Standard Costing

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Definition of standard cost, target costing, kaizen costing and some mathematical problem with requirements.

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Standard Costing

  1. 1. Standard Costing
  2. 2. Standard Cost 1. Standard Costing refers to expected costs under anticipated conditions. 2. Standard cost systems allow for comparison of standard versus actual costs. 3. Differences are referred to as standard cost variances. 4. Variances should be investigated if significant.
  3. 3. Standard Costs and Budgets 1. Standard cost is the standard cost of a single unit. 2. Budgeted cost is the cost, at standard, of the total number of budgeted units.
  4. 4. Target Costing A target cost is the allowable amount of cost that can be incurred on a product and still earn the required profit from that product. It is a market driven cost that is computed before a product is produced.
  5. 5. Kaizen Costing Kaizen costing is the process of continual cost reduction that occurs after a product design has been completed and is now in production. It used during implementation of a product in market.
  6. 6. Cost Variances A cost variance is defined by CIMA as “the difference between a planned, budgeted, or standard cost and the actual cost incurred. The same comparisons may be made for revenues”.
  7. 7. Types of variances • Favorable Variance (F) • Adverse Variance (A) When actual results are better than expected results, we have Favorable Variance. When actual results are worse than expected results, we have Adverse Variance.
  8. 8. Material variances The material total variance “measures the difference between the standard material cost of the output produced and the actual material cost incurred”. Material Price variance Material Usage variance Materials cost variance
  9. 9. Worked example: Material Variances Product X has a standard material cost as follows. 10 kilogram of material Y at $10 per kilogram = $100 per unit of X. During period 4, 1,000 units of X were manufactured, using 11,700 kilograms of material Y which cost $98,631.
  10. 10. Worked example: Material Variances Requirements: a) The material total variances b) The material price variances c) The material usage variances
  11. 11. Labor Variances The calculate of labor variances is very similar to the calculation of material variances. The labor total variance measures the difference between the standard labor cost of the output produced and the actual labor cost incurred. Labor cost variance Labor rate variance Labor Efficiency variance
  12. 12. Worked example: Labor Variances The standard labor cost of product X is as follows. 2 hours of grade Z labor at $10 per hour = $20 per unit of product X. During period 4, 1,000 units of product X were made, and the labor cost of grade Z labor was $17,825 for 2,300 hours of work.
  13. 13. Worked example: Labor Variances Requirements: a) The Labor total variance b) The Labor rate variance c) The Labor Efficiency variance
  14. 14. Variable Overhead Variances Variable production overhead total variance measures the difference between the variable production overhead that should be used for actual output and the variable production overhead actually used”. Variable Overhead variance VO Expenditure variance VO Efficiency variance
  15. 15. Worked example: Variable overhead Variances suppose that the variable overhead cost of product X is as follows. 2 hours at $1.50 = $3 per unit During the latest period, 400 units of product X were made. The labor force worked 760 hours. The variable overhead cost was $1,672.
  16. 16. Worked example: Variable overhead Variances Requirements: a) The variable overhead total variance b) The variable overhead expenditure variance c) The variable overhead efficiency variance

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