Standard costing

H&P CH:10
CIMA Official Terminology
 A standard cost is a 'planned UNIT COST of a
product, component or service'.

Standard costing is the preparation of standard costs to value

inventories/cost products and/or to use in variance analysis, a
key management control tool.

A standard cost card shows full details of the standard cost of each product.
iPhone 7 COST SUMMARY

Apple iPhone 7 32GB (A1778)

Cost Summary
A. Direct Material Costs $219.80
(Component Costs)
B. Conversion Costs $5.00
(Assembly / Insertion / Test Costs)
Total Cost (A + B ) $224.80
(Direct materials and manufacturing)
Source: IHS Markit
Itemized Manufacturer Name Manufacturer Part Description Total
Components Number Cost
Apps Processor
System-on-Chip TSMC (Apple) APLW24 Apple A10, Quad-Core 64-Bit $26.90
ARM Based CPU, Hexa-Core
GPU, 16nm FinFET
Itemized Manufacturer Name Manufacturer Part Description Total
Components Number Cost
Baseband / RF / $33.90
PA
Baseband INTEL CORP PMB9943 Baseband Processor, Multi-
Mode
RF Transceiver INTEL CORP PMB5750 RF Transceiver, Multi-Mode
(Qty:2)
RF Front End
Antenna Switch TDK CORP D5313 Antenna Switch Module, w/
Module Filters
Antenna Switch TDK CORP D5325 Antenna Switch Module, w/
Module Filters
Envelope Tracking QORVO INC 81003M Envelope Tracking IC
FEM BROADCOM LTD DFI620 FEM
(AVAGO)
FEM SKYWORKS SKY13702-20 FEM
FEM SKYWORKS SKY13703-21 FEM
PAM BROADCOM LTD AFEM-8050 PAM
(AVAGO)
PAM BROADCOM LTD AFEM-8060 PAM
(AVAGO)
PAM QORVO INC RF6110 PAM
PAM SKYWORKS SKY77359 PAM
Itemized Manufacturer Name Manufacturer Part Description Total
Components Number Cost
Battery
HUIZHOU DESAY Li-Polymer, 3.8V, 1960mAh $2.50
Itemized Manufacturer Name Manufacturer Part Description Total
Components Number Cost
BT / GNSS / $8.00
WLAN
BT / WLAN UNIVERSAL SCIENTIFIC S39S00201 BT / WLAN Module
INDUSTRIAL
GNSS BROADCOM LTD BCM47734IUBG GNSS Receiver
Front End BT / WLAN & GNSS Front
End

Itemized Manufacturer Name Manufacturer Part Description Total

Components Number Cost
Cameras $19.90
Front FaceTime 7MP BSI w/ Fixed Lens
Rear 12MP BSI, w/ AutoFocus, &
Optical Image Stabilization

Itemized Manufacturer Name Manufacturer Part Description Total

Components Number Cost
Display $43.00
Display / Touchscreen 4.7" 1334x750 LTPS IPS LCD,
Module w/ In-Cell Touch
Itemized Manufacturer Name Manufacturer Part Description Total
Components Number Cost
Electromechanica $16.70
ls
Taptic Engine Taptic Engine
Other Electro- Antennas, Connectors,
Mechanicals Microphones, PCBs, Speakers,
etc.

Itemized Manufacturer Name Manufacturer Part Description Total

Components Number Cost
Glue Logic $1.30
LATTICE ICE5LP4K-SWG36I FPGA - iCE40 Ultra, 40nm
SEMICONDUCTOR

Itemized Manufacturer Name Manufacturer Part Description Total

Components Number Cost
Mechanicals $18.20
Enclosure Enclosure, Main, Bottom -
Machined Aluminum
Other Mechanicals Hardware, Labels, Insulators,
Shielding, vents, etc.
Itemized Manufacturer Name Manufacturer Part Description Total
Components Number Cost
Memory $16.40
NAND SK HYNIX H23QEG8VG2ACS- 32GB NAND
BC
SDRAM SAMSUNG K3RG1G10CM- 2GB LPDDR4 PoP
SEMICONDUCTOR YGCH

Itemized Manufacturer Name Manufacturer Part Description Total

Components Number Cost
Power $7.20
Management
PMIC - Main DIALOG 338S00225 PMIC - Main
SEMICONDUCTOR
PMIC - RF INTEL PMB6826 PMIC - RF
Others Other PMICs, Transistors,
Diodes, etc.

