Standard Costing

Standard a benchmark set by management in aid of

performance measurement. In manufacturing companies,
standards are classified into two categories:
QUANTITY Standard indicates the quantity of raw
materials or labor time required to produce a unit of product.
This is normally expressed per unit of output.
COST Standard indicates what the cost of the quantity
standard should be. This is normally expressed per unit of
input.

BUDGETS vs. STANDARDS

Standard Cost Variance Analysis
VARIANCE = Actual Costs (AC)
Standard Costs
AC > SC (SC) Variance (debit
: Unfavorable
balance)
AC < SC : Favorable Variance (credit
balance)
Material Variance
Actual Material Cost = Actual Quantity (AQ) x Actual
Price (AP)
Standard Material Cost = Standard Quantity (SQ) x
Standard Price (SP)
Analysis:
Materials Cost Variance
Quantity Variance: Q x SP = Difference in Quantity
x SP
Price Variance: Q x P = AQ x Difference in
Prices
 Labor Variance
Actual Labor Cost = Actual Hours (AH) x Actual Rate
(AR)
Standard Labor Cost = Standard Hours (SH) x Standard
Rate (SR)
Analysis:
Materials Cost Variance
Effieciency Variance: H x SR = Difference in Hours
x SR
Rate Variance: H x R = AH x Difference in
Rate
FACTORY OVERHEAD (FOH) Variance = (Actual FOH Cost)
(Standard FOH Cost)
Materials Price, Mix and Yield Variances
Mix and yield variances are normally calculated
whenever the production process involves combining
several materials to produce a unit of product.
Material Variance = Actual Material Cost Standard
Material Cost
Analysis:
Price Variance: A Q x P
Mix Variance: ( AQ x SP ) TAQASP
Yield Variance: TAQASP Standard Cost

Legend:
AQ = Actual Quantity
P = Difference in Prices
SP = Standard Price
TAQASP = Total Actual Quantity at Average Standard
Price

Note: mix and yield variances may also apply to direct

labor.
IMPORTANT NOTES: Material and Labor Variance
Analysis
1. Material Price Variance is also known as:
Material spending variance, material money variance,
material rate variance
2. Material Quantity Variance is also known as:
Material usage variance, material efficiency variance
3. Material usage variance is a quantity variance
while material price usage variance is a price
variance.
4. Labor Rate Variance is also known as:
Labor price variance, labor spending variance, labor
money variance
5. Labor Efficiency Variance is also known as:
Labor hours variance, labor usage variance, labor time
variance
6. Labor efficiency variance excludes idle time spent
in the production. If any, idle time is separately
explained through the Idle Time Variance, which
is regarded as unfavorable.
IDLE TIME Variance = Idle time x Standard
Labor Rate
FACTORY OVERHEAD (FOH) VARIANCE ANALYSIS
IMPORTANT NOTES: Factory Overhead Variance
Analysis
1. SFOH = Standard Hours x Standard FOH Rate. Under standard costing,
SFOH is likewise referred to as the applied factory overhead.
2. If AFOH is more than SFOH, then factory overhead is said to be under
applied, hence, under application indicates an unfavorable variance,
while over application indicates a favorable variance.
3. The term capacity variance is also used to mean the volume
variance.
4. Budget Variance = Actual Cost Budgeted Cost = Actual FOH
Budgeted FOH (BFOH)
If BFOH is adjusted based on standard hours (BASH), then budget
variance is controllable variance.
If BFOH is adjusted based on actual hours (BAAH), then budget
variance is spending variance.
5. Volume variance is actually the fixed volume variance, there is no
such thing as a variable volume variance or variable capacity variance.
6. Under the 3-way approach, the FOH efficiency variance is actually the
variable efficiency variance. Other than BAAH BASH, variable FOH
efficiency variance may also be computed based on : Change in hours x
variable FOH rate = (AH-SH) VR
7. FOH variances may be classified into:
Variable FOH Variances = Variable Spending Variance +
(variable)Efficiency Variance
FFOH Variance = Fixed Spending Variance + (fixed) Volume Variance
8. Manufacturing Efficiency Variance incorporates the effect of both FOH
Uses of Standard Costs
1. Cost Control
2. Pricing decisions
3. Costing of inventories
4. Motivation and performance appraisal
5. Cost awareness and cost reduction
6. Preparation of budgets
7. Preparation of cost reports
8. Management by exception

Standard Costing Procedures

1. Establishing standards
2. Measuring actual performance
3. Comparing actual performance with standards
4. Taking corrective actions when needed
5. Revising standards when needed