Standard Costing

LECTURER : MAMOLIEHI MATSOBANE

SUBJECT : BA2
SEMESTER : JD 2022
 Definition
Standard Costing
A costing technique where pre-determined
standards are used for planning, control and
performance measurement.

A standard cost is a pre-determined unit cost.

 Standards
What is a standard ?

CIMA describes it as a “benchmark measurement

of resource usage or revenue or profit generation,
set in defined conditions”

Types of standard
▪ Basic Standard
▪ Ideal Standard
▪ Attainable Standard
▪ Current Standard
 Types of Standards
• Ideal standard: no allowance for inefficiencies such as losses
or machine downtime.
– almost always result in adverse variances
– can be demotivating for managers
• Attainable standard: assume efficient levels of operation, but
which include allowances for factors such as losses, waste and
machine downtime.
– adverse variances will reveal whether inefficiencies have
exceeded this unavoidable amount.
– more acceptable to managers
• Current standard:based on current performance
levels
– do not encourage any attempt to improve on current
levels of efficiency.
• Basic standard:set for the long term and remain
unchanged over a period of years.
– often retained as a minimum standard and can be
used for long term comparisons of performance.
 Test Your Understanding 1
Standards which remain unchanged over a
period of years are known as:
A Attainable standards
B Basic standards
C Ideal standards
D Current standards
 Test Your Understanding 2
Standards which assume efficient levels of
operation, but which includes allowances for
factors such as waste and machine downtime,
are known as:
A Attainable standards
B Basic standards
C Ideal standards
D Current standards
Standard Cost
Standard cost per unit underPer Unit
marginal Under
and absorption Marginal
costing

and Absorption Costing

Fixed and variable costs
of production are considered
to be product costs
Absorption costing
Non – manufacturing costs
are considered to be period
costs

Only variable costs of

production are considered to be
product costs
Marginal costing Fixed production costs & all
non - manufacturing costs
(both fixed as well as variable)
considered to be period costs hence
not considered in the
standard product costs
Example

Standard cost under Standard cost under

absorption costing marginal costing
$ (per unit) $ (per unit)
Direct material 5.0 5.0
Direct labour 3.0 3.0
Direct expenses 1.0 1.0
Prime cost 9.0 9.0
Factory Overheads
Fixed overhead 2.0 0.0
Variable overhead 6.0 6.0
Standard cost of production 17.0 15.0
Variance

Variance is the difference between the standard costs /

revenues and actual costs / revenues

i.e. deviation from standards

Purpose of variance analysis Cost control & performance evaluation

Variance may be favourable or adverse

Effect of variance (cost & sale variance)

When:
Variance is favourable
Actual cost < Standard Cost

When:
Variance is adverse
Actual cost > Standard Cost

When:
Variance is adverse
Actual sales < Standard sales

When:
Variance is favourable
Actual sales > Standard Sales
Sales Price variances Calculation
Sales Volume variances Calculation
 Example
The following data relate to product R for the latest period.
Budgeted sales revenue $250,000
Standard selling price per unit $12.50
Standard contribution per unit $5.00
Actual sales volume (units) 19,500
Actual sales revenue $257,400
Required: Calculate
i) The Sales price variance
ii) The Sales Volume Variance
Note: Merely calculating variance is not sufficient you need to
write whether it is favourable or adverse.
Test Your Understanding 3

Pick and Pack Plc wants to calculate the sales variances based on the information provided (both
under absorption costing and marginal costing)

Standard Actual
Sales (units) 1000 1,050
Sales price per unit $23 $21
Variable cost of sales per unit $16 $15
Contribution per unit $7 $6
Total fixed cost $2,000 $2,300
Calculate
1. Sales price variance

2. Sales volume variance

Continued…
Material variances calculations
 Example
The standard cost card for product F shows that each unit
requires 3 kg of material at a standard price of $9 per kg.
Last period, 200 units of F were produced and $5,518 was paid
for 620 kg of material that was bought and used.
Required: Calculate

i) Material Price Variance

ii) Material usage Variance
iii) Material Total Variance
TEST YOURUNDERSTANDING 4

Example
From the following information calculate material total, material
usage and material price variances

Standard Direct material (10kg @ $5 per kg)

Actual Direct material (9kg per unit @ $5.5 per kg)
Actual production 10,000 units
Labour variances Calculation
 Example
The standard cost card for product V shows that each
unit requires 3 hours of labour at a standard price of $9
per hour. Last period, 670 units of V were produced
and $17,765 was paid for 2,090 hours of labour.
Required: Calculate
i) The labour rate variance
ii) The labour efficiency variance
iii) Labour Total Variance
Test Your Understanding 5

