STANDARD COSTINGWEEK 2

LEARNING OBJECTIVES

Define standard cost Explain how standard are set Compute the standard cost of actual

or equivalent units produced Compute standard cost variances for

materials, labor and FOH

STANDARD COST

Is the predetermined cost of manufacturing a single unit or a specific quantity of product under current or anticipated operating conditions

( Carter and Usry, 2002)

Standard Costs are used for: Established budgets Controlling costs by motivating

employee and measuring operating efficiency

Simplifying costing procedures and expediting cost reports

Assigning cost to materials, work in progress and finished good in inventory

Establish contract bids and setting sales price

Determining Standard Cost Variance1. Material Standard and Variance:

a. Material purchase price varianceb. Material price usage variancec. Material inventory varianced. Material quantity (or usage) variance

2. Labor Standard and Variancea. Labor rate (wage or cost) varianceb. Labor efficiency variance

3. Factory Overhead Standard and Variancea. Overall or net FOH Varianceb. Two-variance methodc. Three-variance methodd. Four-variance method

1. Material Standard and Variance

a. Material purchase price variance =

( Qt x C.act ) – ( Qt x C. st ) or (C.act – C.st) Qt

C.act > C.st = Unfavorable C.act < C.st = Favorable

b. Material price usage variance =

( Qt. used x C.act ) – ( Qt. used x C. st )or (C.act – C.st) Qt.used

C.act > C.st = Unfavorable C.act < C.st = Favorable

c. Material inventory variance =

( Qt. purchased x C.st ) – ( Qt. used x C. st )or (Qt. purchased – Qt.used) C.st

Qt. purchased > Qt. used = Unfavorable Qt. purchased < Qt. used = Favorable

d. Material quantity (or usage) variance =

( Qt. used x C.st ) – ( Qt. st x C. st )or (Qt.used – Qt.st) C.st

Qt. used > Qt. st = Unfavorable Qt. used < Qt. st = Favorable

2. Labor Standard and Variance

a. Labor rate (wage or cost) variance =

( H. act x R. act ) - ( H. act x R. st ) or ( R.act – R.st) H.act

R. act > R. st = Unfavorable R. act < R. st = Favorable

b. Labor efficiency variance =

( H. act x R. st ) – ( H. st x R. st ) or(H.act – H.st) R.st

H. act > H. st = UnfavorableH. act < H. st = Favorable

3. Factory Overhead Standard and Variance

a. Overall or net FOH Variance =

FOH. act – FOH. st

FOH. act > FOH. st = Unfavorable FOH. Act < FOH. st = Favorable

b. Two-variance method1. Controllable Variance =

FOH.act – ( FOH.var +FOH.fx)

FOH.act > ( FOH.var +FOH.fx) = UnfavorableFOH.act < ( FOH.var +FOH.fx) = Favorable

2. Volume Variance =

( FOH.var +FOH.fx) – FOH.wip.st

( FOH.var +FOH.fx) > FOH.wip.st = UF ( FOH.var +FOH.fx) < FOH.wip.st = F

Controllable variance + Volume variance = Overall or net FOH Variance

3. Three – variance Methodsa. Spending Variance =

FOH.act – (FOH.var1+FOH.fx)

FOH.act > (FOH.var1+FOH.fx) = UF FOH.act < (FOH.var1+FOH.fx) = F

Notes: FOH.var1 = on actual hours

b. Variable Efficiency Variance =

(FOH.var1+FOH.fx) - ( FOH.var +FOH.fx)

(FOH.var1+FOH.fx) > ( FOH.var +FOH.fx) = UF (FOH.var1+FOH.fx) < ( FOH.var +FOH.fx) = F

c. Volume Variance

Spending var + Variable efficiency var + Volume var = Overall FOH

variance

4. Four-Variance Methoda. Fixed efficiency variance

(H.act x FOH.fx.r) – (H.st x FOH.fx.r)

(H.act x FOH.fx.r) > (H.st x FOH.fx.r)= UF (H.act x FOH.fx.r) < (H.st x FOH.fx.r) = F

FOH.fx.r = Fixed FOH rate

b. Idle Capacity Variance =

(FOH.var1+FOH.fx) – (H.act x FOH.r)

(FOH.var1+FOH.fx) > (H.act x FOH.r) = UF(FOH.var1+FOH.fx) < (H.act x FOH.r) = F

c. Spending Varianced. Variable efficiency Variance

Fixed Efficiency Var + Idle Cap Var + Spending Var + Variable eff.var = Overall FOH var

REFERENCE

Carter,W & Usry, M, 2002, Cost Accounting, 13th Edition, Thompson Learning