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STANDARD COSTING

WEEK 2. STANDARD COSTING. LEARNING OBJECTIVES. 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. STANDARD COST.

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STANDARD COSTING

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  1. WEEK 2 STANDARD COSTING

  2. LEARNING OBJECTIVES • 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

  3. STANDARD COST 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)

  4. Standard Costs are used for: • 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

  5. Determining Standard Cost Variance 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

  6. 1. Material Standard and Variance • 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

  7. 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

  8. 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

  9. 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

  10. 2. Labor Standard and Variance • 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

  11. 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

  12. 3. Factory Overhead Standard and Variance • Overall or net FOH Variance = FOH. act – FOH. st FOH. act > FOH. st = Unfavorable FOH. Act < FOH. st = Favorable

  13. b. Two-variance method • Controllable Variance = FOH.act – ( FOH.var +FOH.fx) FOH.act > ( FOH.var +FOH.fx) = Unfavorable FOH.act < ( FOH.var +FOH.fx) = Favorable

  14. 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

  15. 3. Three – variance Methods • 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

  16. 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

  17. c. Volume Variance Spending var + Variable efficiency var + Volume var = Overall FOH variance

  18. 4. Four-Variance Method • 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

  19. 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

  20. c. Spending Variance d. Variable efficiency Variance Fixed Efficiency Var + Idle Cap Var + Spending Var + Variable eff.var = Overall FOH var

  21. REFERENCE Carter,W& Usry, M, 2002, Cost Accounting, 13th Edition, Thompson Learning

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