BASIC CONCEPTS OF STANDARD COSTING

DEFINITION OF STANDARD

• Standard is a measure of acceptable performance, which is used by management as a

guide in making decisions.
• Standards are benchmarks or norm, serves as a criteria in determining whether a
particular performance is acceptable or not.

DEFINITION OF STANDARD COST

• Standard cost is a target cost or the should be cost, but remember that the target cost is
considered as manufacturing cost, so that standard cost is being set to direct materials,
direct labor and factory overhead.
• Standards cost is also considered as planned or pre-determined cost, because it is being
set before the production of goods.

USES OF STANDARD COSTS

1. Planning and Controlling Costs

2. Instrument of Coordination
3. Measurement of Performance
4. Price Setting
5. Inventory Valuation
6. Motivating Employees
7. Budget Preparation

ADVANTAGES AND DISADVANTAGES OF STANDARD COSTING

Advantages:

1. Standard cost is a key element of management by exception.

- Exception means deviation or difference but in terms of standard costing, we called it
variances, meaning management investigating variances with significant impact to the
company regardless of their nature either favorable or unfavorable.
2. Standard costs promotes economy and efficiency among employees.
3. Standard costs can simplified bookkeeping.

Disadvantages:

1. It is time consuming as well as costly.

2. It has difficulty in determining which variance is material.
3. Other useful information are unnoticed because the focus is on variances.
4. Management may not report or cover-up unfavorable variances.

USERS OF STANDARD COSTING

1. Manufacturing Business
2. Service Business
3. Non-profit Organizations
3 TYPES OF STANDARDS

1. Basic Standards
- Standards that remain unchanged as years passes by.

2. Ideal Standards
– attainable only under the best circumstances.
- also called as Theoretical Standard, Maximum-Efficiency Standard or Perfect Standard,
because it requires perfect performance.
- For example: No allowance for machine breakdown, work interruption, wastages, etc.

3. Practical Standards
- Tight but attainable standard. These standards are attainable under normal through highly
efficient operating conditions.
- This is also called as Currently Attainable Standards.
- They allow for normal machine downtime, and employee rest-periods, normal wastages and
work interruptions.

STANDARD SETTING

Standard Cost / Unit

Quantity Price
Standards Standards

❑ Should reflect the units of ❑ Should reflect the final, delivered cost
materials required to produce one of materials, net of any discount and
unit of product. inclusive of allowances for handling
costs.
❑ It applies to all input factors,
considered as the
❑ This is also considered as
manufacturing costs such as
standard price per input factor.
direct materials, direct labor
and factory overhead.
❑ Based on the concepts
❑ Based on the concepts provided, it derived the
provided, it derived the formula:
formula:

INPUT FACTOR Cost

Unit INPUT FACTOR
 PRICE STANDARDS
- It consists of INVENTORIABLE COSTS.
- Just take note in terms of unit of measurement, because price standards and quantity
standards must have the same unit of measurement.
- For example: Price Standards is stated in costs per hour but quantity standards is in
minutes per unit, in this case, it must be converted its either in both minutes or hours,
as long as, they have the same unit of measurement.

QUANTITY STANDARDS

1. BILL OF MATERIALS

- A bill of materials (BOM) is an extensive list of raw materials, components, and

instructions required to construct, manufacture, or repair a product or service.
- It involves unit of measurements stated in net amount.
- It is already net of the following factors:
- Spillage and Evaporation – Only applicable to direct materials
- Rejection – Applicable for direct materials and labor (finished goods)
- Idle Time – Only applicable to direct labor
- But, what we need in computing the quantity standard is the gross amount.
PROBLEM 1

Martin Company manufactures a powerful cleaning solvent. The main ingredient in the solvent is a
raw material called Echol. Information concerning the purchase and use of Echol follows:
Purchase of Echol:
Echol is purchased in 15-gallon containers at a cost of 115 per container. A discount of 2% is offered
by the supplier for payment within 10 days, and Martin Company takes all discounts. Shipping costs,
which Martin Company must pay, amount to 130 for an average shipment of 100 15-gallon containers
of Echol.
Use of Echol The bill of materials calls for 7.6 quarts of Echol per bottle of cleaning solvent. (Each
gallon contains four quarts.) About 5% of all Echol used is lost through spillage or evaporation (the
7.6 quarts above is the actual content per bottle). In addition, statistical analysis has shown that
every 41st bottle is rejected at final inspection because of contamination.

Required:

1. Compute the standard purchase price for one quart of Echol.

2. Compute the standard quantity of Echol (in quarts) per salable bottle of cleaning solvent.
3. Using the data from (1) and (2) above, prepare a standard cost card showing the standard cost of
Echol per bottle of cleaning solvent.

Solution:

1. Price Standards:

= [(115 x 98%) + 1.30]

= P114 per container
= P114 ÷ 15 gallons
= P7.6 per gallon
= P7.6 ÷ 4 quarts
= 1.90 per quart

2. Quantity Standards:

= [(7.6 ÷ 95%) x 41/40]

= 8.20 quarts

3. Standard Cost per unit:

= PS x QS
= 1.90 x 8.20
= 15.58
Notes:

1. Price Standards:
a. Cost of Echol = P115 per container.
b. Discount = 2%
c. Freight costs = 1.30, remember that freight costs of P130 is an average shipment of 100
containers, what we need is the freight costs per container so that, we arrived at 1.30
simply dividing P130 by 100 containers.
d. Remember the basic concepts in terms of the unit of measurement between price standard
and quantity standard, which is stated in the bill of materials calls for 7.6 quarts of Echol.
In this case, the price standard stated in container must be converted into quarts.
e. In connection with that, it is explicitly stated in the problem that every container contains
15 gallons and every gallon contains 4 quarts.

