Standard Costing and

Variance Analysis

UAA – ACCT 202

Principles of Managerial Accounting
Dr. Fred Barbee
The Work of Management

Planning
Planning

Decision
Decision Organizing
Organizing& &
Evaluating
Evaluating Directing
Making
Making Directing

Controlling
Controlling
 The Control Process

Establish Measure
Standards Actual

Revise?

Compare
Take Action
Actual/Std.
 Standard Costs

Predetermined Used for planning labor,

material, and overhead
requirements

Benchmarks for
measuring performance.
Standard
Costs are
Used to simplify the
accounting system.
 Standard Costs
Managers focus on quantities and costs
that exceed standards, a practice known as
management by exception.

Standard
Amount

Direct
Material
Direct Manufacturing
Labor Overhead

Type of Product Cost

 Setting Standard Costs

Accountants, engineers, personnel administrators, and

production managers combine efforts to set standards
based on experience and expectations.
Setting Standard Costs

Should we use
practical standards
or ideal standards?

Engineer Managerial
Accountant
Setting Standard Costs
Practical standards should be
set at levels that are currently
attainable with reasonable and
efficient effort.

Production
manager
Setting Standard Costs
I agree. Ideal standards,
based on perfection,
are unattainable and
discourage most
employees.

Human Resources
Manager
 A Standard is . . .

Abenchmark or “norm” for

measuring performance.
 They are “expected” levels of
performance.
 Theyare monetary measures to
which actual costs are compared.
 Standard Costs . . .

 Are realistically predetermined costs for

 Direct materials
 Direct labor
 Factory overhead
 They are typically expressed as cost per
unit of finished product.
 Why Standard Costs?

 They are useful in preparing operating

budgets.
 They make it easier to pinpoint
production costs that must be controlled.
 They are useful in evaluating
performance of managers and workers.
 Why Standard Costs?

 They help in setting realistic prices.

 They simplify accounting procedures for
inventories and product costing.
 Cost Assignment Approaches

Manufacturing Costs

Cost System DM DL MOH

Actual Actual Actual Actual

Normal Actual Actual Budgeted

Standard Standard Standard Standard

Setting DM Standards
Price Quantity
Standards Standards

Final, delivered Use product

cost of materials, design specifications.
net of discounts.
Setting DL Standards
Rate Time
Standards Standards

Use wage Use time and

surveys and motion studies for
labor contracts. each labor operation.
 Setting VOH Standards
Rate Activity
Standards Standards

The rate is the The activity is the

variable portion of the base used to calculate
predetermined overhead the predetermined
rate. overhead.
Standards vs. Budgets

Are standards the A standard is a per

unit cost.
same as budgets?
A budget is set for Standards are often
used when
total costs. preparing budgets.
 Standard Cost Variances
A standard cost variance is the amount by which
an actual cost differs from the standard cost.

Standard
Cost

This variance is unfavorable

because the actual cost
exceeds the standard cost.
 HOTS, Inc.

 To illustrate the use of standard costs,

consider Herman O Thompson Sports,
Inc. (HOTS, Inc.), a manufacturer of a
popular jogging suit. The company
wishes to have standard costs
developed for the suit in terms of
Direct Material, Direct Labor and
Manufacturing Overhead.
 Determining Standard Cost

 TheQuantity Decision – the

amount of input to be used for a
standard unit of output.
 ThePricing Decision – the
amount that should be paid for
the quantity of the input to be
used.
 Standard DM Price/Unit

 The standard price per unit for DM

should be the final, delivered cost of
materials.
 Specified quantity of materials,
 Quantity discounts,
 Transportation (freight) costs,
 Receiving and handling costs,
 Seasonal availability (if any).
 Standard DM Price/Unit
 A material known as crylon is used in the
jogging suits. The standard price for a
yard of crylon is determined as follows:
Purchase Price, Grade A Crylon $5.70
Freight, by Truck .40
Receiving & Handling .10
Less Discount (20,000 yard lots) (.20)
Standard Price Per Yard $6.00
 Standard DM Quantity/Unit

 The amount of materials that should go

into each finished unit of product
 Engineered (bill of materials) requirements,
 Expected spoilage of RM,
 Unavoidable waste,
 DM in scrapped WIP (Rejects).
 Standard DM Quantity/Unit
 The standard quantity of crylon that goes
into one jogging suit is computed as
follows:

Bill of Materials Requirement 2.8 Yds

Allowance for Waste 0.6 Yds
Allowance for Rejects 0.1 Yds
Standard Quantity/Jogging Suit 3.5 Yds
 Standard DM Quantity/Unit
 Once the price and standard quantities
have been set, the standard cost of
materials (crylon) for one unit of finished
product can be computed.

3.5 Yards per jogging suit x $6.00

per yard = $21.00
 Standard Rate For DL Hour

 The standard rate per hour for DL should

include all costs associated with DL
workers:
 Hourly wage rates
 Expected labor mix
 Fringe benefits
 Employment taxes
 Standard DL Rate Per Hour
 The standard rate per hour for the
expected mix is determined by using
average wage rates, fringe benefits, and
employment taxes for the labor mix.
Average wage rate per hour $13
Average fringe benefits 4
Average employment taxes 1
Standard rate per DL hour $18.
 Standard Hours Per Unit

 Engineered labor time per unit.

 Allowance for breaks, personal needs,
and cleanup.
 Allowance for setup and other machine
downtime.
 Allowance for rejects.
 Standard DL Hours Per Unit
 The standard hours determined to
produce a jogging suit is determined as
follows:
Basic labor time per unit 1.4 Hrs
Allowance for breaks & cleanup 0.1 Hrs
Allowance for setup and downtime 0.3 Hrs
Allowance for rejects 0.2 Hrs
Standard Hours Per Jogging Suit 2.0 Hrs
 Standard DL Costs
 Once the time and rate standards have
been set, the standard cost of labor for
one unit of product can be computed.

2.0 Hrs per Jogging Suit x $18 per

Hour = $36 per Suit
 Variable OH Standards

 Standards exist for VOH and are

typically expressed in terms of “rate”
and “hours.”
 The rate is the variable portion of the POR
 The hours represent the base used to apply
overhead to products.
 Variable OH Standards

 HOTS, Inc. applies MOH costs to

products on the basis of DL hours.
 The variable portion of the POR is $4 per
DL hour.
 Using this rate, the standard cost of
variable overhead for one unit of product
is (2 DL Hours x $4 per Hour = $8 per
suit).
 Standard Cost Card

 After standards have been set for DM,

DL and MOH, a standard cost card can
be prepared.
 The cost card indicates what the final,
manufactured cost should be for a unit of
product.
 HOTS, Inc.
Standard Cost Card For Jogging Suits

Quantity Price Cost

Direct Materials 3.5 Yds. $6/Yd. $21

Direct Labor 2.0 Hrs. 18/Hr. 36

Variable Overhead 2.0 Hrs. 4/Hr. 8

Standard Cost Per Unit $65

 A General Model For Variance Analysis
Variable Production Costs

AQ x AP AQ x SP SQ x SP

DM Price Variance DM Quantity Var.

DL Rate Variance DL Efficiency Var.
VOH Spending Var. VOH Efficiency Var.

Variance Variance

Total Variance
DM Price Variances . . .
DM Quantity Variances . . .