2. Outline
• The usage of standard costing
• Setting of standard cost and types of
standard
• Calculation of variance:
– Direct material
– Direct labor
– Factory overhead
2
3. Standard Costing
The cost that has been pre-determined after
considering other factors.
Those are estimated costs which are considered to
be ideal for each of the cost component ( direct
material, direct labor and factory overhead ).
The standard cost system enable the management
to determine how much a product should cost.
3
4. The usage of standard costing
Planning and controlling:
Compare actual cost & budgeted cost
Improve performance
Increase efficiency
Product costing:
Provide readily available unit cost
information
4
5. Setting of Standard Cost
Involve joint efforts on:
Analysis on the historical cost experience:
Provide initial guidelines for standard setting
Engineering studies:
Determine the most efficient way to operate
Input from operating personnel:
Accountable for meeting the standards
5
6. Types of Standards
Ideal standard
Maximum efficiency
Can be achieved if everything operates perfectly.
Normal standard
Currently attainable standard
Allowance is made for breakdown, interruptions etc..
6
7. Variance Analysis
Variances are the difference between the actual
manufacturing cost and the standard cost at the
actual level of production.
The significance of the variance for each
element in manufacturing cost needs further
analysis to determine the corrective actions.
7
10. Standard Cost
♣
The expected cost per unit product
Illustration 1:
The followings are the standard cost for each unit
(bottle) of peanut butter produced by Syarikat Sedap
Selalu :
10
12. If Syarikat Sedap Selalu produces 10,000 bottles of
peanut butter, the expected total cost would be:
Direct material
10,000 x 0.99
9,900
Direct labor
10,000 x 0.11
1,100
Factory overhead
10,000 x 0.17
1,700
Total cost
12,700
12
13. Calculation of variance
Cost element
Actual cost
Standard cost
Direct material
9,500
9,900
400 (F)
Direct labor
1,050
1,100
50 (F)
Factory overhead
2,000
1,700
300 (U)
F = (Favorable)
Variance
U = (Unfavorable)
13
14. Direct Material Variance
To measure the difference between the actual
cost and the standard cost of direct materials.
Direct Material Price Variance
Direct Material Usage (Quantity) Variance
14
15. 1. Direct material price variance
(Standard Price x Actual Quantity) - (Actual Price x Actual Quantity)
Simplified to be:
Actual Quantity (Standard Price – Actual Price)
AQ ( SP – AP )
15
16. 2. Direct material usage (quantity)
variance
(Standard Price x Standard Quantity) - (Standard Price x Actual Quantity)
Simplified to be:
Standard Price (Standard Quantity – Actual Quantity)
SP ( SQ – AQ )
16
17. Actual Price x Actual Qty
Std Price x Actual Qty
Price Variance
Std Price x Std Qty
Usage Variance
Direct material variance
17
18. Illustration 2
The followings are the actual price and quantity for direct
material used by the company in producing 10,000 bottles of
peanut butter:
Actual Price
Actual Quantity
Peanut
RM2.70/kg
1,400kg
Butter
RM2.505/kg 1,200kg
Sugar
RM1.18/kg
2,300kg
18
19. Direct material price variance:
AQ ( SP – AP )
Peanut:
1,400 (2.70 – 2.80)
= 140 (F)
Butter:
1,200 (2.505 – 2.70)
=
234 (F)
Sugar:
2,300 (1.18 – 1.20)
=
46 (F)
420 (F)
19
20. SP ( AQ – SQ )
Direct material usage variance:
Peanut:
2.80 (1,400 – 1,500)
= 280 (F)
Butter:
2.70 (1,200 – 1,000)
=
540 (U)
Sugar:
1.20 (2,300 – 2,500)
=
240 (F)
20 (U)
Therefore ,
Total direct material variance
=
420 (F) + 20 (U)
=
400 (F)
20
21. Direct Labor Variance
Measures the differences between the actual cost
and the cost that suppose to be paid to the labor.