LABOUR VARIANCES

Standard
Direct labour (2 hours @ $4.5 per hour)
Actual
Direct labour (1.50 hours per unit @ $5 per hour)
Actual production 10,000

Calculate :
1. Direct labour total variance
2. Direct labour rate variance
3. Direct labour efficiency variance
 Test your Understanding 6
According to the standard cost card, the standard labour cost is $5.
The actual hours worked were 15,000. If the labour efficiency
variance is $5,000 (A) how many standard hours were produced?
(a) 14,000
(b) 1,6000
(c) 10,000
(d) 20,000
Variable overhead variances
Calculations
 Example
The standard cost card for product P shows:
Variable production overheads 3 hours at $2 per hour $6 per
unit.
Last period, 670 units of P were produced and actual results
were: Variable production overheads 2,090 hours $5,434.
Required: Calculate
i) The Variable overhead Expenditure variance
ii) The Variable overhead Efficiency variance
iii) The Variable overhead Total variance
Test your Understanding 7

The following is the standard cost card of Cool Ltd:

$
Direct material (15kg @ $50 per kg.) 750
Direct labour (4.5 hours @ $150 per hour) 675
Variable overhead ($26 per labour hour) 117
Total standard variable cost 1,542

The actual results are as follows:

Actual production (units) 12,000
$
Direct material (16kg per unit @ 51 per kg) 9,792,000
Direct labour (4 hours per unit @ $152 per hour) 7,296,000
Variable overhead ($27 per labour hour per unit) 1,296,000
Total actual variable cost 18,384,000
With the help of this information calculate:
❑ Variable overhead expenditure variance
❑ Variable overhead efficiency variance
❑ Total variable overhead variance

Continued…
Fixed overhead variances
Calculations
Calculations cont’d
 Example
PQ operates a standard costing system for its only product. The
standard cost card is as follows:
Direct materials (4 kg at $2 per kg) $8.00
Direct labour (4 hours at $4 per hour) $16.00
Variable overhead (4 hours at $3 per hour) $12.00
Fixed overhead (4 hours at $5 per hour) $20.00
Fixed overhead costs are budgeted at $120,000 per annum
arising at a constant rate during the year. Budgeted monthly
production is 500 units.
Actual production during period 3 was 600 units, with actual
fixed overhead costs incurred being $9,800 and actual hours
worked being 1,970.
 Required
Calculate :
i) Fixed Overhead Expenditure Variance
ii) Fixed Overhead Volume Variance
iii) Fixed Overhead Efficiency Variance
iv) Fixed Overhead Capacity Variance
Test Your Understanding 8

Budgeted / standard Actual

Sales 1,050 units 950 units
Production level 1,100 units 1,000 units
Direct material 3kg @ $20 3.5 kg @ $18
Direct labour 5.5 hours @ $7.5 5 hours @ $8
Variable overheads $1.5 per labour hour $2 per labour hour
Fixed overheads $181,500 $215,000

Calculate
❑ Fixed overhead expenditure variances
❑ Fixed overhead volume variance
❑ Fixed overhead efficiency variance
❑ Fixed overhead capacity variance
❑ Fixed overhead total variance

Continued…
Explain possible causes of the variances in (1)

Material variance
Direct materials price variance Direct materials usage variance
Fluctuations in market prices Quality of material
Purchasing non-standard lots Effective use of material
Change in quantity discounts Waste / spoilage
Taking advantage of a cash discount Misappropriation / theft
Increase in or additional transport costs for Total quality management (TQM)
a quick delivery

Labour variance
Labour rate variances Labour efficiency variance
Changes in basic wage rates Insufficient training
Incomplete supervision
New workers being paid different rates from Workers’ dissatisfaction
standard rates
Different rates being paid to workers employed to Bad working conditions
meet seasonal demands or to do urgent work Use of defective machinery & equipment
Describe the inter-relationships between the variances in (1)

Purchase of poor quality material

Favourable (F) material price (A) usage variance & may be (A)
variance labour / OH efficiency variance

Higher quality, higher prices & poorer Higher waste & spoilage & also may
quality, lower prices require more labour hours

Hiring highly - skilled workers

Adverse (A) (F) efficiency variances

labour rate (labour & O/H) &
variance material usage
variance

Skilled labour paid Skilled labour performs

at higher wage jobs more efficiently &
rate effectively
Adverse (A) & Favourable (F)