Part D

Part D
Standard Costing
Standard costing
Standard costing
Ø Introduction to standard costing

Ø Flexed budget and variances
Ø Direct material cost variances
Ø Direct labour cost variances
Ø Variable production OH variances
3
1. Introduction to standard costing
Ø A standard cost is a predetermined estimated unit cost,

used for inventory valuation and control.
a. To value inventories and production cost for cost accounting
purposes.
b. To act as a control device by establishing standards (planned
costs), highlighting (via variance analysis) activities that are
not conforming to plan and thus alerting management to
areas which may be out of control and in need of corrective
action.
Ø It is most suited to mass production and repetitive
assembly work.
4
STANDARD COST CARD

Product LW
$
Direct material (standard quantity × standard price) X
Direct labour (standard time × standard rate) X
Standard direct cost X
Variable production overhead (standard time × standard rate) X
Standard variable cost of production X
Fixed production overhead (standard time × standard rate) X
Standard full production cost X
Administration and marketing overhead X
Standard cost of sales X
Standard profit X
Standard selling price X
5
Performance standards are used to set efficiency targets.

There are four types:
Ø Ideal
Ø Attainable
Ø Current
Ø Basic
6
Ideal These are based on perfect operating conditions: no wastage, no spoilage, no

inefficiencies, no idle time, no breakdowns. Variances from ideal standards are useful for
pin pointing areas where a close examination may result in large savings in order to
maximize efficiency and minimize waste. However ideal standards are likely to have an
unfavourable motivational impact because reported variances will always be adverse.
Employees will often feel that the goals are unattainable and not work so hard.
Attainable These are based on the hope that a standard amount of work will be carried out efficiently,
machines properly operated or materials properly used. Some allowance is made for
wastage and inefficiencies. If well-set they provide a useful psychological incentive by
giving employees a realistic, but challenging target of efficiency. The consent and co-
operation of employees involved in improving the standard are required.
Current These are based on current working conditions (current wastage, current inefficiencies).
The disadvantage of current standards is that they do not attempt to improve on current
levels of efficiency.
Basic These are kept unaltered over a long period of time, and may be out of date. They are
used to show changes in efficiency or performance over a long period of time. Basic
standards are perhaps the least useful and least common type of standard in use.
7
Ø Standard costing is a control technique which compares

standard costs and revenues with actual results to obtain
variances which are used to improve performance.
8
Recall: Fixed and flexible budgets
Fixed Flexible Actual Budget
budget budget results variance
(a) (b) (c) (b)-(c)
Sales (units) 2,000 3,000 3,000
$ $ $ $
Sales revenue 20,000 30,000 30,000 0
Variable costs
Direct materials 6,000 9,000 8,500 500 (F)
Direct labour 4,000 6,000 4,500 1,500 (F)
Maintenance 1,000 1,500 1,400 100 (F)
Semi-variable costs
Other costs 3,600 4,600 5,000 400 (A)
Fixed costs
Depreciation 2,000 2,000 2,200 200 (A)
Rent and rates 1,500 1,500 1,600 100 (A)
Total costs 18,100 24,600 23,200 1,400 (F)
Profit 1,900 5,400 6,800 1,400 (F)
9
Ø Variances are differences between actual and standard costs.

Ø The process by which the total difference between standard and
actual results is analysed is known as variance analysis.
Ø When actual results are better than expected results, we have a
favourable variance(F). If, on the other hand, actual results are
worse than expected results, we have an adverse variance(A).
(对最终利润是有利还是不利)
10
Variances can be divided into three main groups,

Ø Variable cost variances
Ø Fixed production overhead variances
Ø Sales variances
11
2. Flexed budgets and variances
Total variances are the difference between flexed budget

figures and actual figures.
Number of units produced 1,000 1,000 Difference

Flexed budget Actual Total variance
$ $ $
Direct materials 100,000 98,600 1,400(F)