Direct Labor Rate Variance
Direct Labor Efficiency Variance
21
22. 1. Direct Labor Rate Variance
(Actual Hour x Standard Rate) - (Actual Hour x Actual Rate)
Simplified to be:
Actual Hour ( Standard Rate – Actual Rate )
AH ( SR – AR )
22
23. 2. Direct Labor Efficiency Variance
(Standard Rate x Standard Hour) - (Standard Rate x Actual Hour)
Simplified to be:
Standard Rate ( Standard Hour – Actual Hour )
SR ( SH – AH )
23
24. Actual Hour x Actual Rate
Std Hour x Actual Rate
Rate Variance
Std Hour x Std Rate
Efficiency Variance
Direct Labor Variance
24
25. Illustration 3:
The followings are actual rate and labor hour in the
production of 10,000 bottles of peanut butter:
Actual labor rate
Actual labor hour
Machine operator
RM3.90/hour
190 hours
Packaging
RM2.81/hour
110 hours
25
27. Direct Labor Efficiency Variance:
Machine Operator: 4.00 (190 – 200)
Packaging:
3.00 (110 – 100)
SR ( AH – SH )
=
40 (F)
= 30 (U)
10 (F)
Therefore,
total direct labor variance:
= 40 (M) + 10 (M)
=
50 (M)
27
28. Factory Overhead Variance
Measures the differences between the actual cost
and the supposed related cost of factory overhead.
Variable Factory Overhead Controllable Variance
Fixed Factory Overhead Volume Variance
28
29. Western Rider Inc.
Factory Overhead Cost Budget
For the Month Ended June 30, 2003
Direct Labor Hours
4,000
4,500
5,000
80%
90%
100%
% of Normal Capacity
Total variable costs
Rs.18,000
Variable costs per hour Rs.
Total fixed costs
Rs.12,000
Fixed costs per hour
Rs.
Total costs per hour
Rs. 6.00
Rs.
Rs.14,400
Rs.16,200
3.60
Rs. 3.60Rs.3.60
Rs.12,000
Rs.12,000
3.00
6.60
Rs. 2.67
Rs. 2.40
Rs. 6.27
Overhead is applied at Rs.6.00 per direct
Overhead is applied at Rs.6.00 per direct
labor hour based on estimated 5,000 total
labor hour based on estimated 5,000 total
hours.
hours.
29
30. Western Rider Inc.
Factory Overhead Variances
For the Month Ended June 30, 2003
Actual Hour
4,000
Revised
Budget
Actual
Costs
Variance
Variable costs
Rs.14,400 Rs.10,400Rs.4,000F
(Rs.3.60 x 4,000 hours)
Fixed costs
9,600
12,000 2,400 U
(Rs.2.40 x 4,000 hours)
Total costs
Rs.24,000 Rs.22,400Rs.1,600F
Factory overhead applied at
Factory overhead applied at
Rs.6.00 per direct labor hour
Rs.6.00 per direct labor hour
based on 4,000 actual hours.
based on 4,000 actual hours.
Actual factory
Actual factory
overhead per
overhead per
general ledger.
general ledger.
30
31. Western Rider Inc.
Factory Overhead Variances
For the Month Ended June 30, 2003
Revised
Budget
Actual
Costs
Variance
Variable costs
Rs.14,400 Rs.10,400Rs.4,000 F
(Rs.3.60 x 4,000 hours)
Fixed costs
9,600
12,000 2,400 U
(Rs.2.40 x 4,000 hours)
Total costs
Rs.24,000 Rs.22,400Rs.1,600F
Controllable variance
Controllable variance
based on variable costs
based on variable costs
31
32. Western Rider Inc.
Factory Overhead Variances
For the Month Ended June 30, 2003
Revised
Budget
Actual
Costs
Variance
Variable costs
Rs.14,400 Rs.10,400Rs.4,000F
(Rs.3.60 x 4,000 hours)
Fixed costs
9,600
12,000 2,400 U
(Rs.2.40 x 4,000 hours)
Total costs
Rs.24,000 Rs.22,400Rs.1,600F
Volume variance
Volume variance
based on fixed costs
based on fixed costs
32
33. Variable Factory Overhead Controllable Variance
For the Month Ended June 30, 2003
Actual variable overhead
Budgeted variable overhead
(4,000 actual hours x Rs.3.60)
Favorable controllable variance
Controllable variance
Controllable variance
measures the efficiency
measures the efficiency
of using variable
of using variable
overhead resources.
overhead resources.
Rs.10,400
14,400
Rs.(4,000)
A revised
A revised
budget
budget
based on
based on
the actual
the actual
hours used
hours used
33
34. Fixed Factory Overhead Volume Variance
For the Month Ended June 30, 2003
Budgeted volume (direct labor hours) 5,000
Actual volume (direct labor hours)
4,000
Capacity not used (direct labor hours) 1,000
Standard fixed rate
x Rs.2.40
Unfavorable volume variance
Rs.2,400
Volume variance measures
Volume variance measures
the utilization of fixed
the utilization of fixed
overhead resources.
overhead resources.
Rate based
Rate based
on 5,000
on 5,000
direct labor
direct labor
hours.
hours.
34
