate of the amounts and types of materials needed.
 Cost is based on the purchasing agent’s knowledge of
suppliers’ prices.
 Labor cost standard
 Time-study engineers will establish the time necessary to
perform each operation.
 Human resource department will provide the prevailing wage
rates.
DETERMINING VARIANCES
 A variance is the difference between the actual and the
standard costs of materials, labor, and overhead.
 The differences may be in usage and in prices.
 Materials price variance
 Materials quantity variance
 Labor rate variance
 Labor efficiency variance
MATERIALS PRICE VARIANCE
 Indicates the difference between actual and
standard unit cost times the actual quantity of
materials used.
 (Actual unit price of materials – standard price of
materials) x actual quantity of materials used =
Materials Price Variance
MATERIALS QUANTITY VARIANCE
 Represents the difference between actual quantity
of materials used and standard quantity allowed
times the standard unit cost of materials.
 (Actual quantity of materials used – standard
quantity of materials allowed) x standard unit
price of material = Materials Quantity Variance
MATERIAL PRICE AND QUANTITY VARIANCES

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

MaterialsAQ(AP - SP) Materials quantity variance

price variance SP(AQ - SQ)
Labor rate variance Labor efficiency variance
AQ Variable
= Actualoverhead
Quantity Variable overhead
SP = Standard Price
spending variance efficiency variance
AP = Actual Price SQ = Standard Quantity
STANDARD COSTS AND VARIANCE ANALYSIS: AN
ILLUSTRATION
Zippy

Hanson
Hanson Inc.
Inc. has
has the
the following
following material
material
standard
standard to
to manufacture
manufacture one
one Zippy:
Zippy:
1.5
1.5 pounds
pounds per
per Zippy
Zippy at
at $4.00
$4.00 per
per pound
pound
Records
Records last
last week
week show
show 1,700
1,700 pounds
pounds ofof
material
material were
were purchased
purchased onon May
May 10
10 at
at aa
total
total cost
cost of
of $6,630.
$6,630. The
The material
material was
was used
used
to
to make
make 1,000
1,000 Zippies
Zippies that
that were
were completed
completed
on
on May
May 15.
15.
MATERIAL VARIANCES Zippy
QUESTION 1

The
The actual
actual price
price per
per pound
pound paid
paid for
for
the
the material
material was
was

a.
a. $4.00
$4.00 per
per pound.
pound.
b.
b. $4.10
$4.10 per
per pound.
pound.
c.
c. $3.90
$3.90 per
per pound.
pound.
d.
d. $6.63
$6.63 per
per pound.
pound.
MATERIAL VARIANCES Zippy
QUESTION 1

The
The actual
actual price
price per
per pound
pound paid
paid for
for
the
the material
material was
was

a.
a. $4.00
$4.00 per
per pound.
pound.
b.
b. $4.10
$4.10 per
per pound.
pound.
c.
c. $3.90
$3.90 per
per pound.
pound.
AP = $6,630 ÷ 1,700 lbs.
AP = $3.90 per lb.
d.
d. $6.63
$6.63 per
per pound.
pound.
MATERIAL VARIANCES Zippy
QUESTION 2

Hanson’s
Hanson’s material
material price
price variance
variance (MPV)
(MPV)
for
for the
the week
week was
was

a.
a. $170
$170 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
d.
d. $800
$800 favorable.
favorable.
MATERIAL VARIANCES Zippy
QUESTION 2

Hanson’s
Hanson’s material
material price
price variance
variance (MPV)
(MPV)
for
for the
the week
week was
was

a.
a. $170
$170 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
MPV = AQ(AP - SP)
MPV = 1,700 lbs. × ($3.90 - 4.00)
d.
d. $800
$800 favorable.
favorable.MPV = $170 favorable
MATERIAL VARIANCES Zippy
QUESTION 3