Direct labour 10,000 8,900 1,100(F)
Variable overhead 3,000 3,075 75(A)
12
3. Direct material cost variance

$ $ $

Direct labour 10,000 8,900 1,100(F)
材料成本为什么产生差异？
材料成本=产量*单位用量*单价
13
Usage
Direct materials cost variance
Price
The direct material total variance is the difference between what the output
actually cost and what it should have cost, in terms of material.
The direct material usage variance is the difference between the standard
quantity of materials that should have been used for the number of units
actually produced, and the actual quantity of materials used, valued at the
standard cost per unit of material. It is the difference between how much
material should have been used and how much material was used, valued at
standard cost.
The direct material price variance is the difference between the standard
cost and the actual cost for the actual quantity of material used or purchased.
It is the difference between what the material did cost and what it should
have cost.
14
Product X has a standard direct material cost as follows.

10 kilograms 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 $98,600.
(a) The direct material total variance $

1,000 units should have cost (@ $100) 100,000
But did cost 98,600
Direct material total variance 1,400 (F)
15

10 kilograms 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 $98,600.
(b) The direct material usage variance

1,000 units should have used (@ 10 kgs) 10,000 kgs
But did use 11,700 kgs
Usage variance in kgs 1,700 kgs (A)
@ standard cost per kg ×$10
Usage variance in $ $17,000 (A)
16

10 kilograms 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 $98,600.
(c) The direct material price variance

$
11,700 kgs of Y should have cost (@ $10) 117,000
But did cost 98,600
Material Y price variance 18,400 (F)
17

10 kilograms 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 $98,600.
Summary:
Usage variance 17,000 (A)
Price variance 18,400 (F)
Total variance 1,400 (F)
18

$ $ $
Direct labour 10,000 8,900 1,100(F)
直接人工成本为什么产生差异？
人工成本=产量*单位工时*工资率
19
Efficiency
Direct labour cost variance
Rate
The direct labour total variance is the difference between what the output should have
cost and what it did cost, in terms of labour.
The direct labour efficiency variance is the difference between the hours that should
have been worked, valued at the standard rate per hour. It is the difference between
how many hours should have been worked and how many hours were worked, valued
at the standard rate per hour.
The direct labour rate variance is the difference between the standard cost and the
actual cost for the actual number of hours paid for. It is the difference between what
the labour did cost and what it should have cost.
20
The standard direct labour cost of product X is as follows.

2 hours of grade Z labour at $5 per hour = $10 per unit of product X.
During period 4, 1,000 units of product X were made, and the direct labour cost of
grade Z labour was $8,900 for 2,300 hours of work.
(a) The direct labour total variance

$
1,000 units should have cost (@ $10) 10,000
But did cost 8,900
Direct labour total variance 1,100 (F)
21

During period 4, 1,000 units of product X were made, and the direct
labour cost of grade Z labour was $8,900 for 2,300 hours of work.
(b) The direct labour efficiency (productivity) variance

1,000 units of X should have taken (@ 2 hrs) 2,000 hrs
But did take 2,300 hrs
Efficiency variance in hours 300 hrs (A)
@ standard rate per hour × $5
Efficiency variance in $ $1,500
(A)
22

(c) The direct labour rate variance

$
2,300 hours of work should have cost (@ $5 per hr) 11,500
But did cost 8,900
Direct labour rate variance 2,600 (F)
23

Summary $
Efficiency variance 1,500 (A)
Rate variance 2,600 (F)
Total variance 1,100 (F)
24
5. Variance production OH variances

$ $ $
Direct materials 100,000 98,600 1,400

Direct labour 10,000 8,900 (F)
Variable overhead 3,000 3,075 1,100
(F)
75(A)
变动制造费用为什么产生差异？
变动制造费用=产量*单位工时*单位工时变动成本
25
Efficiency
Variable production overhead variance
Expenditure
The variable production OH total variance is the difference between what the
output should have cost and what it did cost, in terms of variable production
OH.
The variable production OH efficiency variance is exactly the same in hours
as direct labour efficiency variance (only actively hours), but priced at the
standard variable production overhead rate per hour.
The variable production OH expenditure variance is the difference between
the amount of variable production overhead that should have been incurred in
the actual hours actively worked (not idle time), and the actual amount of
variable production overhead incurred.
26
Suppose that the variable production overhead cost of product

