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Definition and Explanation of Standard Cost:
A
standard cost is the predetermined cost of
manufacturing a single unit or a number of
product units during a specific period in the
immediate future. It is the planned cost of a
product under current and/or anticipated
operating conditions.
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Purposes
and Advantages of Standard Costing System:
Standard
costing systems help in planning operations and
gaining insights into the probable impact of
managerial decisions on cost levels and profits.
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Setting Standards:
Calculation
of a standard cost is based on physical standards,
two types of which are often discussed, a basic
standard and current standards.
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more.
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Materials Price Standard:
Usually two
standards are set for direct materials costs. These are:
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Materials Price Variance:
When actual price
paid for the materials is more or less than the standard
price of the materials, the difference is called direct
materials price variance.
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Materials Quantity
Standard:
Materials quantity standard is also called
materials usage standard. This standard is normally
developed from materials specifications prepared by the
departments of engineering (mechanical, electrical, or
chemical) or product design.
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Materials
Quantity Variance:
Materials quantity
variance is computed by comparing the actual quantity of
materials used with the standard quantity of material
allowed, both priced at standard cost. If actual quantity
used is more than the standard quantity allowed to produce a
particular number of units, the variance is called
unfavorable materials quantity variance.
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Direct
Labor Rate Standard:
The standard rate
per hour for direct labor includes not only wages earned but
also fringe benefits and other labor costs.
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more.
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Direct Labor Rate
Variance:
The
price variance for direct labor is commonly termed
as labor rate variance. This variance
measures any deviation from standard in the average
hourly rate paid to direct labor workers.
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more.
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Direct Labor Efficiency Standard:
Setting direct
labor time or efficiency standard means computing the labor
time required to complete a unit of product. The
establishment of labor time standard or labor efficiency
standard is a specialized function.
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Direct Labor
Efficiency Variance:
Labor efficiency
variance is calculated by comparing the actual hours worked
with standard hours allowed, both at the standard labor
rate. The standard hours allowed figure is determined by
multiplying the number of direct labor hours established or
predetermined to produce during the period for which the
variances are being computed.
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Factory Overhead
Cost Standards:
The standard
factory overhead rate is a predetermined rate that is
usually based on direct labor hours. Other bases may also be
used, e.g., direct labor dollars or machine hours.
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Overall or Net Factory Overhead Variance:
Jobs or processes
are charged with with costs on the basis of standard hours
allowed multiplied by the standard factory overhead rate.
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Overhead Controllable Variance:
The
controllable variance is the difference between
actual expenses incurred and the budget allowance
based on standard hours allowed for work performed.
This variance may be favorable or unfavorable.
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Overhead Volume Variance:
The Volume variance represents the difference between the
budget allowance and the standard expenses charged to work
in process.
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Overhead
Spending Variance:
Overhead spending variance is the difference
between actual expenses incurred and the budgeted
allowance based on actual hours worked.
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more.
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Overhead Idle Capacity Variance:
Overhead Idle
capacity variance is the difference between the budget
allowance based on actual hours worked and actual hours
worked multiplied by the standard overhead rate.
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Overhead
Efficiency Variance:
Overhead efficiency
variance is the difference between the actual hours worked
at standard rate and overhead charged to production
(standard hours allowed at standard rate).
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Variable
Overhead Efficiency Variance:
Variable overhead efficiency variance is the
difference between budget allowance based on actual
hours worked and budget allowance based on standard
hours allowed.
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more.
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Fixed
Overhead Efficiency Variance:
Fixed overhead
efficiency variance is calculated is as
follows:
Fixed
overhead efficiency variance = (Actual hours
× Fixed overhead rate) - (Standard hours
allowed × Fixed overhead rate)
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Mix and
Yield Variance:
Basically, the
establishment of a standard product cost requires
the determination of price and quantity standards.
In many industries, particularly of the process
type, materials mix and materials yield play
significant parts in the final product cost, in cost
reduction, and in profit improvement.
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Variance
Analysis Example:
A comprehensive example of the calculation
of materials, labor and overhead variances.
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here to read more.
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Standard Costing and Variance Analysis Formulas:
This is
a collection of variance formulas/equations
which can help you calculate variances for
direct materials, direct labor, and factory
overhead.
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more
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Management by Exception and Variance Analysis:
Variance analysis and performance reports are
important elements of
management by exception. Simply put, management by exception means that the manager's attention should be directed
toward those parts of the organization where plans are not working out for
reason or another.
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more
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International Uses of Standard Costing System:
Standard costing
system is used by companies worldwide. A comparative
study of cost accounting practices found that
three-fourth of the companies surveyed in the United
Kingdom, two-third of the companies surveyed in
Canada, and 40% of the companies in Japan used
standard costing system.
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more
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Advantages, Disadvantages, and Limitations of
Standard Costing:
The use of standard costs is a key element
in a
management by exception approach. If costs remain within the standards,
Managers can focus on other issues. When costs
fall significantly outside the standards,
managers are alerted that there may be problems
requiring attention.
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