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1. Chapter 8Chapter 8
Standard Cost AccountingStandard Cost Accounting
Materials, Labor, and FactoryMaterials, Labor, and Factory
OverheadOverhead

2. Learning ObjectivesLearning Objectives
LO1LO1 Describe the different standards usedDescribe the different standards used inin
determining standard costs.determining standard costs.
LO2LO2 Use the proper procedures for recordingUse the proper procedures for recording
standard costs for materials and labor.standard costs for materials and labor.
LO3LO3 Explain the meaning of variances and howExplain the meaning of variances and how
they are analyzed.they are analyzed.
LO4LO4 Prepare journal entries to record andPrepare journal entries to record and
dispose of variances.dispose of variances.

3. Learning ObjectivesLearning Objectives
Lo5Lo5 Perform an in-depth variancePerform an in-depth variance
analysis.analysis.
LO6LO6 Recognize the specific features of aRecognize the specific features of a
standard cost system.standard cost system.
LO7LO7 Account for standard costs in aAccount for standard costs in a
departmentalized factory.departmentalized factory.
LO8LO8 Recognize the difference betweenRecognize the difference between
actual and applied overhead.actual and applied overhead.

4. Learning ObjectivesLearning Objectives
LO9LO9 Compute the controllable variance and theCompute the controllable variance and the
volume variance for the two-variancevolume variance for the two-variance
method of analysis.method of analysis.
LO10LO10 Compute the spending, efficiency, budget,Compute the spending, efficiency, budget,
and volume variances for the four-varianceand volume variances for the four-variance
method of analysis.method of analysis.
LO11LO11 Compute the budget, capacity, andCompute the budget, capacity, and
efficiency variances for the three-varianceefficiency variances for the three-variance
method of analysis.method of analysis.

5. Standard CostStandard Cost
AccountingAccounting
 Primary purpose is to control costs andPrimary purpose is to control costs and
promote efficiency.promote efficiency.
 This system is used in conjunction withThis system is used in conjunction with
other costing methods.other costing methods.
 It is based on predetermined rates.It is based on predetermined rates.
 Any deviation can be quickly detectedAny deviation can be quickly detected
and responsibility pinpointed so thatand responsibility pinpointed so that
appropriate action may be taken.appropriate action may be taken.

6. Control of CostsControl of Costs
 Stability of costs does not necessarilyStability of costs does not necessarily
indicate efficiency.indicate efficiency.
 Comparison of actual costs to standard,Comparison of actual costs to standard,
rather than to historical cost, will helprather than to historical cost, will help
control costs and promote efficiency.control costs and promote efficiency.
 Standard costs are usually determined for aStandard costs are usually determined for a
period of one year and are revised annually.period of one year and are revised annually.

7. Types of StandardsTypes of Standards
 A standard is a norm against which theA standard is a norm against which the
actual performance can be measured.actual performance can be measured.
 Ideal standard – a standard that a company setsIdeal standard – a standard that a company sets
in which they meet their maximum degree ofin which they meet their maximum degree of
efficiency. Does not take inefficient conditionsefficiency. Does not take inefficient conditions
into consideration.into consideration.
 Attainable standard – includes factors such asAttainable standard – includes factors such as
lost time and normal waste and spoilage.lost time and normal waste and spoilage.

8. Standard CostStandard Cost
ProceduresProcedures
1.1. Standard costs are determined for the threeStandard costs are determined for the three
elements of cost – direct materials, directelements of cost – direct materials, direct
labor, and factory overhead.labor, and factory overhead.
2.2. The standard costs, the actual costs, and theThe standard costs, the actual costs, and the
variance between the actual and standardvariance between the actual and standard
costs are recorded in appropriate accounts.costs are recorded in appropriate accounts.
3.3. Significant variances are analyzed andSignificant variances are analyzed and
investigated and appropriate action is taken.investigated and appropriate action is taken.

