STANDARD

COSTING

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? The word standard means a criterion (principle, measure).
? A standard is an approved or acceptable level of performance
? Standards are not universal they depend upon individuals
setting the standard
A standard figure is one against which one can measure an
actual figure to see the deviation.

STANDARD
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 Appropriateness
SETTIN
G Attainability
STANDA
• Expected standards
RDS
• Practical standards
• Ideal standards
 Standard costs are budgeted
costs to
 manufacture a single unit of product, or
STANDA  perform a single service
RDS To develop standards, identify
 material and labor types, quantities, and
prices
 overhead types and behavior
 STANDARD
RATE
 The word Standard Rate is the numerical proportion
prevailing between two sets of things.
 A firm has three ‘standard of things’ available on which to
base standard rates: Money, Physical inputs and Physical
output

Money
Money/output, e.g.
Re./unit of Money/output, e.g.
materials Re./unit of
product
Physical Physical
Inputs Input/output, e.g. labour/machine
hrs./unit of product Outputs
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Standard cost is ‘a predetermined cost which is compared in
advance of production on the basis of specifications of all the
factors affecting costs and used in standard costing.’
In other words, Standard costing is a system where preset standards
are used in the estimation of costs. This can provide more detailed
variance analysis information for managers.
It involves the setting of detailed predetermined standard product
costs, so that a business can accurately estimate, based on the
standards set, what the cost of a product or service should be.

STANDARD COST
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Standard costing is a technique which is used in many industries, where
production is of repetitive nature.
Standard costing is developed due to the shortcomings of historical costing.

CIMA, London, defines standard costing ‘Benchmark measurement of

resource usage or revenue or profit generation, set in defined conditions’.
Standard cost as defined by CIMA Official Terminology
Setting a standard involves the establishment of two components for each cost
type, the volume required and the unit cost attached to that volume.

STANDARD COSTING
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The management evaluates the performance of a
company by comparing it with some
predetermined measures

Therefore, it can be used as a process of measuring

and correcting actual performance to ensure that
the plans are properly set and implemented

STANDARD COSTING
SYSTEM
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 Materials used
 Types
 Quality
 Quantity
MATERI  Price
AL From
STANDA  Product specifications, observation,
inquiry
RDS  Bill of materials

Balance cost, quality, and

projected sales price
Labor Standards
 Labor used
 Types
 Production, setup, cleanup, and rework

 Quantity
 Cost
 Include wages, payroll taxes, and fringe benefits

 From
 Industrial engineering studies including methods-time

measurement (MTM), time and motion studies, and

historical data
 Operations flow document
Overhead Standards
 Variable and fixed manufacturing overhead
 Estimated level of activity
 Estimated costs
 Predetermined factory overhead application
rates
To establish control,
?To provide information regarding deviation from the plan
?To indicate what is attainable by efficient working
?To highlight those areas where attainable efficiency is not
achieved
To set standards for various elements of cost,

To fix responsibility
To make budgetary control more effective

OBJECTIVES OF
STANDARD COSTING
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 Set the predetermined standards for sales margin and
Set production costs

Collect Collect the information about the actual performance

Compare the actual performance with the standards to arrive

Compare at the variance
Analyze the variances and ascertaining the causes of
Analyze variance

Take Take corrective action to avoid adverse variance

Adjust the budget in order to make the standards more

Adjust realistic

PROCEDURES OF
STANDARD COSTING
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Valuation
• Assigning the standard cost to the actual output
Planning
• Evaluating performance by determining how
efficiently the current operations are being carried
out
Controlling
• Use the current standards to estimate future sales
volume and future costs

FUNCTIONS OF
STANDARD COSTING
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 ↳ Standards can quickly become out of
date
↳ Factors may affect a variance for
which a particular manager is
accountable
↳ but over which the manager has no
LIMITATION control
S OF ↳ creating clear lines of demarcation
STANDARD ↳ between the areas of responsibility
COSTING ↳ of various managers may be difficult
↳ may create incentives for managers
↳ and employees to act in undesirable
ways

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VARIA
NCE

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 valuation of performance
by a means of variances,
whose timely reporting
VARIA should maximise the
opportunity for managerial
NCE action’
ANALY Variance analysis as defined by CIMA
Official Terminology

SIS

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 A variance is the difference
between the standards and
the actual performance
VARIA When the actual results are
NCE better than the expected
ANALY results, there will be a
favourable variance (F)
SIS If the actual results are
worse than the expected
results, there will be an
adverse variance (A/UF)

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Functional Measurement Result Basis Controllabilit
Basis Basis y Basis

CLASSIFICATION OF
VARIANCES
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FUNCTIONAL
BASIS
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MEASUREMENT
BASIS
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 Absolute variance:
Difference between the
standard cost and the
actual cost in terms of
MEASURE money is known as
MENT absolute variance.
Relative variance:
BASIS difference is expressed as
a percentage of the
standard cost, it is known
as relative variance.

