STANDARD COSTING: Setting of computed standards and analysis of variance

What, Why, and How of Standard Costing

A standard cost is the predetermined norm for direct materials, direct labor, and overhead assigned to cost products or services.

It is the budgeted or forecasted 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.

Two components: standard and cost

Standard – like a benchmark or norm used for planning and controlling purposes.

- a model against which actual results are compared and evaluated just like a budget.

- whatever is considered normal can generally be accepted as a standard.

Cost – a resource sacrificed or foregone to achieve a particular objective

- the amount paid or cash equivalent value exchanged for goods or services that will give current or future benefits to the business enterprise.

Purposes of Standard Costs:

1. Establishing budgets.

2. Controlling costs and motivating and measuring efficiencies.

3. Promoting possible cost reduction.

4. Simplifying costing procedures and expediting cost results.

5. Assigning costs to materials, work in process, and finished goods inventories.

Forming the basis for establishing bids and contracts and for setting sales prices.

Advantages of Standard Costs

1. Standards serve as measurements which call attention to cost variations. Therefore executives and supervisors become cost conscious as they become aware of results.

2. This cost-consciousness tends to reduce costs and encourages economies in all phases of the business.

3. The use of standard costs for accounting purposes simplifies costing procedures through the reduction of clerical labor and expense.

4. Reports can be systematized to present complete information regarding standards, actual costs, and variances.

Comparison of Budgets and Standards

SIMILARITIES:

1. Both standards and budgets aim at the same objective – managerial control – it is often felt that the two are the same and cannot function independently.

2. Both budgets and standard costs make it possible to prepare reports which compare actual costs and predetermined.

3. With the use of standard costs, the preparation of budgets for any volume and mixture of products is more reliably and speedily accomplished, and a budget becomes a summary of standards for items of cost.

DIFFERENCES:

BUDGET STANDARD COSTINGThe budget, as a statement of expected costs, acts as a guidepost which keeps the business on a charted course.

Standards do not tell what costs are expected to be, but rather what they will be if certain performances are achieved.

A budget emphasizes the volume of business and the cost level which should be maintained if the firm is to operate as desired.

Standards stress the level to which costs should be reduced. If costs reach this level, profits will be increased.

SETTING STANDARDS

Standards must be set for a definite period of time to be effective in the control and analysis of costs. Standards are usually computed for a six- or twelve-month period, although a longer period is sometimes used.

The success of a standard cost system depends on the reliability, accuracy, and acceptance of the standards. Extreme care must be taken to be sure that all factors are considered in the establishment of standards.

Methods:

1. Sampling of averages derived from the records of previous records.2. Engineering department makes a careful study of products and operations, using

appropriate sampling techniques and including participation by those individuals whose performance is to be measured by the standards.

The Master Standard Cost Card

The Master Standard Cost Card shows the itemized cost of each material part, labor operation, and overhead cost. It is supported by individual cards that indicate how the standard cost was compiled and computed.

STANDARD COST CARD FOR PRODUCT MC Date of Standard Aug. 1, 2010

DIRECT MATRIALS

ITEM QTYCODE

STANDARD UNIT PRICE

DEPARTMENTTOTALS1 2 3 4 5

2-234 43-671 244-480 25-361 8

P 3.00/pc 10.00/doz 5.00/pc 1.50/pc

P12P20

P10 12

TOTAL DIRECT MATERIAL COST P 54.00

DIRECT LABOR

OPERATION STDNUMBER HRS

STANDARD RATE/HR

DEPARTMENT1 2 3 4 5

1-477 32-581 11.53-218 45-420 2.5

P 6.00 6.40 6.30 6.20

P18.00 73.60

P25.20P15.50

TOTAL DIRECT LABOR COST P132.30

FACTORY OVERHEAD

STANDARDHOURS

RATE/DL HOUR

DEPARTMENT1 2 3 4 5

14.5 4 2.5

P 1.80 2.00 1.50

P26.10P 8.00

P3.75TOTAL FACTORY OVERHEAD P 37.85TOTAL MANUFACTURING COST PER UNIT P 224.15

Materials Purchase Price Variance – occurs if the actual price paid is more or less than the standard price

EXAMPLE: Assuming 5,000 pieces of item 4-480 on the standard cost card for MC are purchased at a unit price of P4.97.

PIECES X UNIT COST AMOUNT

Actual quantity purchased 5,000 4.97 actual P24,850

Actual quantity purchased 5,000 5.00 standard 25,000

Materials purchase price variance 5,000 P (.03) P (150) fav.