The
The standard
standard quantity
quantity of
of material
material that
that
should
should have
have been
been used
used toto produce
produce
1,000
1,000 Zippies
Zippies is
is

a.
a. 1,700
1,700 pounds.
pounds.
b.
b. 1,500
1,500 pounds.
pounds.
c.
c. 2,550
2,550 pounds.
pounds.
d.
d. 2,000
2,000 pounds.
pounds.
MATERIAL VARIANCES Zippy
QUESTION 3

The
The standard
standard quantity
quantity of
of material
material that
that
should
should have
have been
been used
used toto produce
produce
1,000
1,000 Zippies
Zippies is
is
SQ = 1,000 units × 1.5 lbs per unit
SQ = 1,500 lbs
a.
a. 1,700
1,700 pounds.
pounds.
b.
b. 1,500
1,500 pounds.
pounds.
c.
c. 2,550
2,550 pounds.
pounds.
d.
d. 2,000
2,000 pounds.
pounds.
MATERIAL VARIANCES Zippy
QUESTION 4

Hanson’s
Hanson’s material
material quantity
quantity variance
variance (MQV)
(MQV)
for
for the
the week
week was
was

a.
a. $170
$170 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
d.
d. $800
$800 favorable.
favorable.
MATERIAL VARIANCES Zippy
QUESTION 4

Hanson’s
Hanson’s material
material quantity
quantity variance
variance (MQV)
(MQV)
for
for the
the week
week was
was
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs - 1,500 lbs)
a.
a. $170
$170 unfavorable.
unfavorable.
MQV = $800 unfavorable

b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
d.
d. $800
$800 favorable.
favorable.
MATERIAL VARIANCES Zippy
SUMMARY

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price

1,700 lbs. 1,700 lbs. 1,500 lbs.

× × ×
$3.90 per lb. $4.00 per lb. $4.00 per lb.
$6,630 $ 6,800 $6,000

Price variance Quantity variance

$170 favorable $800 unfavorable
LABOR RATE VARIANCE
 Indicates the difference between actual and
standard labor rate times the actual hours worked.
 (Actual labor rate per hour – standard labor rate
per hour) x actual number of labor hours worked
= Labor Rate Variance
LABOR RATE AND EFFICIENCY VARIANCES

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate

Rate Variance Efficiency Variance

MaterialsAH(AR - SR) Materials quantity variance

price variance SR(AH - SH)
Labor rate variance Labor efficiency variance
AHVariable overhead
= Actual Hours Variable overhead
SR = Standard Rate
spending variance efficiency variance
AR = Actual Rate SH = Standard Hours
LABOR EFFICIENCY VARIANCE
 Represents the difference between actual quantity
of labor worked and standard quantity allowed
times the standard rate per hour.
 (Actual number of labor hours worked – standard
number of labor hours allowed) x standard labor
rate per hour = Labor Efficiency Variance
STANDARD COSTS AND VARIANCE ANALYSIS: AN
ILLUSTRATION
Zippy

Hanson
Hanson Inc.
Inc. has
has the
the following
following labor
labor
standard
standard to
to manufacture
manufacture one
one Zippy:
Zippy:
1.5
1.5 standard
standard hours
hours per
per Zippy
Zippy at
at $8.00
$8.00 per
per hour
hour
Payroll
Payroll records
records last
last week
week show
show 1,450
1,450
hours
hours were
were worked
worked at
at aa total
total labor
labor cost
cost
of
of $11,890
$11,890 to
to make
make 1,000
1,000 Zippies
Zippies that
that
were
were completed
completed onon May
May 15.
15.
LABOR VARIANCES Zippy
QUESTION 1

Hanson’s
Hanson’s actual
actual rate
rate (AR)
(AR) for
for labor
labor
for
for the
the week
week waswas

a.
a. $8.20
$8.20 per
per hour.
hour.
b.
b. $8.00
$8.00 per
per hour.
hour.
c.
c. $7.80
$7.80 per
per hour.
hour.
d.
d. $7.60
$7.60 per
per hour.
hour.
LABOR VARIANCES Zippy
QUESTION 1