Itemized Manufacturer Name Manufacturer Part Description Total

Components Number Cost
User Interface $14.00
Audio codec CIRRUS LOGIC CS42L71 Audio Codec
Audio Amplifier CIRRUS LOGIC 338S00220 Audio Amplifier (Qty:3)
NFC NXP PN67V NFC Controller
Others Interface Ics, discretes,
passives, etc.
Sensors
Barometer BOSCH SENSORTEC Barometric Pressure Sensor
GMBH
e-compass ALPS Electronic Compass
Other Sensors Accelerometer, Gyroscope,
Touch ID Fingerprint sensor,
ALS/Proximity sensor, etc.
Box Contents $11.80
Lightning Cable USB to Lightning
Lightning to 3.5mm Audio Adapter, Lightning to
Audio Adapter 3.5mm Jack
Headset w/ Lightning Headset, Stereo, w/ Lightning
Connector Connector
Charger Wall to USB Type A Jack, 5V,
1A
Boxes and Literatures

Itemized Components Total Cost

1. Apps Processor $26.90
2. Baseband / RF / PA $33.90
3.Battery $2.50
4. BT / GNSS / WLAN $8.00
5. Cameras $19.90
6. Display $43.00
7. Electromechanicals $16.70
8. Glue Logic $1.30
9. Mechanicals $18.20
10. Memory $16.40
11. Power Management $7.20
12. User Interface $14.00
13. Box Contents $11.80
Total Cost (Direct Material Costs) $219.80
Example: The standard variable cost of product ZX11
is set out below.
STANDARD COST CARD - PRODUCT ZX11
Direct MATERIALS $ $
Material X – 3 kg at $4 per kg 12
Material Y – 9 litres at $2 per litre 18
30
Direct LABOUR
Grade A – 6 hours at $7 per hour 42
Grade B – 8 hours at $8 per hour 64
106
Standard DIRECT COST 136
Variable production overhead – 14 hours at $0.50 per hour 7
Standard variable COST OF PRODUCTION 143
Fixed production overhead – 14 hours at $4.50 per hour 63
Standard FULL PRODUCTION COST 206
Administration and marketing overhead 15
Standard COST OF SALE 221
Standard profit 20
Standard SALES PRICE 241
 Notice: how the Total standard cost is built up
from standards for each cost element:
 Standard QUANTITIES of materials at standard
PRICES,
 Standard quantities of labour time at standard RATES
 and so on….,

1.Quantities
2.Prices
3.Rates
 It is therefore determined by management's estimates
of the following.
 The expected Prices of materials, labour and expenses
 Efficiency levels in the use of materials and labour
 Budgeted overhead(OH) costs and budgeted volumes
(VOL) of activity
 Example 1
BB Company makes one product, the Jex.

Two types of labour are involved in the preparation of a Jex, skilled and semi-skilled. Skilled labour is
paid $10 per hour and semi-skilled $5 per hour. Twice as many skilled labour hours as semi-skilled
labour hours are needed to produce a Jex, four semi-skilled labour hours being needed.

A Jex is made up of three different direct materials. Seven kilograms of direct material A, four litres
of direct material B and three metres of direct material C are needed. Direct material A costs $1
per kilogram, direct material B $2 per litre and direct material C $3 per metre.

Variable production overheads are incurred at BB Company at the rate of $2.50 per direct labour
(skilled) hour.

A system of absorption costing is in operation at BB Company. The basis of absorption is direct

labour (skilled) hours. For the forthcoming accounting period, budgeted fixed production
overheads are $250,000 and budgeted production of the Jex is 5,000 units.

Administration, selling and distribution overheads are added to products at the rate of $10 per
unit.