9. Determining StandardsDetermining Standards
– Materials and Labor– Materials and Labor
 Materials cost standardMaterials cost standard
 Determined based on the productionDetermined based on the production
engineering department’s estimate of theengineering department’s estimate of the
amounts and types of materials needed.amounts and types of materials needed.
 Cost is based on the purchasing agent’sCost is based on the purchasing agent’s
knowledge of suppliers’ prices.knowledge of suppliers’ prices.
 Labor cost standardLabor cost standard
 Time-study engineers will establish the timeTime-study engineers will establish the time
necessary to perform each operation.necessary to perform each operation.
 Human resource department will provide theHuman resource department will provide the
prevailing wage rates.prevailing wage rates.

10. Recording StandardRecording Standard
CostsCosts
 Standard costs, actual costs, and theStandard costs, actual costs, and the
variances are recorded in variousvariances are recorded in various
journals and transferred to the generaljournals and transferred to the general
ledger.ledger.
 The entries may occur more frequently,The entries may occur more frequently,
depending upon the capabilities of thedepending upon the capabilities of the
accounting information system.accounting information system.

11. Determining VariancesDetermining Variances
 AA variancevariance is the difference between the actualis the difference between the actual
and the standard costs of materials, labor, andand the standard costs of materials, labor, and
overhead.overhead.
 The differences may be in usage and in prices.The differences may be in usage and in prices.
 Materials price varianceMaterials price variance
 Materials quantity varianceMaterials quantity variance
 Labor rate varianceLabor rate variance
 Labor efficiency varianceLabor efficiency variance

12. Materials PriceMaterials Price
VarianceVariance
 Indicates the difference between actualIndicates the difference between actual
and standard unit cost times the actualand standard unit cost times the actual
quantity of materials used.quantity of materials used.
 (Actual unit price of materials – standard(Actual unit price of materials – standard
price of materials) x actual quantity ofprice of materials) x actual quantity of
materials used = Materials Pricematerials used = Materials Price
VarianceVariance

13. Materials QuantityMaterials Quantity
VarianceVariance
 Represents the difference betweenRepresents the difference between
actual quantity of materials used andactual quantity of materials used and
standard quantity allowed times thestandard quantity allowed times the
standard unit cost of materials.standard unit cost of materials.
 (Actual quantity of materials used –(Actual quantity of materials used –
standard quantity of materials allowed) xstandard quantity of materials allowed) x
standard unit price of material =standard unit price of material =
Materials Quantity VarianceMaterials Quantity Variance

14. Labor Rate VarianceLabor Rate Variance
 Indicates the difference between actualIndicates the difference between actual
and standard labor rate times the actualand standard labor rate times the actual
hours worked.hours worked.
 (Actual labor rate per hour – standard(Actual labor rate per hour – standard
labor rate per hour) x actual number oflabor rate per hour) x actual number of
labor hours worked = Labor Ratelabor hours worked = Labor Rate
VarianceVariance

15. Labor EfficiencyLabor Efficiency
VarianceVariance
 Represents the difference betweenRepresents the difference between
actual quantity of labor worked andactual quantity of labor worked and
standard quantity allowed times thestandard quantity allowed times the
standard rate per hour.standard rate per hour.
 (Actual number of labor hours worked –(Actual number of labor hours worked –
standard number of labor hours allowed)standard number of labor hours allowed)
x standard labor rate per hour = Laborx standard labor rate per hour = Labor
Efficiency VarianceEfficiency Variance

16. Materials VariancesMaterials Variances
Actual cost (Actual quantity
used x actual priced per unit)
Actual quantity used x
standard price per unit
Equivalent production x
Standard per unit x
Standard price
Net Materials Variance
Materials Price Variance Materials Quantity Variance

17. Labor VariancesLabor Variances
Actual hours (Actual hours
worked x actual rate per hour)
Actual hours worked x
standard price per hour
Equivalent production x
Standard hours per unit x
Standard rate
Net Labor Variance
Labor Rate Variance Labor Efficiency Variance