X is as follows.
2 hours at $1.50 = $3 per unit
During period 6, 1,000 units of product X were made. The
labour force worked 2,020 hours, of which 60 hours were
recorded as idle time. The variable overhead cost was $3,075.
(a) The variable overhead total variance
$
1,000 units of product X should cost (@ $3) 3,000
But did cost 3,075
Variable production overhead total variance 75 (A)
27
Suppose that the variable production overhead cost of product X is as

follows.
During period 6, 1,000 units of product X were made. The labour
force worked 2,020 hours, of which 60 hours were recorded as idle
time. The variable overhead cost was $3,075.
(b) The variable production overhead efficiency variance
1,000 units of product X should take (@ 2 hrs) 2,000 hrs
But did take (active hours) 1,960 hrs
Variable production overdead efficiency variance in hours 40 hrs (F)
@ standard rate per hour × $1.50
Variable production overhead efficiency variance in $ $60 (F)
28
Suppose that the variable production overhead cost of product X is as

follows.
During period 6, 1,000 units of product X were made. The labour
force worked 2,020 hours, of which 60 hours were recorded as idle
time. The variable overhead cost was $3,075.
(c) The variable production overhead expenditure variance
$
1,960 hrs of variable production overhead should cost (@ $1.50) 2,940
But did cost 3,075
Variable production overhead expenditure variance 135 (A)
29
Suppose that the variable production overhead cost of product

X is as follows.
During period 6, 1,000 units of product X were made. The
labour force worked 2,020 hours, of which 60 hours were
recorded as idle time. The variable overhead cost was $3,075.
Summary
$
Variable production overhead efficiency variance 60 (F)
Variable production overhead expenditure variance 135 (A)
Variable production overhead total variance 75 (A)
30
Specimen exam: A12
A company has calculated a $10,000 adverse direct material variance
by subtracting its flexed budget direct material cost from its actual
direct material cost for the period.
Which of the following could have caused the variance?

1. An increase in direct material prices
2. An increase in raw material usage per unit
3. Units produced being greater than budgeted
4. Units sold being greater than budgeted
A. 2 and 3 only B. 3 and 4 only C. 1 and 2 only D. 1 and 4 only
C
31
2. Flexed budgets and variances
Usage
a) Direct materials cost variance
Price
Efficiency
b) Direct labour cost variance
Rate
Efficiency
c) Variable production overhead variance
Expenditure
32
Overview
Ø Direct material cost, direct labour cost and variable production

OH have similarity:
Ø 量差：direct material usage variance, direct labour efficiency

variances and variable production OH efficiency variances
（实际用量-标准用量）*标准单价
Ø 价差：direct material price variances, direct labour rate variances

and variable production OH expenditure variances
实际用量 × 实际单价 - 实际用量 × 标准单价
33
Cost variances
Cost variances
Ø Fixed production OH variances
Ø Significance of cost variances
35
1. Fixed production OH variances
Fixed overhead total variance is the difference between fixed overhead incurred
and fixed overhead absorbed.
In other words, it is the under- or over-absorbed fixed overhead.
36
Over/under absorbed Fixed production OH total variances
Expenditure variance
Volume variance @OAR
Efficiency variance Capacity variance

