### Week 2. STANDARD COSTING

```WEEK 2
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Define standard cost
Explain how standard are set
Compute the standard cost of actual or
equivalent units produced
Compute standard cost variances for
materials, labor and FOH
Is the predetermined cost of manufacturing a
single unit or a specific quantity of product
under current or anticipated operating
conditions
( Carter and Usry, 2002)
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Established budgets
Controlling costs by motivating employee
and measuring operating efficiency
Simplifying costing procedures and
expediting cost reports
Assigning cost to materials, work in progress
and finished good in inventory
Establish contract bids and setting sales price
1. Material Standard and Variance:
a. Material purchase price variance
b. Material price usage variance
c. Material inventory variance
d. Material quantity (or usage) variance
2. Labor Standard and Variance
a. Labor rate (wage or cost) variance
b. Labor efficiency variance
3. Factory Overhead Standard and Variance
a. Overall or net FOH Variance
b. Two-variance method
c. Three-variance method
d. Four-variance method
a.
Material purchase price variance =
( Qt x C.act ) – ( Qt x C. st ) or (C.act – C.st) Qt
C.act > C.st = Unfavorable
C.act < C.st = Favorable
b. Material price usage variance =
( Qt. used x C.act ) – ( Qt. used x C. st )
or (C.act – C.st) Qt.used
C.act > C.st = Unfavorable
C.act < C.st = Favorable
c. Material inventory variance =
( Qt. purchased x C.st ) – ( Qt. used x C. st )
or (Qt. purchased – Qt.used) C.st
Qt. purchased > Qt. used = Unfavorable
Qt. purchased < Qt. used = Favorable
d. Material quantity (or usage) variance =
( Qt. used x C.st ) – ( Qt. st x C. st )
or (Qt.used – Qt.st) C.st
Qt. used > Qt. st = Unfavorable
Qt. used < Qt. st = Favorable
a.
Labor rate (wage or cost) variance =
( H. act x R. act ) - ( H. act x R. st )
or ( R.act – R.st) H.act
R. act > R. st = Unfavorable
R. act < R. st = Favorable
b. Labor efficiency variance =
( H. act x R. st ) – ( H. st x R. st ) or
(H.act – H.st) R.st
H. act > H. st = Unfavorable
H. act < H. st = Favorable
a.
Overall or net FOH Variance =
FOH. act – FOH. st
FOH. act > FOH. st = Unfavorable
FOH. Act < FOH. st = Favorable
b. Two-variance method
1. Controllable Variance =
FOH.act – ( FOH.var +FOH.fx)
FOH.act > ( FOH.var +FOH.fx) = Unfavorable
FOH.act < ( FOH.var +FOH.fx) = Favorable
2. Volume Variance =
( FOH.var +FOH.fx) – FOH.wip.st
( FOH.var +FOH.fx) > FOH.wip.st = UF
( FOH.var +FOH.fx) < FOH.wip.st = F
Controllable variance + Volume variance =
Overall or net FOH Variance
3. Three – variance Methods
a. Spending Variance =
FOH.act – (FOH.var1+FOH.fx)
FOH.act > (FOH.var1+FOH.fx) = UF
FOH.act < (FOH.var1+FOH.fx) = F
Notes: FOH.var1 = on actual hours
b. Variable Efficiency Variance =
(FOH.var1+FOH.fx) - ( FOH.var +FOH.fx)
(FOH.var1+FOH.fx) > ( FOH.var +FOH.fx) = UF
(FOH.var1+FOH.fx) < ( FOH.var +FOH.fx) = F
c. Volume Variance
Spending var + Variable efficiency var +
Volume var = Overall FOH variance
4. Four-Variance Method
a. Fixed efficiency variance
(H.act x FOH.fx.r) – (H.st x FOH.fx.r)
(H.act x FOH.fx.r) > (H.st x FOH.fx.r)= UF
(H.act x FOH.fx.r) < (H.st x FOH.fx.r) = F
FOH.fx.r = Fixed FOH rate
b. Idle Capacity Variance =
(FOH.var1+FOH.fx) – (H.act x FOH.r)
(FOH.var1+FOH.fx) > (H.act x FOH.r) = UF
(FOH.var1+FOH.fx) < (H.act x FOH.r) = F
c. Spending Variance
d. Variable efficiency Variance
Fixed Efficiency Var + Idle Cap Var + Spending
Var + Variable eff.var = Overall FOH var
Carter,W & Usry, M, 2002, Cost Accounting, 13th
Edition, Thompson Learning
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