Standard costing

Standard costing

1. standard cost = target/planned unit cost

   • types of standards
     • basic
       • to show trends over time, least useful
     • ideal
       • in perfect conditions, rarely achievable => adv motivational effect
     • attainable
       • efficient, but not perfect conditions
     • current
       • based on current levels, no incentive to improve
   • needed to prepare budgets
   • may be based on AC or MC

2. variance analysis

   • actual vs standard
   • sales variance
     • sales price
       • effect on profit of selling at a different price
         • (Actual price - Standard price) x Actual quantity sold
     • sales volume
       • effect on profit from the change in volume of sales
         • (Actual quantity sold - Budgeted quantity sold) x Standard margin
           • where standard margin is
             • standard profit per unit (AC)
             • standard contribution per unit (MC)
       • AQS > BQS => favourable variance, profit higher
     • total sales variance = Sales price variance + Sales volume variance
   • raw materials variance
     • materials price variance
       • (Actual quantity bought x Actual price) - (Actual quantity bought x Standard price)
       • standard price is usually set at mid-year standard, resulting in fav variances in beg of year, adv var later on
     • materials usage variance
       • (Actual quantity used x Standard price) - (Standard quantity for act prod x Standard price)
   • labour variances
     • labour rate variance
       • difference in rate paid
         • Actual hours x Actual rate - Actual hours x Standard rate
     • labour efficiency variance
       • difference in hours worked
         • Actual hours x Standard rate - Standard hours x Standard rate
   • variable overhead variances
     • variable overhead EXPENDITURE variance
       • var OH cost per hour changed
         • Actual hours x Actual rate - Actual hours x Standard rate
     • variable overhead EFFICIENCY variance
       • working fewer or more hours than expected for actual production
         • Actual hours x Standard rate - Stand. hours 4output x Stand. rate
     • if variance is due to change in unit output, impossible to calculate subvariances
   • fixed overhead variances
     • effect on profit of diff between actual and expected fixed overheads