STRATCOST

STANDARD
COSTING
Chapter 14: Standard Costs and Operating
Performance Measures
Presented by: Group 2
APILADO - BONDOC - MANGILIT - PARAS - OCAMPO
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. State the nature and rationale of standard costs.
2. Discuss the users of standard cost.
3. Explain the benefits and limitations of standard costs.
4. Describe how standards are set.
5. Explain the process of setting standard costs for direct
material, direct labor and overhead.
6. Identify the possible causes of variances and
responsibility for them.
7. Compute and analyze the variances between actual 2
costs and standard costs.
RATIONALE OF STANDARD COSTS
Comparing actual costs with those incurred in a previous period is
one way to evaluate costs. To properly interpret and control costs,
we can compare actual costs with standard costs so we can study
any difference or variance.
Standards are benchmarks or “norms” for measuring performance.
In managerial accounting, two types of standards are commonly
used.
yardsticks that
measure
STANDARDS achievement or
lack of
achievement 3
STANDARD COSTS
Standard costs represent what costs should be incurred
under attainable, acceptable performance. They do not
represent what the cost would be if perfection in
performance had actually been attained. Standards
establish desirable minimum costs.
ACTUAL > STANDARD =

Variances are generally investigated
4
Standard Costs
Quantity standards Price or cost standards

specify how much of an specify how much
input should be used to should be paid for
make a product or each unit of the
provide a service. input.
How much of a cost element should What the costs of the time
be used in manufacturing a unit of
product or service or the materials should be
Examples: Firestone, Sears, McDonald’s, hospitals,

construction and manufacturing companies.
RATIONALE OF STANDARD COSTS
Comparing actual costs with those incurred in a previous period is
one way to evaluate costs. To properly interpret and control costs,
we can compare actual costs with standard costs so we can study
any difference or variance.
Standards are benchmarks or “norms” for measuring performance.
In managerial accounting, two types of standards are commonly
used.
yardsticks that
measure
STANDARDS achievement or
lack of
achievement 6
Standard Costs
Deviations from standards deemed significant
are brought to the attention of management, a
practice known as management by exception.
Standard
Amount
Direct
Material
Direct Manufacturing
Labor Overhead
Type of Product Cost

USERS OF STANDARD COSTS
MANUFACTURIN SERVICE
G Ex: Auto service centers
FOOD NOT-FOR-PROFIT
Ex: Jollibee, McDonalds ORGANIZATIONS
ANY LINE OF BUSINESS 8

BENEFITS OF STANDARD COSTS
SERVES AS COMPASS AID FOR BUDGETING

These standards provide a measuring They aid management planning by
device calling attention to cost variations. providing the unit amount for
In turn, these standards serve as a compass budgeting. Managers thoroughly
that guide managers toward improvement. study all factors affecting costs.
INTEGRATE FUNCTIONS SAVE COSTS

Standard cost systems integrate Standard cost systems might appear
managerial, accounting and engineering to be costly to use because of the
functions. Coordination is encouraged start-up investment, using standards
because all elements of the organization can save data-processing costs.
9
are striving the same goal.
LIMITATIONS OF STANDARD
COST
AMOUNT MATERIAL FOCUS ON
Difficulty may be encountered in determining
which variances are material or significant in
VARIANCES
amount to warrant investigation. Other useful information such as trends may
not be noticed since they focus only on
variances.
COVER UNFAVORABLE KEYING ON