A mark-up of 25% is made on the Jex.

Required : Using the above information complete the standard cost card for the Jex.
 STANDARD COST CARD – PRODUCT Jex
Direct materials $ $
A 7 kgs × $1 7
B 4 litres × $2 8
C 3 m × $3 9
24
Direct labour
Skilled – 8(SEM 4 x2) × $10 80
Semi-skilled – 4 × $5 20
100
Standard direct cost 124
Variable production overhead 8 hrs × $2.50 20
Standard variable cost of production 144
Fixed production overhead 8 hrs × $6.25 (see Working) 50
Standard full production cost 194
Administration, selling and distribution overhead 10
Standard cost of sale 204
Standard profit 25% × 204 21
Standard sales price 255
Working: Overhead absorption rate
= $250,000/5,000 x 8 hrs = $6.25 per skilled labour hour
Example 2
Product P has the following standard cost card based on
production and sales levels of 15,000 units.
Production cost
Variable 32
Fixed 45.5
Selling cost
Variable 7.5
Fixed 29
Profit 5
Selling price 119
In the month of June, production was 16,000 units and sales were
15,000 units. Assuming all other factors remained the same, what
was the profit for June?
Profit =$120,500; Budgeted units =15,000;
Actual units = 16,000
 $
Revenue 15,000 × $119.00 1,785,000
Cost of sales:
Fixed production cost 15,000 × $45.50 682,500
Fixed selling cost 15,000 × $29.00 435,000
Variable production cost 16,000 × $32.00 512,000
Variable selling cost 15,000 × $7.50 112,500
1,742,000
Less: Closing inventory 1,000 × ($32 + $45.50) 77,500
1,664,500
Profit 120,500
Note: You may have struggled with the question above. It can be confusing when you
first see it, but in standard costing, fixed costs are often given as a value per unit.
This doesn't mean that the cost should be multiplied by the actual number of units. To
obtain the value for the total fixed cost you must multiply the fixed cost per unit by the
budgeted number of units.
Preparation of standards
 Standard costs may be used in both Absorption costing
and in Marginal costing systems.
 As we noted earlier, the standard cost of a product (or
service) is made up of a number of different standards, one
for each cost element, each of which has to be set by
management

Standards for each cost element are

made up of a monetary component and a
resources requirement component.
 Standard direct material prices:
 Direct material prices will be estimated by the purchasing
department from their knowledge of the following.
 Purchase contracts already agreed
 Pricing discussions with regular suppliers
 The forecast movement of prices in the market
 The availability of bulk purchase discounts
 Standard direct labour rates:
 Direct labour rates per hour will be set by discussion with the
personnel department and by reference to the payroll and
to any agreements on pay rises with trade union representatives
of the employees.
 A separate hourly rate or weekly wage will be set for each different
labour grade/type of employee.
 An average hourly rate will be applied for each grade (even though
individual rates of pay may vary according to age and experience).
 To estimate the MATERIALS required to make each
product (material USAGE) and also the LABOUR
hours required (labour EFFICIENCY), technical
specifications must be prepared for each product by
production experts (either in the production
department or the work study department).
Problems in setting standards
1. Deciding how to incorporate inflation into planned unit costs
2. Agreeing on a performance standard (attainable or ideal)
3. Deciding on the quality of materials to be used (a better quality
of material will cost more, but perhaps reduce material wastage)
4. Estimating materials prices where seasonal price variations or
bulk purchase discounts may be significant
5. Finding sufficient time to construct accurate standards as standard
setting can be a time-consuming process
6. Incurring the cost of setting up and maintaining a system for
establishing standards
7. Dealing with possible behavioural problems, managers
responsible for the achievement of standards possibly resisting the
use of a standard costing control system for fear of being blamed
for any adverse variances
Using standard costing today
 Standard costing can be applied in service industries, where
a measurable cost unit can be established.
 For example it is possible to set a standard cost for the
following.

1. Transport cost per tonne-mile

2. Laundry cost per hotel room night
3. Cost per chargeable consultant hour
4. Cost per equivalent full time student
5. Cost per medical examination