LECTURE NOTE

Chapter 10 (lecture)

STANDARD COSTING
AND

VARIANCE ANALYSIS

Study Objectives

10.1 Definition of Standard Costing:CLO1
10.2 Uses of Standard Costing: CLO1
10.3 Calculation of standard costing: CLO3
10.4 Types of standard: CLO1

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Study Objectives

10.5 Variance analysis: CLO3

a) Direct Material Variance:
- price variance dan quantity variance

b) Direct Labour Variance:
- price (rate) variance and
quantity (efficiency) variance

c) Overhead Variance:
- expenditure and efficiency variance for variable
overhead
- volume and efficiency variance for fixed overhead

10.6 Implications of variance analysis: CLO3

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10.1 Definition of Standard Costing

•A standard costs are predetermined unit costs which
are used as measures of performance.

•Standard costing values its manufactured products with
a predetermined materials cost, a predetermined
direct labour cost and a predetermined
manufacturing overhead cost.

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Distinguishing between standards and
budgets

Standard cost - the Budgeted cost -
standard cost means budget means the
the budgeted cost of total amount of whole
one unit of product. budgeted production.

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10.2 Uses of Standard Costing

1. Standards are important for decision making
q How we produce our product.
q How we price our product.

2. Monitor manufacturing
q Large variances may indicative of problems
in production.

3. Performance measurement
q Differences between actual and standards
are often used as measures of a manager’s
performance

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Uses of Standard Costing

4. Facilitate management planning
5. Useful in setting selling price.
4. S t a n d a r d c o s t i n g i s a t o o l t h a t h e l p s

management account in controlling costs.

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Setting standards

How do we set the standards?

Standard costs are developed in a variety of ways.
General practices:

1. Prior years performance
2. Expected future performance under normal

operating conditions.
3. developed from price lists provided by suppliers.
4. determined time and motion studies conducted by

industrial engineers.
5. developed from analyses of past data.

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Elements of Standard Cost

Direct
Materials

Direct Standard

Materials X direct
Quantity per materials

unit (kg/liter) price per

kg/liter (RM)

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Elements of Standard Cost

Direct
Labour

Standard X Standard direct
direct labour labour
hours per
unit (hour) rate per hour (RM)

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Elements of Standard Cost

Manufacturing
Overhead

Predetermine X Estimated per
overhead rate unit activities

Estimated Overhead cost (e.g standard direct
Estimated Activity labour hours per

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10.4 Types of Standard

1 2 3

Ideal Normal/ Basic
standards Attainable Standards
Standard

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Ideal Standards

v is the standard cost that can be achieve only with
the highest efficiency/ optimum level and
performance usually under perfect conditions.

v impossible to achieve

v The level of performance under ideal standards
would be achieved through the best possible
combination of factors — the most favorable prices
for materials and labor, highest output with best
equipment and layout, and maximum efficiency in
the utilization of the production resources

v Not widely used

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Normal/ Attainable Standards

v Normal standard is the cost that can be achieved
under normal conditions

v Represents efficient levels of performance that are
attainable under expected operating conditions.

v developed under the assumption that there will be
occasional problems in the production process such
as equipment failure, labor turnover and materials
defects.

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Basic Standards

v is established for use unaltered for an indefinite period
which may be a long period of time.

v Basic standards are seldom revised or updated to reflect
current operating costs and price level changes

v Basic standards representing a fixed base are used
primarily to measure trends in operating performance.

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10.5 Variance Analysis

An analysis of the difference between total standard cost
and total actual cost is called variance analysis.
Variance analysis attempts to identify and explain the
reasons for the difference between a standard amount and
an actual amount.

