Standard Cost Variance

Analysis
Standard
A measure of acceptable performance established by
management as a guide in making economic decisions.
A benchmark for measuring performance.
Quantity Standards
Indicate the quantity of raw materials or labor time
required to produce a unit of product or to provide
services.
Cost Standards
Indicate what the cost of the quantity standards
(materials quantity and labor time) should be.
Advantages of Using of Standard Costs
•Standard costs serves as a key element in the application of
management by exception, management by objectives and
responsibility accounting.
•Standard costs promote economy and efficiency among employees.
•The use of standard costs simplifies bookkeeping and costing
procedures.
VARIANCE
The difference between actual costs and standard costs. It should be
described either as favorable (when actual cost is less than
standard cost) or Unfavorable (when actual cost is greater than
standard cost.
Standard Costing Control Loop
1. Establish standards.
2. Measure actual performance.
3. Compare actual performance with standard.
4. Analyze the variance.
5. Investigate the variances that are material or significant in
amount.
6. Take correlative action when needed. This may include reversion
of standards.
Management by Exception
Only those variances that are material or significant in
amount, whether favorable or unfavorable, should be
investigated.
Two types of Standards
1. IDEAL STANDARDS
Attainable only under the best circumstances.
Also called Theoretical or Maximum Efficiency Standards, they require perfect performance: no
allowance for machine breakdown, work interruption, wastages, etc. 100% of the time.

2. PRACTICAL STANDARDS
Currently attainable standards
Tight, but attainable.
They allow for normal machine downtime and employee rest-periods, normal wastages, and work
interruptions.
This standards are attainable under normal though highly efficient operating conditions.
MATERIAL STANDARDS
Standard Price per Unit
Should reflect the final, delivered cost of materials, net of any discount and
inclusive of allowances for handling costs.

Standard Quantity per Unit

Should reflect the units of materials required to product each unit of product,
including allowances for unfavorable wastages, spoilage as well as other
normal inefficiencies.
Labor STANDARDS
Standard Rate per hour
Should include wages, fringe benefits and other labor costs.

Standard Time (Hours) per Unit

 The amount of labor time (or number of hours) required to produce each
unit of product, including allowances for employee rest periods, personal
needs of employees, and even normal machine downtime.
Variable Manufacturing Overhead Standards
The standards for variable manufacturing costs are
computed in the same manner as the standards for labor
costs are computed. The quantity and price factors used are
time (hours) and variable overhead rate per hour.
Fixed Manufacturing Overhead Standards
Fixed overhead costs are usually expressed in terms of total figures.
To set the standards rate for fixed overhead, the total fixed overhead
costs is computed using the practical (normal) capacity level as the
base.

*The standard time for overhead is usually expressed in terms of

direct labor standard time or machine hours.
STANDARDS v BUDGET
TOTAL BUGETED COSTS
The cost the should be incurred for budgeted production.

= Budgeted Production x Standard Cost per unit

TOTAL STANDARDS COSTS
The cost that should have been incurred for actual
production.

= Actual production x Standard Cost per Unit

VARIANCE ANALYSIS