18. Accounting forAccounting for
VariancesVariances
To record the entry for direct materialsTo record the entry for direct materials
cost:cost:
Work in ProcessWork in Process XXXX
Materials Quantity VarianceMaterials Quantity Variance XXXX
Materials Price VarianceMaterials Price Variance XXXX
MaterialsMaterials XXXX
To record the entry for directTo record the entry for direct
labor cost:labor cost:
Work in ProcessWork in Process XXXX
Labor Rate VarianceLabor Rate Variance XXXX
Labor Efficiency VarianceLabor Efficiency Variance XXXX
PayrollPayroll XXXX
To record the entry applying factoryTo record the entry applying factory
overhead to work in process:overhead to work in process:
Work in ProcessWork in Process XXXX
Applied Factory OverheadApplied Factory Overhead XXXX
To record the entry forTo record the entry for
finished goods at standardfinished goods at standard
cost:cost:
Finished GoodsFinished Goods XXXX
Work in ProcessWork in Process XXXX

19. Disposition of theDisposition of the
VariancesVariances
1.1. Prorate the variances to Cost of Goods Sold, Work in Process,Prorate the variances to Cost of Goods Sold, Work in Process,
and Finished Goods in proportion to the standard materials,and Finished Goods in proportion to the standard materials,
labor, and overhead costs included in the ending balances forlabor, and overhead costs included in the ending balances for
those accounts.those accounts.
2.2. Close the variance entirely to Cost of Goods Sold for the period.Close the variance entirely to Cost of Goods Sold for the period.
3.3. If 2 (above) would materially misstate financial statements,If 2 (above) would materially misstate financial statements,
prorate (1, above).prorate (1, above).
4.4. If production is seasonal or varies greatly, set up a deferredIf production is seasonal or varies greatly, set up a deferred
charges or credits on interim balance sheets, and dispose of atcharges or credits on interim balance sheets, and dispose of at
year end using one of the above methods.year end using one of the above methods.
5.5. If due to abnormal circumstances, charge off as extraordinaryIf due to abnormal circumstances, charge off as extraordinary
gains or losses on the income statement.gains or losses on the income statement.

20. Analysis of VariancesAnalysis of Variances
 Possible reasons forPossible reasons for
materials pricematerials price
variance.variance.
1.1. Inefficient purchasingInefficient purchasing
methods.methods.
2.2. Use of a slightlyUse of a slightly
different material thandifferent material than
the standard calledthe standard called
for.for.
3.3. Increase in marketIncrease in market
price.price.

21. Analysis of VariancesAnalysis of Variances
(cont.)(cont.)
 Reasons forReasons for
materials usagematerials usage
variance.variance.
1.1. Materials wereMaterials were
spoiled or wasted.spoiled or wasted.
2.2. More materialsMore materials
were used as anwere used as an
experiment toexperiment to
upgrade theupgrade the
quality of thequality of the
product.product.

22. Features of StandardFeatures of Standard
CostingCosting
1.1. An actual unit cost of manufacturing a product is notAn actual unit cost of manufacturing a product is not
determined – only the total cost.determined – only the total cost.
2.2. Even though based on estimates, standards may be veryEven though based on estimates, standards may be very
reliable.reliable.
3.3. Standards must change as conditions change.Standards must change as conditions change.
4.4. Standards provide incentives to keep costs andStandards provide incentives to keep costs and
performance in line with predetermined managementperformance in line with predetermined management
objectives.objectives.
5.5. Recording variances, helps management focus attentionRecording variances, helps management focus attention
on prices paid and quantities purchased.on prices paid and quantities purchased.
6.6. Variances may be calculated weekly or daily to facilitateVariances may be calculated weekly or daily to facilitate
corrective action, even when recorded monthly.corrective action, even when recorded monthly.

