Standard Costs - University of North Florida

Chapter 43
Managerial Accounting
Standard Costs
Prepared by Diane Tanner
University of North Florida
Standard Costs
 What is a standard cost?
 The ‘cost’ that management believes should be
incurred to produce one unit of a good or service
under anticipated conditions
 Primary benefit
 Allows for comparison of standard versus actual
 Differences are flagged for investigation if
 Reduces the cost of accounting for product costs
during an accounting period
• A budgeted cost is the cost of the total
number of budgeted units
• Can be a standard cost or not
How are Standard Costs Developed?
 Materials
Formulas or recipes
Price lists provided by suppliers
Analyses of past data
 Labor
Time and motion studies conducted by industrial
Union contracts
Analyses of past data
 Overhead
Various sources
Primarily past data
Ideal Versus Attainable Standards
Two attitudes about developing standard costs:
Ideal standards
 Assumption that no obstacles to the production
process will be encountered
 Called ‘perfection’ standards
Attainable Standards
 Assumption that there will be occasional
problems in the production process
 Such as equipment failure, labor turnover,
and materials defects
Components of Direct Standard Costs
Standard Price is the budgeted price of the
material (per RM unit), labor (per hour)
Standard Quantity is the budgeted quantity of
material (in RM quantities), labor (in hours)
Determining a Material Standard Cost
 Units for materials
 Based on the unit in which the company orders its raw materials
 E.g., pounds, feet, tons, ounces, kilograms
 Prices for materials
 Based on the price quoted to buy each unit of materials
 E.g., $1 per pound, or $2 per square foot
 Standard cost of materials
Standard quantity
Standard cost
of materials
Standard price per raw
material denomination
Determining a Labor Standard Cost
 Units for labor
 Based on hours because that is how direct labor wages are
 Minutes must be converted to hours
 Prices for labor
 Based on the hourly wage rate
 Fringes are included
 Standard cost of labor
Standard hours
Standard price per labor
Standard cost
allowed per unit
of labor
Determining an Overhead Standard Cost
 Not quantitatively determinable using a price and quantity
calculation because some overhead costs are fixed and
some are variable
 Often separated into fixed and variable components
 Based on manufacturing overhead rates
 Variable overhead
 The unit variable overhead cost a company expects one unit of
product to cost to produce
 Fixed overhead
 The total cost a company expects all units of product produced
to cost divided by the number of units produced
Investigation of Standard Cost Variances
 Variances are not a clear sign of good or bad
– If actual cost is greater than the standard cost, the variance
is unfavorable.
– If the actual cost is less than the standard cost, the variance
is favorable.
 Indicate a potential problem
 Must be investigated if material in amount
 Management by exception
 Many reasonable explanations
Breaking a variance into two components
allows us to isolate the cause of the variance
and is called variance analysis.
The End