Standard Costing-I
Week 9
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This chapter extends our study of management
control by explaining how standard costs are used
by managers to control costs. It demonstrates how to
compute direct materials, direct labor, and variable
overhead variances.
• Unit 9.1 Introduction to Standard Costing
• Unit 9.2 Setting Direct Materials Standards
• Unit 9.3 Setting Direct Labor Standards
• Unit 9.1 Introduction to Standard Costing
• Standards are benchmarks or “norms” for measuring performance.
• 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 a planned cost of a product under current or anticipate operating
conditions.
• Introduction to Standard Costing
• A standard cost has two components: a standard and a cost.
• A Standard is like norm and whatever is considered normal can
generally be accepted as standard.
• In industry, the standard to making a desk, assembly a radio,
refining a crude oil, or manufacturing cars are based on carefully
determined quantitative and qualitative measurements and
engineering methods.
In managerial accounting,
two types of standards are commonly used.
• Price standards
specify how much
should be paid for
each unit of the
input.
• Quantity standards
specify how much of an
input should be used to
make a product or
provide a service.
The Uses of Standard Costing
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Standard cost system can be used in connection with either Job order or
Process costing.
Standard costing is most rapidly adaptable to environments with stable
technology, homogeneous products manufactured.
Standard costing typically is found where process costing is used; examples
are manufacturers of petroleum and chemical products, building supplies,
steel and soft drinks.
Standard cost is also found where job order costing is used for homogeneous
units produced in batches on each job; examples are manufacturers of radios
and televisions, furniture, paper products and processed foods.
The Uses of Standard Costing
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2.
3.
4.
Standard costs aid in planning and controlling operation. They provide insight
into probable impacts of decisions on costs and profits.
Standard costs are used for:
Establishing budgets.
Controlling costs by motivating employees and measuring operating
efficiencies.
Simplifying costing procedures and expediting cost reports.
Assigning costs to materials, work in process, and finished goods inventories.
Unit 9.2 Setting Direct Materials Standards
• A standard is a benchmark for measuring
performance. Standards are set for both the quantity
and the cost of inputs needed to manufacture goods
or to provide services.
• Quantity standards indicate how much of an input,
such as labor time or raw materials, should be used
to make a product or provide a service.
• Cost standards indicate what the cost of the input
should be.
Standard Price
per Unit
Standard Quantity
per Unit
Final, delivered
cost of materials,
net of discounts.
Summarized in
a Bill of Materials.
Monetary Part of Standards
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
Price inflation can cause difficulties in setting realistic standard
prices.
• Unit 9.3 Setting Direct Labor Standards
Standard Rate
per Hour
Standard Hours
per Unit
Often a single
rate is used that reflects
the mix of wages earned.
Use time and
motion studies for
each labor operation.
Standard 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).
Similar problems when dealing with inflation to those described
for material prices can be met when setting labour standards.
The Standard Cost Card
A standard cost card for one unit of
product might look like this:
Inputs
Direct materials
Direct labor
Variable mfg. overhead
Total standard unit cost
A
B
AxB
Standard
Quantity
or Hours
Standard
Price
or Rate
Standard
Cost
per Unit
3.0 lbs.
2.5 hours
2.5 hours
$
$ 4.00 per lb.
14.00 per hour
3.00 per hour
$
12.00
35.00
7.50
54.50
• Companies establish standard to measure the
actual performance, for the material, labor and
overhead.
• After comparison, actual results with standard
data, the answer is called variance, which
could be favourable and unfavourable.
• Favourable variance shows the particular area
performs well, whereas, unfavourable shows in
efficiency of a particular area.
Q. Standard cost data for production of 100,000 units in a year
2020:
• Direct materials = 550,000 kgs. @ Rs. 9.00 per kg.
• Direct labor
= 200,000 hrs. @ Rs. 12.00 per hr.
• Actual production 12,000 units in the month of April 2020:
• Direct materials = 72,000 kgs. Used, total costing Rs. 684,000.
• Direct labor
= 21,600 hrs. used @ Rs. 13.00 per hr.
• Required:
• Calculate, Two variances of material, and two variances of labor.