23. Journal Entries in aJournal Entries in a
Standard Cost SystemStandard Cost System
Recording of materials cost in a standard cost system.Recording of materials cost in a standard cost system.
Work in ProcessWork in Process XX (Standard)XX (Standard)
Materials Quantity VarianceMaterials Quantity Variance XX (Unfavorable)XX (Unfavorable) XX (Favorable)XX (Favorable)
Materials Price VarianceMaterials Price Variance XX (Unfavorable)XX (Unfavorable) XX (Favorable)XX (Favorable)
Factory Overhead (Indirect Materials)Factory Overhead (Indirect Materials) XXXX
Materials (Actual)Materials (Actual) XXXX
Recording of labor in a standard costRecording of labor in a standard cost
system.system.
Work in ProcessWork in Process XX (Standard)XX (Standard)
Labor Rate VarianceLabor Rate Variance XX (Unfavorable)XX (Unfavorable) XX (FavorableXX (Favorable
Labor Efficiency VarianceLabor Efficiency Variance XX (Unfavorable)XX (Unfavorable) XX (Favorable)XX (Favorable)
Factory Overhead (Indirect Labor)Factory Overhead (Indirect Labor) XXXX
PayrollPayroll XXXX

24. Journal Entries in aJournal Entries in a
Standard Cost SystemStandard Cost System
(cont.)(cont.)
Applying factory overhead to work in process.Applying factory overhead to work in process.
Work in Process (standard cost)Work in Process (standard cost) XXXX
Applied Factory OverheadApplied Factory Overhead XXXX
Transfer to finished goods.Transfer to finished goods.
Finished Goods (standard cost)Finished Goods (standard cost) XXXX
Work in ProcessWork in Process XXXX
Record actual factory overhead.Record actual factory overhead.
Factory Overhead (actual)Factory Overhead (actual) XXXX
Various CreditsVarious Credits XXXX

25. Factory Overhead –Factory Overhead –
Determining StandardDetermining Standard
CostsCosts
 Involves estimation of factory overhead at theInvolves estimation of factory overhead at the
standard level of production taking historicalstandard level of production taking historical
data and future changes into consideration.data and future changes into consideration.
 Standard cost is applied to Work in ProcessStandard cost is applied to Work in Process
based on number of units produced.based on number of units produced.
 Factory overhead is debited with actual costsFactory overhead is debited with actual costs
and credited with standard costs.and credited with standard costs.

26. Two-Variance MethodTwo-Variance Method
 Divides the total variance into two parts.Divides the total variance into two parts.
 Controllable varianceControllable variance
 The amount by which the actual factoryThe amount by which the actual factory
overhead costs differ from the standardoverhead costs differ from the standard
overhead costs for the attained level ofoverhead costs for the attained level of
production.production.
 Volume varianceVolume variance
 The difference between budgeted fixedThe difference between budgeted fixed
overhead and the fixed overhead applied tooverhead and the fixed overhead applied to
work in process.work in process.

27. Labor VariancesLabor Variances
Actual factory overhead
Overhead budgeted
for actual production
Applied factory overhead
Net factory
overhead variance
Controllable variance Volume variance

28. Four-Variance MethodFour-Variance Method
 Recognizes two variable cost variancesRecognizes two variable cost variances
and two fixed cost variances.and two fixed cost variances.
 Cost variances.Cost variances.
 Variable overhead spending varianceVariable overhead spending variance
 Variable overhead efficiency varianceVariable overhead efficiency variance
 Fixed cost variances.Fixed cost variances.
 Fixed overhead budget varianceFixed overhead budget variance
 Fixed overhead volume varianceFixed overhead volume variance

29. Three-Variance MethodThree-Variance Method
 Separates actual and applied overheadSeparates actual and applied overhead
into three variances.into three variances.
 Budget variance or spending varianceBudget variance or spending variance
 Capacity varianceCapacity variance
 Efficiency varianceEfficiency variance
 Not as common as two variance methodNot as common as two variance method
but frequently used by manufacturers.but frequently used by manufacturers.