STANDARD COSTING

Prepared By:
Sitti Syamsiar Muharram
Senior Lecturer
Faculty of Accountancy
UiTM Sabah
Learning Objectives
 define standard costing
 types of standard
 determination of standard cost
 define variance analysis
 calculate the variances
 state reasons for variances
 limitations of standard costing
Definition of Standard Costing
 It is a technique which establishes predetermined
estimated of the cost of products and services and then
compares these predetermined costs with actual costs as
they are incurred
 The predetermined costs are known as STANDARD
COSTS and the difference between the standard cost
and actual cost is known as a VARIANCE.
 The process by which the total difference between
actual cost and standard cost is broken down into its
different elements is known as VARIANCE ANALYSIS.
Types of Standards
Types Description
Basic Standards Long term standards which would remain unchanged
over the years

Ideal Standards Based on the possible operating condition – no

breakdowns, no material wastage, no stoppages or
idle time, in short, perfect efficiency

Attainable Standard based on efficient (but not perfect) operating

conditions – would include allowances for normal
material losses, realistic allowances, machine
breakdown etc
Current Standard Set for use over limited period to reflect current
condition
Determination of Standard Cost
 Reference : Dec2015 (Question 3 (B) (a)

Standard cost card for NT03

RM RM
Direct material: DMS (4 units X RM5/unit) 20
Direct labour : 2 hours X RM10/hour 20
Prime Cost 40
Add: Production Overhead
Variable (RM4/hour X 2 hours) 8
Fixed (RM2/hour X 2 hours) 4 12
Production Cost 52
Variance Analysis
 Variance arises from differences between standard
and actual quantities and/ or differences between
standard and actual prices.
 The only purpose of variance analysis is to provide
practical pointers to the causes of off-standard
performance so that management can improve
operations, increase efficiency, utilize resources
more effectively and reduce costs
 Variance Analysis Formula
Variance Formula

Direct Material Price = (Standard Price– Actual Price) Actual Quantity

(*Note: Use purchase quantity if it is given)

Direct Material Usage = (Standard Quantity of actual production – Actual

Quantity Used) Standard Price

Direct Material Cost = Direct Material Price Variance + Direct Material

Usage Variance

Direct Labour Rate = (Standard Rate– Actual Rate) Actual Hours Paid

Direct Labour Efficiency = (Standard Hours of actual production – Actual

Hours Worked) Standard Rate

Direct Labour Cost = Direct Labour rate Variance + Direct Labour

Efficiency Variance
 Variance Analysis Formula (Continued)

Variance Formula

Variable O/head = Actual VOH – (Standard VOH X Actual Hours)

(VOH) Expenditure
Variable O/head = (SH – AH) Standard VOH
(VOH) Efficiency
Fixed O/head = (Budgeted FOH – Actual FOH)
Expenditure

Fixed O/head (FOH) = (Budgeted Volume – Actual Volume) FOH Absorption

Volume Rate
Fixed O/head (FOH) = (Actual Hours – Budgeted Hours) FOH Absorption Rate
Capacity
Sales Price Variance = (Actual SP – Standard SP) Actual Volume

Sales Margin = (Actual Volume – Standard Volume) Standard Margin

Volume
 The possible reasons/causes for
Variance
Material • paying higher/lower prices than planned
Price • Buying lower or higher quality than planned

Material • greater/lower yield from material than planned

Usage • Greater/ lower rate of scrap than anticipated

• higher rates being paid than planned due to

Labour Rate wage award
• higher /lower grade of worker being used than
planned

Labour • use of incorrect grade of labour

• incorrect materials and /or machine
Efficiency problems
 ADVANTAGES
 The standards serve as targets and is
used in performance evaluation and
cost control – easier to determine
causes of deviations (variance) and
the corrective actions required
 Increase cost awareness among
employees as it forces attention on
costs and can lead to efficient use of
resources
 It is important information for policy
formation, budgeting and profit
planning
 A practical and objective measure of
performance – quantitative
information, no possibility of
misinterpretation and disagreement
when comparisons are made between
actual and standard information
LIMITATIONS
 Can only be applied in mass
production factories because
standard is applicable when
product follows a uniform set of
process
 Standards are set by human
beings based on experience and
personal judgment and thus
subject to human error –
sometimes too high (where they
are difficult to achieve), too
lenient (too easily attainable
without any effort)
 The tendency for company to
retain particular set of standards
for longer than is necessary and
without re-modifying them
according to current situations
DISCUSSION QUESTION
 Jun2015 (Question 3)