Standard costing refers to expected costs under anticipated conditions and allows for comparison of standard versus actual costs. Differences between standard and actual costs are referred to as variances, which should be investigated if significant. Standard cost is the cost of a single unit while budgeted cost is the total cost of budgeted units. Target costing determines the allowable cost to earn a required profit, while kaizen costing continually reduces costs after design and production. Cost variances measure differences between planned and actual costs. Material, labor, and variable overhead variances compare standard and actual costs for these items.

1. Standard Costing

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. 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. 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. 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. 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. 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. 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. 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. Worked example: Material
Variances
Requirements:
a)The material total variances
b)The material price variances
c)The material usage variances

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. 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. Worked example: Labor
Variances
Requirements:
a)The Labor total variance
b)The Labor rate variance
c)The Labor Efficiency variance

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. 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. Worked example: Variable
overhead Variances
Requirements:
a)The variable overhead total variance
b)The variable overhead expenditure
variance
c)The variable overhead efficiency variance