@OAR @OAR
37
38
Fixed overhead volume variance
Ø Fixed overhead volume efficiency variance is the difference between the
number of hours that actual production should have taken, and the number of hours
actually taken (that is, worked) multiplied by the standard absorption rate per hour.
Ø Fixed overhead volume capacity variance is the difference between budgeted
(planned) hours of work and the actual hours worked, multiplied by the standard
absorption rate per hour.
39
Suppose that a company plans to produce 1,000 units of product E during August 20X3. The
expected time to produce a unit of E is five hours, and the budgeted fixed overhead is $20,000.
The standard fixed overhead cost per unit of product E will therefore be as follows.
5 hours at $4 per hour = $20 per unit OAR/unit
Actual fixed overhead expenditure in August 20X3 turns out to be $20,450. The labour force
manages to produce 1,100 units of product E in 5,400 hours of work.
(a) The fixed overhead total variance
$
Fixed overhead incurred 20,450
Fixed overhead absorbed (1,100 units × $20 per unit) 22,000
Fixed overhead total variance (= under-/over-absorbed overhead) 1,550 (F)
40
5 hours at $4 per hour = $20 per unit
(b) The fixed overhead expenditure variance
$
Budgeted fixed overhead expenditure 20,000
Actual fixed overhead expenditure 20,450
Fixed overhead expenditure variance 450 (A)
41
(c) The fixed overhead volume variance
$
Actual production at standard rate (1,100 × $20 per unit) 22,000
Budgeted production at standard rate (1,000 × $20 per unit) 20,000
Fixed overhead volume variance 2,000 (F)
42
(d) The fixed overhead volume efficiency variance
1,100 units of product E should take (× 5 hours) 5,500 hrs

But did take 5,400 hrs
Fixed overhead volume efficiency variance in hours 100 hrs (F)
× standard fixed overhead absorption rate per hour × $4
Fixed overhead volume efficiency variance in $ $400 (F)
43
(e) The fixed overhead volume capacity variance
Budgeted hours of work 5,000 hrs

Actual hours of work 5,400 hrs
Fixed overhead volume capacity variance 400 hrs (F)
× Standard fixed overhead absorption rate per hour × $4
Fixed overhead volume capacity variance in $ $1,600 (F)
44
The variances may be summarized as follows.
$
Expenditure variance 450 (A)
Efficiency variance 400 (F)
Capacity variance 1,600 (F)
Over-absorbed overhead (total variance) 1,550 (F)
45
Specimen exam: A22
A manufacturing company operates a standard absorption costing system. Last month
25,000 production hours were budgeted and the budgeted fixed production cost was
$125,000. last month the actual hours worked were 24,000 and standard hour for actual
production were 27,000.
What was the fixed production overhead capacity variance for last month?
A. $5,000 Adverse
B. $5,000 Favourable
C. $10,000 Adverse
D. $10,000 Favourable
46
3. The significance of cost variances
Four general causes of variances
a) Inappropriate standard.
b) Inaccurate recording of actual costs.
c) Random events.
d) Operating inefficiency.
48
3. The significance of cost variances
Ø Materiality, controllability, the type of standard being used, the
interdependence of variances and the cost of an investigation should be
taken into account when deciding whether to investigate reported variances.
Ø When two variances are interdependent (interrelated) one will usually be
adverse and the other one favourable: materials price and usage variances, labour
rate and efficiency variances.
49
Overview
Fixed production OH variances:
Ø Total
Ø Expenditure
Ø Volume (efficiency and capacity)
50
Sales variances and operating statements
Sales variances and operating statements
Ø Sales variances
Ø Operating statements
Ø Variances in a standard MC system
Ø Deriving actual data from standard details and variances
Ø Control action
52
1. Sales variances
Costs are, however, only one factor which contribute to the

achievement of planned profit. Sales are another important factor
and sales variances can be calculated to aid management’s
control of their business.
Sales = Sales volume × Selling price

