What is Standard Costing? definition, need and process

The template provided in Exhibit 8-3 can be used to compute the total direct material variance, direct material quantity variance, and direct material price variance. The total variances can be calculated in the last line of the top section of the template by subtracting the actual amounts from the standard amounts projected. The standard quantity allowed is 37,500 hours less the actual hours worked of 45,000 hours equals a variance of (7,500) direct labor hours. This variance is unfavorable because the actual hours worked exceed the standard hours allowed. The overall rate variance is favorable since the actual rate incurred was lower than the standard rate allowed. Brad spent $9,000 more on variable manufacturing overhead than he projected.

Direct Labor

The total direct labor variance standard costing system can be calculated in the last line of the top section by subtracting the actual amounts from the standard amounts. The standard quantity allowed of 37,500 direct labor hours less the actual hours worked of 45,000 hours yields a variance of (7,500) direct labor hours. The total direct labor variance is the total standard labor costs allowed of $675,000 less the actual amount paid for direct labor of $832,500, which is $(157,500) unfavorable.

• To incorporate future expectations into current planning and control processes.
• Any difference between actual labor costs and the standard indicates efficiency or inefficiency.
• The standard quantity allowed of 37,500 direct labor hours less the actual hours worked of 45,000 hours yields a variance of (7,500) direct labor hours.
• The standard cost in Viindoo software is typically calculated by taking into account the expected costs of the different components that make up a product or service.
• The cost accountant may periodically change the standard costs to bring them into closer alignment with actual costs.

Classification and Codifications of Accounts:

• Advantage – It shows changes in trend of price and efficiency from year to year.
• Activity-based costing looks at the activities that go into making a product and assigns costs to those activities rather than the product itself.
• It may be influenced by regular spares and material supply for production, retaining optimum fund level in material stores and stocks.
• It’s important to include all related costs of manufacturing the product when you calculate product cost.

If the amount applied to the good output is greater than the budgeted amount of fixed manufacturing overhead, the fixed manufacturing overhead volume variance is favorable. Basic standards are standards established for use within a business over a long period of time. This basic standards can be used in the preparation of current standards as well. The advantage of basic standards is that they can provide better comparisons within the business, allowing present data to be easily comparable to past data. Performance standards are typically used in order to set efficiency targets of business.

• Indirect labor is labor used in the production process that is not easily and economically traced to a particular product.
• In the absence of standard costs, actual costs are compared with the actual costs incurred in a previous period.
• Consequently, the reports’ information may be so stale that it is almost useless.
• Workers often did not know how many hours they would work in a week when they reported on Monday morning because time-keeping systems (based in time book) were rudimentary.

Video Illustration 8-2: Computing direct materials variances

It is called the predetermined cost, estimated cost, expected cost, or the budgeted cost. To illustrate standard costs variance analysis for direct materials, refer to the data for NoTuggins in Exhibit 8-1 above. The direct material standards for one unit of NoTuggins are 4.2 feet of flat nylon cord that costs $0.50 per foot for a total Grocery Store Accounting direct material cost per unit of $2.10. During the period, 600,000 feet of flat nylon cord costing $330,000 were purchased and used.

Important While Making Budgets:

This result gross vs net is interpreted as the organization paid $30,000 more for materials used in production than they planned. This direct materials price variance could indicate a purchasing issue, such as the purchasing department paying more than the agreed-upon amount (purchase order amount). Or the cause could be a supplier or sourcing issue in which the material can be sourced cheaper elsewhere.