Hanson’s
Hanson’s actual
actual rate
rate (AR)
(AR) for
for labor
labor
for
for the
the week
week waswas

a.
a. $8.20
$8.20 per
per hour.
hour. AR = $11,890 ÷ 1,450 hours
b.
b. $8.00
$8.00 per
per hour.
hour. AR = $8.20 per hour

c.
c. $7.80
$7.80 per
per hour.
hour.
d.
d. $7.60
$7.60 per
per hour.
hour.
LABOR VARIANCES Zippy
QUESTION 2

Hanson’s
Hanson’s labor
labor rate
rate variance
variance (LRV)
(LRV) for
for
the
the week
week was
was

a.
a. $290
$290 unfavorable.
unfavorable.
b.
b. $290
$290 favorable.
favorable.
c.
c. $400
$400 unfavorable.
unfavorable.
d.
d. $400
$400 favorable.
favorable.
LABOR VARIANCES Zippy
QUESTION 2

Hanson’s
Hanson’s labor
labor rate
rate variance
variance (LRV)
(LRV) for
for
the
the week
week was
was

a.
a. $290
$290 unfavorable.
unfavorable.
b.
b. $290
$290 favorable.
favorable.LRV = AH(AR - SR)
LRV = 1,450 hrs($8.20 - $8.00)
c.
c. $400
$400 unfavorable.
unfavorable.
LRV = $290 unfavorable

d.
d. $400
$400 favorable.
favorable.
LABOR VARIANCES Zippy
QUESTION 3

The
The standard
standard hours
hours (SH)
(SH) of
of labor
labor that
that
should
should have
have been
been worked
worked toto produce
produce
1,000
1,000 Zippies
Zippies is
is

a.
a. 1,550
1,550 hours.
hours.
b.
b. 1,500
1,500 hours.
hours.
c.
c. 1,700
1,700 hours.
hours.
d.
d. 1,800
1,800 hours.
hours.
LABOR VARIANCES Zippy
QUESTION 3

The
The standard
standard hours
hours (SH)
(SH) of
of labor
labor that
that
should
should have
have been
been worked
worked toto produce
produce
1,000
1,000 Zippies
Zippies is
is
SH = 1,000 units × 1.5 hours per unit
SH = 1,500 hours
a.
a. 1,550
1,550 hours.
hours.
b.
b. 1,500
1,500 hours.
hours.
c.
c. 1,700
1,700 hours.
hours.
d.
d. 1,800
1,800 hours.
hours.
LABOR VARIANCES Zippy
QUESTION 4

Hanson’s
Hanson’s labor
labor efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was
was

a.
a. $290
$290 unfavorable.
unfavorable.
b.
b. $290
$290 favorable.
favorable.
c.
c. $400
$400 unfavorable.
unfavorable.
d.
d. $400
$400 favorable.
favorable.
LABOR VARIANCES Zippy
QUESTION 4

Hanson’s
Hanson’s labor
labor efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was
was
LEV = SR(AH - SH)
a.
a. $290
$290 unfavorable.
unfavorable.
LEV = $8.00(1,450 hrs - 1,500 hrs)
LEV = $400 favorable
b.
b. $290
$290 favorable.
favorable.
c.
c. $400
$400 unfavorable.
unfavorable.
d.
d. $400
$400 favorable.
favorable.
LABOR VARIANCES Zippy
SUMMARY

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate

1,450 hours 1,450 hours 1,500 hours

× × ×
$8.20 per hour $8.00 per hour $8.00 per hour
$11,890 $11,600 $12,000

Rate variance Efficiency variance

$290 unfavorable $400 favorable
MATERIALS VARIANCES

Actual cost (Actual quantity
used x actual priced per unit)
Equivalent production x
Actual quantity used x
Standard per unit x
standard price per unit
Standard price

Materials Price Variance Materials Quantity Variance

Net Materials Variance

LABOR VARIANCES

Actual hours (Actual hours
worked x actual rate per hour)
Equivalent production x
Actual hours worked x
Standard hours per unit x
standard price per hour
Standard rate

Labor Rate Variance Labor Efficiency Variance

Net Labor Variance