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RESULT BASIS
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COST
VARIANCE

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Cost variance = Price variance + Quantity variance

Cost variance is the difference between the standard cost and the Actual
cost

Price variance = (standard price – actual price)*Actual quantity

A price variance reflects the extent of the profit change resulting from the
change in activity level

COST VARIANCE
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 Material cost
THREE variance
TYPES Labour cost
OF COST variance
VARIAN
CE Variable overheads
variance

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MATERIAL AND LABOUR
VARIANCE

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 It is the difference between the
standard direct material cost of
MATER the actual production volume and
the actual cost of direct materials.
IAL Material cost variance =

COST (Standard quantity of input for actual

production × SP) –

VARIA (Actual quantity of input × AP)

NCE Material cost variance =

Material price variance +
Material usage variance

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 This is that portion of the material
cost variance which is due to the
MATER difference between the standard
price specified and the actual price
IAL paid.
PRICE If the actual price is higher than
VARIA the standard price, it would result
NCE in adverse price variance and if the
actual price is lower than standard
price, the result is favorable price
variance.

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 Material Price Variance (MPV)
Material= PxQ

AP x AQ SP x AQ SP x SQ

MPV
Total Variance
What
was What should
(SP - AP) x AQ *
paid have been
paid
*
Favorable or unfavorable
MATERI Calculate Material
AL Price Variance at
PRICE
VARIAN point of purchase, or
CE when materials used
 This is that portion of material cost
variance which is due to the difference
between the standard quantity of actual
production and the actual quantity used.
MATERI
AL Material usage variance
USAGE
VARIAN = (Standard quantity – actual quantity) x
CE standard price

= (Standard quantity for actual production –

actual quantity production) x standard price

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 MATERIAL COST
VARIANCE
SP of material= 3, AP material = 3.2, AQ material =2400, If company produces
Standard 1000 units it will required standard 4000 units of material (4000/1000=
Standard quantity per unit=4). The company has produced 800 units.
 Material price variance
= (standard price – actual price)*actual quantity
= ($3 - $3.2)*2400
= $480 (A)
 Material usage variance
= (Standard quantity – actual quantity)* standard price
= (Standard quantity for actual production – actual quantity production) *
standard price

4000 units
= (4*800 – 2400)*$3
1000 units
25 = $2400 (F)
MATERIAL COST
VARIANCE
 Material price variance $480 (A)
 Material usage variance $2400 (F)
 Total Material cost variance $1920 (F)

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 This is that portion of usage variance
which is due to the difference
between the standard and actual
MATER composition of mixture.

IAL Material Mixture Variance =

Standard price [Actual quantity in
MIX standard mix (i.e. RSQ) – Actual
VARIA quantity]
Revised Standard quantity =
NCE Total actual quantity consumed ×

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 This variance arises due to the difference
between the standard yield specified and actual
yield obtained.

MATER Material yield variance =

IAL [(Standard loss in terms of actual input) – (Actual

YIELD
loss on actual input)] × (Average standard price)

VARIA Material yield variance =

NCE Material usage variance – Material mix variance

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MATER
IAL When a product is produced from a mixture of

two or more kinds of material, there may arise
material sub-usage variance.
SUB-  Material sub-usage variance =

USAGE
 (Standard Quantity – Revised Standard
Quantity) × Standard Price
It can be seen from this formula that material
VARIA

sub- usage variance is the analysis of variance in
basic standard quantity of each material.

NCE

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LABOUR VARIANCES LABOUR=
RXH
 FORMULAS OF LABOUR
VARIANCES
 Labour rate variance = (standard price – actual price) x actual
hours
 Labour Idle Time Variance = [(actual hrs.- idle time) x standard
price] – (actual hrs. x standard price)
 Labour Gang variance = [revised(actual hrs.- idle time) x standard
price] – [(actual hrs.- idle time) x standard price]
 Labour Yield variance = [revised(actual hrs.- idle time) x standard
price x (actual output/standard output)] - [revised(actual hrs.- idle
time) x standard price]
 Labour sub-efficiency variance = (standard hrs. x standard
price)
- [revised(actual hrs.- idle time) x standard price x (actual
output/standard output)]
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Labour Usage variance = standard price
x (standard hrs. – actual hrs.)

