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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 Variance
1. 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