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Variance Analysis

Variance
Analysis

Direct Direct Variable Fixed
Material Labour Overhead Overhead
Variances Variances Variances Variances

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Direct Materials Variances

v The direct material variance is comprised of two other variances,
which are:
• Price variance
• Quantity Variance

a. Price Variance
§ difference between the standard and actual cost per unit of the
direct materials purchased, multiplied by the actual quantity used
in the production process.
§ This variance is the responsibility of the purchasing department.

b. Quantity Variance
§ difference between the actual quantity used and the standard
quantity at actual units of production multiplied by the standard
price per unit.
§ This variance is the responsibility of the production department.

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Direct Materials Variances

v A matrix is used to determine and analyze a variance

Actual Quantity (AQ) Actual Quantity (AQ Standard Quantity (SQ)
X XX

Actual price (AP) Standard price(SP) standard price (SP)

Price Variance Quantity Variance

greater than (UF) greater than (UF)

Less than (F) Less than (F)

Direct Materials Variance

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Direct Materials Variances

v If the actual quantity purchased is not equal to the actual
quantity used:

Actual Qty Actual Qty Actual Qty standard
purchased purchased used quantity

X XX X
Actual Price Standard Price Standard Price Standard Price

Price Variance Quantity Variance
greater than (UF) greater than (UF)

Less than (F) Less than (F)

Direct Materials Variance

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Direct Materials Variances

Attention !!

v Standard Qty = standard qty per unit x Actual units of
production

v Actual Qty = actual qty per unit x Actual units of production

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Direct Labour Variances

v The direct labour variance is comprised of two variances,
which are:
§ Price (Rate) Variance
§ Quantity (Effieciency) Variance

a. Price (Rate) Variance
v is the difference between the actual rate per hour

and standard rate per hour multiplied by the actual
hour utilized during a period.
b. Quantity (Effieciency) Variance
v is the difference between actual hours worked and
standard hours at actual production

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Direct Labour Variances

v A matrix is used to determine and analyze a variance

Actual Hours (AH) Actual Hours (AH) Standard Hour (SH)
X X X

Actual Rate (AR) Standard Rate (SR) Standard Rate (SR)

Price(Rate) variance Quantity (Effieciency Variance

greater than(UF) greater than (UF)

Less than (F) Less than (F)

Direct Labour Variances 23

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Direct Labour Variances

Attention !!!

vStandard hours = standard hour per unit x
actual production units.

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Variable Overhead Variances

vThe variable overhead variance is comprised of
two variances, which are:

a) Expenditure Variance

the difference between variable production
overhead expense incurred during a period
and the standard variable overhead
expenditure.

b) Efficiency Variance
§ difference between standard number of
manufacturing hours and the actual hours
worked during the period

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Variable Overhead Variances

v A matrix is used to determine and analyze a variance

Actual Hours (AH) Actual Hours (AH) Standard Hour (SH)
X X X

Actual Rate (AR) Standard Rate (SR) Standard Rate (SR)

Expenditure Variance Efficiency Variance
greater than(UF) greater than (UF)

Less than (F) Less than (F)

Variable Overhead Variances

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Variable Overhead Variances

Attention
vStandard rate = predetermined variable

Overhead

vStandard hours = standard hour per unit x
actual production units.

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Fixed Overhead Variances

v The Fixed Overhead variance is comprised of two
variances, which are:

a) Expenditure Variance
§ Fixed Overhead Expenditure Variance, also known
as fixed overhead spending variance, is the
difference between budgeted and actual fixed
production overheads during a period.

b) Volume Variance
§ Fixed Manufacturing Overhead Volume Variance
quantifies the difference between budgeted and
absorbed fixed production overheads.

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Fixed Overhead Variances

v A matrix is used to determine and analyze a variance

Actual Hours (AH) Normal Hours (NH) Standard Hour (SR)
X X X

Actual Rate (AR) Standard Rate (SR) Standard Rate (SR)

Expenditure Variance Volume Variance

greater than(UF) greater than (UF)

Less than (F) Less than (F)

Fixed Overhead Variances

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Fixed Overhead Variances

vStandard hour = Predetermined Fixed
Overhead Rate

vStandard hours = standard hour per unit x
actual production units.

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