Labour efficiency variance = (standard

hrs. x standard price)- [revised(actual
hrs.- idle time) x standard price]

LABOUR COST VARIANCE =

(STANDARD HRS. X STANDARD PRICE) –
(ACTUAL HRS. X ACTUAL PRICE)
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 This is that portion of the
labour cost variance which is
caused by the use of actual
LABOU wage rate other than
R RATE predetermined.
VARIA Labour rate variance =
NCE (SR-AR)xAH
(Standard rate-Actual rate)*Actual
hours

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 It is the difference between
LABOU the standard time and the
actual time spent
R multiplied by standard
EFFICI wage rate.
ENCY
VARIA Labour efficiency variance =
NCE (Standard hours-Actual
hours)*Standard rate

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 It is that portion of labour cost variance
which is due to the abnormal idle time
of workers.
LABOU
R IDLE While calculating labour efficiency

TIME variance, abnormal idle time is

deducted from the actual time spent to

VARIA determine the real efficiency of the

workers.

NCE
Idle time variance = Abnormal idle
time × Standard wage rate

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 This variance arises due to the
change in the composition or mix
of a group of workers as
compared to the standard
LABOUR composition or mix.
Labour gang variance = (Revised
GANG standard time – Idle time) ×
Standard rate per hour
VARIANC
E Here, RST= Total actual time x

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LABOUR YIELD
VARIANCE
 It is computed on the basis of the increase or
decrease in the actual yield or output when
compared to the standard.

 Labour Yield Variance = [Actual yield – Standard

yield in units expected from the actual hours
worked] × Standard labour cost per unit

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 Labour Usage Variance is
the measure of difference
LABOU between standard hours
and actual
R hours,multiplied by the
standard rate.
USAGE
VARIA Labour Usage variance
NCE = (standard hrs. – actual
hrs.) x standard price

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 Labor cost variance can be defined
as the deviation of the actual direct
wages paid from the direct wages

LABOU specified for the standard output.

R COST Labour Cost Variance=

VARIAN
CE
(Standard time x Standard price)-
(Actual time x Actual price)

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OVERHEADS
VARIANCE

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 Standard Variable
Overheads=
VARIABL Actual Production *
E Standard Rate
PRODUC
TION Standard Rate = Budgeted
OVERHE Variable
Overheads/Budgeted
AD Production

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II. FIXED PRODUCTION
OVERHEAD
Variances

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II. FIXED PRODUCTION
OVERHEAD
Fixed Production Overhead Cost or Total Variance

Total Variance =( Actual Production * Standard Recovery

Rate)- Actual Overheads

Fixed Production Overhead Expenditure Variance

Expenditure Variance=( Standard Recovery rate

• * Budgeted Production)- Actual Overhead

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FIXED
PRODUCTIO
N Volume Variance =
OVERHEAD Standard Fixed Overhead- Budgeted fixed Overhead

VOLUME
VARIANCE

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 Salesvariances an b calculated in two ways:
A. The turnover or the volume method
B. The profit or the margin method

SALES
= P*V
(PRICE*VOLUME)
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A. THE TURNOVER OR THE VALUE
METHOD

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 Value Variance= Actual Sales- Budgeted Sales
 Price Variance= Actual Sales – Standard Sales
 Volume Variance= Standard Sales- Budgeted
Sales
 Quantity Variance= Revised Standard Sales –
Budgeted Sales
 Mixed Variance= Standard Sales – Revised
Standard Sales

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B. PROFIT
METHOD
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 Process industries

APPLICA Service industries

TION OF
STANDA Engineering industries
RD
COSTIN Textile industries
G
Extraction industries

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 ADVANTAGES OF STANDARD
COSTING
• Formulation of price and production policies
• Comparison and analysis of data
• Management by exception
• Delegation of authority and responsibility
• Cost consciousness
• Better capacity to anticipate
• Better economy, efficiency, and productivity
• Preparation of periodical financial statements
• Facilities budgeting
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 High degree of technical
LIMITA skill

TIONS Segregation of variances

OF into controllable and non-
controllable factors
STAND
ARD Duplication in recording,

COSTIN
G Either too strict or too
liberal.

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“THANK YOU”

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