Ø Selling price variance
Ø Sales volume profit variance
53
1. Sales variances
The selling price variance is a measure of the effect on expected

profit of a different selling price to standard selling price. It is
calculated as the difference between what the sales revenue should
have been for the actual quantity sold, and what it was.
54
1. Sales variances
Suppose that the standard selling price of product X is $15. Actual

sales in 20X3 were 2,000 units at $15.30 per unit. The selling price
variance is calculated as follows.
$
Sales revenue from 2,000 units should have been (@ $15) 30,000
But was (@ $15.30) 30,600
Selling price variance 600 (F)
55
1. Sales variances
The sales volume variance is the difference between the actual

units sold and the budgeted (planned) quantity, valued at the
standard profit per unit.
In other words, it measures the increase or decrease in standard
profit as a result of the sales volume being higher or lower than
budgeted (planned).
56
1. Sales variances
Suppose that a company budgets to sell 8,000 units of product J for

$12 per unit. The standard full cost per unit is $7. Actual sales were
7,700 units, at $12.50 per unit.
Budgeted sales volume 8,000 units

Actual sales volume 7,700 units
Sales volume variance in units 300 units (A)
× Standard profit per unit ( $(12-7) ) × $5
Sales volume variance in $ $1,500 (A)
57
2. Operating statements
$
Budgeted profit 30,600
Sales volume profit variance 1,500 (A)
Standard profit from actual sales 29,100
(F) (A)
Variance $ $
Sales price 1,400
Material price 600
Material usage 500
Labour rate 200
Labour efficiency 3,400
Labour idle time 1,000
Variable overhead expenditure 200
Variable overhead efficiency 510
Fixed overhead expenditure 4,560
Fixed overhead volume efficiency 6,290
Fixed overhead volume capacity 8,140
10,900 15,900 5,000 (A)
Actual profit 24,100
58
2. Operating statements
A company uses a standard absorption costing system. The following
figures are available for the last accounting period in which actual profit
was $270,000.
$
Sales volume profit variance 15,000 A
Sales price variance 12,500 F
Total variable cost variance 17,500 A
Fixed cost expenditure variance 7,500 F
Fixed cost volume variance 5,000 A
What was the standard profit for actual sales in the last accounting
period?
A. $252,500 B. $267,500 C. $272,500 D. $287,500
59
Specimen exam: A13
A company has recorded the following variances for a period:
Sales volume variance $10,000 adverse
Sales price variance $5,000 favourable
Total cost variance $12,000 adverse
Standard profit on actual sales for the period was $120,000.

What was the fixed budget profit for the period?
Budgeted profit
Sales volume profit variance
Standard profit from actual sales
X - 10,000 = 120,000
X = 130,000
60
3. Variances in a standard MC costing system
Two main differences between the variances calculated in an AC

system and in a MC system.
Ø In the marginal costing system the only fixed overhead
variance is an expenditure variance.
Ø The sales volume variance is valued at standard contribution
margin, not standard profit margin.
61
$ $ $
Budgeted contribution 68,340
Sales volume contribution variance 3,350 (A)
Standard contribution from actual sales 64,990
(F) (A)
Sales price 1,400
Material price 600
Material usage 500
Labour rate 200
Labour efficiency 3,400
Labour idle time 1,000
Variable overhead expenditure 200
Variable overhead efficiency 510
4,610 3,200
1,410 (F)
Actual contribution 66,400
Budgeted fixed production overhead 37,740
Expenditure variance 4,560 (A)
Actual fixed production overhead 42,300
Actual profit 24,100
62
December 2011 exam paper
A company calculates the following under a standard absorption

costing system.
I. The sales volume margin variance

II. The total fixed overhead variance
III. The total variable overhead variance
If a company changed to a standard marginal costing system,

which variances could change in value?
A. (i) only B. (ii) only C. (i) and (ii) only D. (i), (ii) and (iii)
63
A company uses standard marginal costing. Last month the standard contribution on
actual sales was $10,000 and the following variances arose.
$
Total variable costs variance 2,000 A
Sales price variance 500 F
Sales volume contribution variance 1,000 A
Total fixed costs variance 1,000 F
What was the actual contribution for last month?