EXCEPTIONS PROBLEMS
Subordinates may be tempted to cover up Management by exception technique may
unfavorable exceptions or not report them at all, affect supervisory employees in an
particularly when they do not receive unsatisfactory manner because they are not
reinforcement or commendation for the positive getting complete review of operations as 10
things they do. they are always just keying it on problems.
HOW STANDARDS ARE SET
I recommend using practical

standards that are currently
attainable with reasonable
and efficient effort.
11
Engineer Managerial Accountant
SETTING DIRECT MATERIAL
STANDARDS
Price Quantity
Standards Standards
Final, delivered
Summarized in
cost of materials,
a Bill of Materials.
net of discounts.
SETTING DIRECT LABOR STANDARDS
Rate Time
Standards Standards
Often a single Use time and

rate is used that reflects
motion studies for
the mix of wages earned.
each labor operation.
SETTING OVERHEAD STANDARDS
Rate Quantity
Standards Standards
The rate is the The quantity is

variable portion of the
predetermined
the activity in the
overhead allocation base for
rate. predetermined overhead.
OPERATING PERFORMANCE
EVALUATION
ANALYSIS OF VARIANCES
Price Variance
(AP – SP) x AQ
Efficiency Variance
(AQ – SQ) x SP
(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)
AQ = Actual Quantity SP = Standard Price 16
AP = Actual Price SQ = Standard Quantity
A General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price
Price Variance Quantity Variance


× × ×
Actual quantity is the amount of direct

materials, direct labor, and variable
manufacturing overhead actually used.

× × ×
Standard quantity is the standard quantity

allowed for the actual output of the period.

× × ×
Actual price is the amount actually

paid for the input used.

× × ×
Standard price is the amount that

should have been paid for the input
used.

× × ×
(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)

AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity
Direct Materials Variance Analysis: Alternative
Presentation
Materials Price Variance

Actual Price Pxx
Less: Standard Price xx
Unfavorable (Favorable) Pxx
Multiplied by: Actual Quantity Purchased xx
Materials Quantity Variance

Actual Quantity Pxx
Less: Standard Quantity xx
Multiplied by: Standard Price xx 23
MATERIALS QUANTITY VARIANCE MAY BE BROKEN
DOWN INTO:
Materials Mix Variance

AQ x SP (per material) Pxx
Less: Total Actual Input x Average SP xx
Materials Yield Variance
Total Actual Input x Average SP Pxx
Less: SQ x SP (per material) xx
24
POSSIBLE CAUSES OF MATERIALS PRICE
VARIANCE:
1. Fluctuations in market prices of materials
2. Purchasing from distant suppliers, which results in
additional transportation costs
3. Failure to take cash discounts available
4. Purchasing materials of substandard quality or in
uneconomical lots
5. Unfavorable purchase contract terms
25
Responsibility for Material Variances
Materials Quantity Variance Materials Price Variance
Production Manager Purchasing Manager
The standard price is used to compute the quantity variance

so that the production manager is not held responsible for
the purchasing manager’s performance.
POSSIBLE CAUSES OF MATERIALS
QUANTITY OR USAGE VARIANCE:
1. Waste and loss of material in handling and processing

2. Substitution of defective or nonstandard materials
3. Spoilage or production of excess scrap because of
inexperienced workers or poor supervision
4. Lack of proper tools or machines
5. Variation in yields from materials
27
Direct Labor Variance Analysis
Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
Rate Variance Efficiency Variance

Direct Labor Variance Analysis: Alternative
Presentation
Labor Rate Variance

Actual Labor Rate Pxx
Less: Standard Labor Rate xx
Multiplied by: Actual Hours xx
Labor Efficiency or Time Variance

Actual Hours Pxx
Less: Standard Hours xx
Multiplied by: Standard Labor Rate xx 29
LABOR USAGE VARIANCE MAY FURTHER BE
ANALYZED INTO:
Labor Efficiency Variance

