STANDARD COSTING

 A costing method for the valuation of cost units

at an expected cost based upon the budget.
standard costing is closely linked to budgeting.
 A standard is a benchmark measurement of
resource usage.
 Standard costing is a system of accounting based
on pre-determined costs and revenue per unit.
 Variance analysis is performed by comparing the
actual cost and standard cost.
 Standard cost can be prepared using either
absorption costing or marginal costing.
 TYPES OF STANDARDS
 IDEAL STANDARD : a standard that assume perfect working
conditions
It can be used as a long – term organizational goal.
It may have an adverse motivational impact.
 ATTAINABLE STANDARD : It is based upon efficient (but not
perfect) level of operations.
Attainable standards must be based on tough but realistic
performance level.
They are used for budgeting and budgetary control.
 BASIC STANDARD : These are long – term standard which
remains.
They cannot be used to highlight current efficiency because
they are out of date.
 USES OF STANDARD COST
 Preparation of budget
 Stock valuation
 Budgetary control and variance analysis
 Decision making (pricing decision)
 Performance monitoring and evaluation.
PROBLEMS IN SETTING STANDARDS
 Deciding how to incorporate inflation into planned unit cost
 The cost of setting up and maintaining a system of
establishing standards
 Possible behavioural problems
 Deciding on the quality of materials and grade of labour to
be used.
 COST VARIANCES
 Material
 Labour
 Variable overhead
 Fixed overhead
Fixed overhead variance : fixed cost are constant in total terms hence total
cost is our starting point. The analysis of variance will be dependent on the
costing methodology. Do we use absorption costing or marginal costing?
Either is potentially applicable.

Absorption costing principles : the total fixed overhead variance will be

similar to the under/over absorption.
The total variance may be sub – analyzed into two
 Volume variance : if the company produces more or less units and hence
absorb more or less overhead than budgeted.
 Expenditure variance : if the company spends more or less fixed overhead
than budgeted.
Calculating variances associated with revenues
and reconciling budgeted profit or contribution
to actual contribution.

SALES VARIANCE
 The sales variance identify any changes
between the selling price and standard cost.
 Volume Variance = (AS – BS) * SPM
 Price Variance = (AP –SP) * AS
 Reconciliation of profit statement
Absorption costing operating statement
budgeted profit xxxxx
sales vol. variance xxxxx
standard profit xxxxx
sales price variance xxxxx
total xxxxx
cost variance xxxxx
actual profit XXXX
Marginal Costing (value cost units at the variable
cost)

Variances that remains Variances that

the same changes
• All variable cost var. Sales vol. variance now
valued at standard contribution margin
• Sales price variance
• Fixed overhead var.Fixed overhead vol. var.
(capacity & efficiency var)
disappears
Sales volume variance = (AS – BS) * SCM

Marginal costing operating statement

budgeted contribution xxxxx
sales variance xxxxx
total xxxxx
variable cost variance xxxxx
actual contribution xxxxx
budgeted fixed cost xxxxx
fixed variable o/head var. xxxxx
actual profit xxxxx
 ADVANCE VARIANCES
Specific application of variance analysis
 Planning and operational variance
 Material mix and yield variance

Planning and operational variance – key issues

 Original standards may become out of date
 Solution – revised the standard to reflect the
change.
 Normal Analysis

Original Actual
Standards standards
Revised standards

Planning operational
variances variances
Planning error operational factors
• Uncontrollable management actions
• Reconciling itemcontrollable
SQSP SQSP RSQRSP
usage

AQSP RSQSP AQRSP

price

AQAP RSQRSP AQAP

 MIX AND YIELD VARIANCES
 A sub –analysis of the material usage variance
into mix and yield component
 Applicable in a manufacturing environment
where:
1. Material inputs go into making the product (a
mix)
2. The material inputs are inter – changeable to
some degree (typically a process costing
environment)
SQSP

AQ(SM)SP

AQSP

AQAP