A. $7,000 B. $7,500 C. $8,000 D. $8,500
64
4. Deriving actual data
Rather than being given actual data and asked to calculate

the variances, you may be given the variances and required
to calculate the actual data on which they were based.
65
XYZ uses standard costing. The following data relates to labour grade 11.
Actual hours worked 10,400 hours
Standard allowance for actual production 8,320 hours
Standard rate per hour $5
Rate variance (adverse) $416
What was the actual rate of pay per hour?
Rate variance = 10,400 * X – 10,400 * 5 = 416
X = 5.04
66
The standard material content of one unit of product A is 10kg of
material X which should cost $10 per kg. In June 20X4, 5,750 units of
product A were produced and there was an adverse material usage
variance of $1,500.
Required
Calculate the quantity of material X used in June 20X4.
Let the quantity of material X used = Y
5,750 units should have used (@ 10kg) 57,500 kg
But did use Y kg
Usage variance in kg (Y – 57,500) kg
@ standard price per kg × $10
Usage variance in $ $1,500
10 (Y – 57,500) = 1,500
Y = 57,650 KG
67
Overview
Ø Sales variances: selling price variance and sales volume

profit variance
Ø Operating statement
Ø Variances in standard MC system
Ø Deriving actual data
Ø Control action
68

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Part D

Ø Introduction to standard costing

Ø A standard cost is a predetermined estimated unit cost,

STANDARD COST CARD

Performance standards are used to set efficiency targets.

Ideal These are based on perfect operating conditions: no wastage, no spoilage, no

Ø Standard costing is a control technique which compares

Ø Variances are differences between actual and standard costs.

Variances can be divided into three main groups,

Total variances are the difference between flexed budget

Number of units produced 1,000 1,000 Difference

Direct materials 100,000 98,600 1,400(F)

Number of units produced 1,000 1,000 Difference

Direct materials 100,000 98,600 1,400(F)

Product X has a standard direct material cost as follows.

(a) The direct material total variance $

Product X has a standard direct material cost as follows.

(b) The direct material usage variance

Product X has a standard direct material cost as follows.

(c) The direct material price variance

Product X has a standard direct material cost as follows.

Number of units produced 1,000 1,000 Difference

The standard direct labour cost of product X is as follows.

(a) The direct labour total variance

The standard direct labour cost of product X is as follows.

(b) The direct labour efficiency (productivity) variance

The standard direct labour cost of product X is as follows.

(c) The direct labour rate variance

The standard direct labour cost of product X is as follows.

Number of units produced 1,000 1,000 Difference

Direct materials 100,000 98,600 1,400

Suppose that the variable production overhead cost of product

Suppose that the variable production overhead cost of product X is as

Suppose that the variable production overhead cost of product X is as

Suppose that the variable production overhead cost of product

Which of the following could have caused the variance?

A. 2 and 3 only B. 3 and 4 only C. 1 and 2 only D. 1 and 4 only

Ø Direct material cost, direct labour cost and variable production

Ø 量差：direct material usage variance, direct labour efficiency

Ø 价差：direct material price variances, direct labour rate variances

Over/under absorbed Fixed production OH total variances

Efficiency variance Capacity variance

1,100 units of product E should take (× 5 hours) 5,500 hrs

Budgeted hours of work 5,000 hrs

Costs are, however, only one factor which contribute to the

Sales = Sales volume × Selling price

The selling price variance is a measure of the effect on expected

Suppose that the standard selling price of product X is $15. Actual

The sales volume variance is the difference between the actual

Suppose that a company budgets to sell 8,000 units of product J for

Budgeted sales volume 8,000 units

Actual profit 24,100

Standard profit on actual sales for the period was $120,000.

Two main differences between the variances calculated in an AC

A company calculates the following under a standard absorption

I. The sales volume margin variance

If a company changed to a standard marginal costing system,

What was the actual contribution for last month?

Rather than being given actual data and asked to calculate

Ø Sales variances: selling price variance and sales volume

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