AH x SR Pxx
Less: SH based on Actual Input (SHAI) x SR xx
Labor Yield Variance
SHAI x SR Pxx
Less: SHAO x SR xx
30
POSSIBLE CAUSES OF LABOR RATE
VARIANCE:
1. Inexperienced workers hired
2. Change in labor rate particularly peak season that
has not been incorporated in standard rate
3. Use of an employee having a wage classification
other than that assumed when the standard for a job
was set
4. Use of a greater number of higher-paid employees in
the group than anticipated
31
Responsibility for Labor Variances
Production managers are Mix of skill levels

usually held accountable assigned to work tasks.
for labor variances
because they can
Level of employee
influence the:
motivation.
Quality of production
supervision.
Quality of training
Production Manager provided to
employees.
POSSIBLE CAUSES OF LABOR EFFICIENCY
VARIANCE:
1. Good or poor training of workers
2. Poor materials or faulty equipment
3. Good or poor supervision and scheduling of work
4. Experience of lack of experience on the job
5. Inefficient equipment
6. Machine breakdown
7. Nonstandard materials being used
33
Variable Manufacturing Overhead
Variance Analysis
Actual Variable Actual Hours Standard Hours

Overhead × ×
Standard VOH Standard VOH
Spending Efficiency Variance

Variance
Factory Overhead Variance Analysis: Alternative
Presentation
Variable Overhead Spending Variance

Actual VOH Pxx
Less: AH x SVOR xx
Variable Overhead Efficiency Variance

Actual Hours Pxx
Less: Standard Hours xx
Multiplied by: SVOR xx
Unfavorable (Favorable) Pxx 35
POSSIBLE CAUSES OF VARIABLE OVERHEAD
SPENDING VARIANCE
1. Actual costs were different from those expected
because of fluctuations in market prices orates
2. Increase in energy costs
3. Waste in using supplies
4. Avoidable machine breakdowns
5. Wrong grade of indirect material and indirect labor
6. Lack of operators or tools
36
POSSIBLE CAUSES OF CAPACITY OR
VOLUME VARIANCE
1. Poor production scheduling
2. Unusual machine breakdowns
3. Storms or strikes
4. Fluctuations over time
5. Decrease in customer demand
6. Excess plant capacity
7. Shortage of skilled workers
37
Advantages of Standard Costs
Management by Promotes economy
exception and efficiency
Advantages
Enhances
Simplified responsibility
bookkeeping accounting
Potential Problems with Standard
Costs
Emphasizing standards Favorable
may exclude other variances may
important objectives. Potential be misinterpreted.
Problems
Standard cost Emphasis on
reports may negative may
not be timely. impact morale.
Invalid assumptions Continuous

about the relationship improvement may
between labor be more important
cost and output. than meeting
standards.
COMBINED MANUFACTURING
OVERHEAD VARIANCE
ANALYSIS
A. If the company is using a flexible
budget, the total overhead variance
may be analyzed as follows:
If the company is using a flexible budget, the total
overhead variance may be analyzed as follows:
Two-Variance Method
Controllable Variance
Actual Manufacturing OH Pxx
Less: Budget allowed based on SH
Fixed (at normal capacity) Pxx
Variable (SH*VOH rate) xx xx
Capacity Variance
Budget allowed based on SH Pxx
Less: SH x SOH rate xx
42
Total Manufacturing Overhead Pxx
Three Variance Method
Spending Variance
Less: Budget allowed on AH
Variable (AH*VOH rate) xx xx
Variable Efficiency Variance
Budget allowed based on AH Pxx
Less: Budget allowed on SH
Variable (SH*VOH rate) xx xx 43
Three Variance Method (cont.)
Volume Variance
Budget allowed based on SH Pxx
Less: SH x SOH rate xx
Favorable (Unfavorable) Pxx
Total Overhead Variance Pxx
44
Four Variance Method
Spending Variance
Less: Budget allowed based on AH xx
Variable Efficiency Variance

Budget allowed based on AH Pxx
Less: Budget allowed based on SH xx
Four Variance Method (cont.)
Fixed Efficiency of Effectiveness Variance
Standard Hours Pxx
Less: Actual Hours xx
Unfavorable (Favorable) xx
Multiplied by: FOH Rate Pxx
Favorable (Unfavorable) Pxx
Idle Capacity Variance
Normal Capacity Hours Pxx
Less: Actual Hours xx
Unfavorable (Favorable) xx
Multiplied by: FOH Rate xx
Total OH Variance Pxx
B. If the company uses a fixed or
static budget, variance analysis may
be done as follows:
If the company uses a fixed or static budget, variance
analysis may be done as follows:
Two-Variance Method
Budget Variance (1-2)
Less: Budgeted OH (at normal capacity) xx
Capacity Variance (2-4)

