Standard Costing
Standards
Standards may be ideal, attainable, current or basic. Attainable standards are the most motivating. A standard cost card shows, per unit, the standard quantity or hours multiplied by the standard price or rate.
The variance rules
Calculate every variance as standard minus actual; a positive result is favourable (F), a negative result adverse (A).
- Material price = (standard price − actual price) × actual quantity purchased
- Material usage = (standard quantity for actual output − actual quantity used) × standard price
- Labour rate = (standard rate − actual rate) × actual hours paid
- Labour efficiency = (standard hours for actual output − actual hours worked) × standard rate
- Variable overhead expenditure and efficiency follow the same pattern using the standard rate
- Fixed overhead expenditure = budgeted − actual fixed overhead
- Fixed overhead volume = (actual output − budgeted output) × standard fixed overhead per unit; it splits into capacity and efficiency variances
Extra complications
Idle time belongs in the labour efficiency variance because hours are paid but not worked. Mix and yield variances apply when materials are combined in a standard proportion. Planning and operational variances separate the effect of a revised standard from genuine operating performance.
Operating statement
Budgeted profit ± sales variances ± cost variances = actual profit. Learn the layout; the individual variances must total to the reconciliation difference.
Worked example
Standard 2 kg at £5. Actual output 1,000 units using 2,150 kg costing £5.20 per kg. Usage = (2,000 − 2,150) × £5 = £750 A. Price = (£5.00 − £5.20) × 2,150 = £430 A.