Standard Costing

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 Standard

Standards are benchmarks or “norms”

for measuring performance. Two types
of standards are commonly used.

Quantity standards Cost (price)

specify how much of an standards specify
input should be used to how much should be
make a product or paid for each unit
provide a service. of the input.

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 Standard Costs

An estimated or pre-determined cost of producing a good

or service, under normal conditions.

It is chosen to serve as a benchmark in standard costing /

budgetary control system. It is a budget for production of
one unit of product or service.

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 Standard Costs

Deviations from standard deemed significant

are brought to the attention of management, a
practice known as management by exception.

Standard
Amount

Direct
Material
Direct Manufacturing
Labor Overhead

Type of Cost
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 Standard Costs
It is a cost accounting technique for cost control
where standard costs are determined and compared with
actual costs, to initiate corrective action.

A management tool to facilitate management by exception.

Steps in
Standard
Costing
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 Steps in Standard Costs

Set the standard cost

A standard quantity is predetermined & standard price per

unit is estimated.
Budgeted cost is calculated by using standard cost.

•Record the actual cost

Record actual quantity & cost incurred giving full details.

Variance Analysis
Comparison of actual cost with budgeted cost.

Variance is used in controlling cost.

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 Steps in Standard Costs

Variance Analysis
Take suitable corrective action.

Fix responsibilities to ensure compliance.

Create effective control system.

Reset the standard / budget, if required.

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 Types of Standards
1. Ideal Standards:

•An ideal standard is one that could be achieved only under

perfect operating conditions.
•It makes no allowances for normal losses, machine breakdowns
or idle time.
•Ideal standards are not achievable standards, apart from in very
short run and are therefore of little use for control where their
use could be very demotivating for employees.

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2. Normal / Practical / Attainable Standards:
• What could be achieved with a reasonable level of effort
under normal operating conditions. They include an
allowance for normal losses, machine breakdowns,
maintenance and idle time.

• They are good for control as they provide motivation by

giving employees realistic but achievable efficiency targets.

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• Basic standards is established for use over a long period from
which a current standard can be developed.

• Such standards do not change from year to year.

• Basic Standards represent a fixed base.

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 • Current Standard: the level of attainment that is
currently being achieved.
• The disadvantage is that they do not attempt to
improve on current levels of efficiency or cost.

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 In setting standards, three aspects should be kept in mind:
 their value for control

 their motivational effect

 their usefulness for planning purposes.

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Standard Costing
Standard costing is an accounting system which includes all or some of
following features:

(i)Estimates / budgets are prepared on pre-determined basis.

(ii)Differences between Actual costs of goods produced and Standard costs are
investigated (variance analysis).
(iii)Recording costs in ledgers based on standards.

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 Setting Standards

Accountants, engineers, purchasing

agents, and production managers
combine efforts to set standards that encourage
efficient future production.

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 Setting Standards

Should we use I recommend using practical

ideal standards that standards that are currently
require employees to attainable with reasonable and
work at 100 percent efficient effort.
peak efficiency?

Engineer Managerial
Accountant
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 Setting Direct Material Standards

Price Quantity
Standards Standards

Final, delivered Summarized in

cost of materials, a Bill of Materials.
net of discounts.

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 Setting Direct Labor Standards

Rate Time
Standards Standards

Often a single Use time and

rate is used that reflects motion studies for
the mix of wages earned. each labor operation.

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 Setting Variable Overhead Standards

Rate Activity
Standards Standards

The rate is the The activity is the

variable portion of the base used to calculate
predetermined overhead the predetermined
rate. overhead.

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 Standard Cost Card

A standard cost card for one unit

of product look like this:
A B AxB
Standard Standard Standard
Quantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. $ 4.00 per lb. $ 12.00
Direct labor 2.5 hours 14.00 per hour 35.00
Variable mfg. overhead 2.5 hours 3.00 per hour 7.50
Total standard unit cost $ 54.50

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 Standards vs. Budgets

Are standards the A standard is a per

same as budgets? unit cost.
A budget is set for Standards are often
used when
total costs. preparing budgets.

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 Price and Quantity Standards

Price and and quantity standards are

determined separately for two reasons:

 The purchasing manager is responsible for raw

material purchase prices and the production manager
is responsible for the quantity of raw material used.

 The buying and using activities occur at different times.

Raw material purchases may be held in inventory for a
period of time before being used in production.
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 Advantages of Standard Costs

Management by Promotes economy

exception and efficiency

Advantages
Enhances
Simplified responsibility
bookkeeping accounting

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Potential Problems with Standard Costs

Emphasizing standards Favorable

may exclude other variances may
important objectives. be misinterpreted.
Potential
Problems
Standard cost Emphasis on
reports may negative may
not be timely. impact morale.

Continuous
Invalid assumptions improvement may
about relationship be more important
between labor than meeting standards.
cost and output.
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 LO 1

QUANTITY STANDARDS: Definition

The amount of input that should

be used per unit of output.

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 LO 1

PRICE STANDARDS: Definition

The amount that should be paid

for the quantity of input used.

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 LO 1

Where do quantity & price

standards come from?

Quantity
Quantity standards come from
experience, studies, & personnel.
Price
Price standards come from
operations, purchasing, personnel,
& accounting.

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 LO 2

STANDARD COST PER UNIT:

Definition

Is the sum of standards costs for

direct materials (DM), direct
labor (DL), & overhead.

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 Test Your Understanding 1
Lunches Ltd makes sandwiches for sale to offices & over the counter.
Contents of their 'spicy meat special' are as follows:
2 slices bread 88 grams spicy meat mix
44 grams grated cheese 20 grams pickle

It is company policy to guarantee cooked weight of meat to be a

minimum of 88 grams. There is a 20% loss of weight during cooking.
Losses due to accidental damage, dropped sandwiches, etc. are
estimated to be 5% of completed sandwiches.
•Anticipated prices of raw materials for coming period are:
•Bread Rs 54 per loaf of 18 useable slices
•Spicy meat mix (uncooked) Rs 320 per kg
•Cheese Rs 300 per kg Pickle Rs 160 per kg
•Prepare standard ingredients cost of one sandwich.

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 Test Your Understanding 2

The fastest time in which a batch of 20 sandwiches has

been made was 32 minutes, with no hold-ups.
However, work studies have shown that, on average about
8% of sandwich makers' time is non-productive, and that, in
addition to this set-up time (getting ingredients together
etc.) is 2 minutes.
If sandwich-makers are paid Rs 45 per hour, what is
attainable standard labour cost of one sandwich?

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