Budgeted OH Pxx
Less: Standard or Applied OH
(SH x SOH Rate) xx
Net Unfavorable (Favorable) Variance Pxx

Three-Variance Method
Budget Variance (1-2)
Less: Budgeted OH xx
Capacity Variance (2-3)

Budgeted Hours x SOH Rate Pxx
Less: AH x SOH Rate xx
49
Three-Variance Method (cont.)
Efficiency Variance (3-4)

AH x SOH Rate Pxx
Less: SH x SOH Rate xx
Net Unfavorable (Favorable) Variance Pxx
50
TREATMENT OF VARIANCES
A. If relatively small, close it to Cost of Goods Sold

B. Standard costs must be adjusted to actual costs for
financial reporting purposes. This shall require
distribution of the variances to each account that
has been charged or credited with specific standard
cost that is now being adjusted to actual. These
accounts may be COGS, RM inventory, WIP
inventory and FG inventory.
51
Variance Analysis (Standard
Variable Costing System in use)
Certified
Containers, Inc.
Required:
1. Compute the direct materials,
labor and variable
manufacturing overhead price
and efficiency variances.
2. Compute the fixed
manufacturing OH price
(spending) variance 52
Computation of Standard Cost
Per Unit Variance Analysis
X Department
Required:
1. What was the standard cost per finished
piece?
2. What is the total material variance?
Indicate whether the variance is F or U.
Give the peso amounts.
3. Compute and analyze the DL costs
variances.
4. Compute and analyze the FOH
variance using the two, three, and four- 53
variance method.
Combined Variance Analysis:
Fixed Budget in Use
Norton Company
Required:
1. Compute and analyze the
spending (Budget) variance
and idle capacity variance.
54
Mix; Yield Variance
Analysis
Chicleros
Company, Inc.
Required:
Analyze variances in:
1. Materials
2. Direct Labor
3. Factory Overhead
55
“ Let us be about setting high
standards for life, love,
creativity, and wisdom. If our
expectations in these areas
are low, we are not likely to
experience wellness. Setting
high standards makes every
day and every decade worth
looking forward to. – Greg
Anderson 56
THANKS!
Any questions?
57

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STANDARD

ACTUAL > STANDARD =

Quantity standards Price or cost standards

Examples: Firestone, Sears, McDonald’s, hospitals,

Type of Product Cost

ANY LINE OF BUSINESS 8

SERVES AS COMPASS AID FOR BUDGETING

INTEGRATE FUNCTIONS SAVE COSTS

COVER UNFAVORABLE KEYING ON

I recommend using practical

Often a single Use time and

The rate is the The quantity is

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Actual quantity is the amount of direct

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Standard quantity is the standard quantity

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Actual price is the amount actually

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Standard price is the amount that

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)

Materials Price Variance

Materials Quantity Variance

Materials Mix Variance

Production Manager Purchasing Manager

The standard price is used to compute the quantity variance

1. Waste and loss of material in handling and processing

Actual Hours Actual Hours Standard Hours

Rate Variance Efficiency Variance

Labor Rate Variance

Labor Efficiency or Time Variance

Labor Efficiency Variance

Production managers are Mix of skill levels

Actual Variable Actual Hours Standard Hours

Spending Efficiency Variance

Variable Overhead Spending Variance

Variable Overhead Efficiency Variance

Invalid assumptions Continuous

Total Overhead Variance Pxx

Variable Efficiency Variance

Capacity Variance (2-4)

Net Unfavorable (Favorable) Variance Pxx

Capacity Variance (2-3)

Efficiency Variance (3-4)

A. If relatively small, close it to Cost of Goods Sold

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