2. Quantity Standards:
a. Starting point: Amount stated in the Bill of Materials which is 7.6
b. Remember, the basic concept that the amount stated in the BOM is already a net amount
but what we need in computing the quantity standard is the gross amount.
In that case, it is explicitly stated in the problem, about 5% of all Echol used is lost through
spillage or evaporation, and statistical analysis has shown that every 41st bottle is rejected at final
inspection because of contamination. (41/40).

3. Standard Cost per unit:

a. Just remember the basic equation that SC/unit = PS x QS
PROBLEM 2

Danson Company is a chemical manufacturer that supplies various products to industrial users.
The company plans to introduce a new chemical solution, caned Nysap, for which it needs to develop
a standard product cost. The following information is available on the production of Nysap:

a. Nysap is made by combining a chemical compound (nyclyn) and a solution (salex), and boiling the
mixture. A 20% loss in volume occurs for both the salex and the nyclyn during boiling. After boiling,
the mixture consists of 9.6 liters of salex and 12 kilograms of nyclyn per 10-liter batch of Nysap.

b. After the boiling process is complete, the solution is cooled slightly before 5 kilograms of protet are
added per 10-liter batch of Nysap. The addition of the protet does not affect the total liquid volume.
The resulting solution is then bottled in 10-liter containers.

c. The finished product is highly unstable, and one 10-liter batch 1 out of six is rejected at final
inspection. Rejected batches have no commercial value and are thrown out.

d. It takes a worker 35 minutes to process one 10-liter batch of Nysap. Employees work an eight-
hour day, including one hour per day for rest breaks and cleanup.

Required:

1. Determine the standard quantity for each of the raw materials needed to produce an acceptable
10-liter batch of Nysap.
2. Determine the standard labor time allowed to produce an acceptable 10-liter batch of Nysap.
3. Assuming the following costs, prepare a standard cost card for direct materials and direct labor
for one acceptable 10-liter batch of Nysap:

Salex P1.50 per liter

Nyclyn 2.80 per kilogram
Protet 3.00 per kilogram
Direct labor costs 9.00 per hour

Solution:

Standard
Quantity Standard Price Standard
Cost/Unit

Salex (96 liters ÷ 80% x 6/5) = 14.40 liters 1.50 per liter 21.60

Nyclyn (12 kg. ÷ 80% x 6/5) = 18.00 kg. 2.80 per kg 50.40

Protet (5 kg x 6/5) = 6.00 kg. 3.00 per kg. 18.00

Direct (35/60 x 6/5 x 8/7 = 0.80 hrs. 9.00 per hour 7.20
Labor
Total: 97.20
Notes:

1. Salex
a. Amount = 9.6 liters, source: BOM, but remember this is a net amount.
b. Must be grossed up by the different factors:
- Spillage and Evaporation = 20% → 80%
- Rejection = 1 out of six is rejected at final inspection → 6/5

2. Nyclyn
a. Amount = 12 kilogram, source: BOM, but remember this is a net amount.
b. Must be grossed up by the different factors:
- Spillage and Evaporation = 20% → 80%
- Rejection = 1 out of six is rejected at final inspection → 6/5

3. Protet
a. Amount = 5 kilogram, source: BOM, but remember this is a net amount.
b. Must be grossed up by the different factors:
- No Spillage and Evaporation – remember that protet applied after the boiling process is
complete.
- Rejection = 1 out of six is rejected at final inspection → 6/5

4. Direct labor
a. Amount = 35 minutes to process one 10-liter batch of Nysap, convert it into hour
= 35/60
a. b. Must be grossed up by the different factors:
- No Spillage and Evaporation – this is only applicable to direct materials.
- Rejection = 1 out of six is rejected at final inspection → 6/5
- Idle Time = Employees work an eight-hour day, including one hour per day for rest breaks and
cleanup → 8/7
BASIC CONCEPTS OF VARIANCE ANALYSIS
❑ ACTUAL COST ≠ STANDARD COST → VARIANCE
❑ ACTUAL COST > STANDARD COST → UF VARIANCE OR DEBIT VARIANCE (+ COGS)
❑ ACTUAL COST < STANDARD COST → F VARIANCE OR CREDIT VARIANCE ( - COGS)

DIRECT MATERIAL VARIANCES – QAAS PASS – 3 Line Template

Q – Quantity
P – Price _________________________
A – Actual
S – Standard
Price/Rate/Spending Variance

SQ
Quantity/Usage/Efficiency Variance
= Actual production x
Standard quantity per
unit

REMEMBER:

The template for the Direct Material Variances, can be illustrated into 3 to 4 lines. The template
provided above is a 3-line Template wherein this is only applicable if the Actual Quantity Purchased
is equal to Actual Quantity Used.

TEMPLATE EXPLANATION:

The first line is the Actual Cost (AQ x AP) and the third line is the Standard Cost (SQ x SP),
meaning, Total Variance is the difference between the Actual Cost and Standard Cost. And when
the Actual Cost is greater than the Standard Cost, it will be resulted to Unfavorable Variance. On
the other hand, if the Actual Cost is less than the Standard Cost it will be resulted to Favorable
Variance.
And, since we are applying the concept of Management by Exception, the second line in the
template was created (AQ x SP), in which the purpose of that is to segregate the total variance into
price and quantity.

GENERAL VARIANCE ANALYSIS MODEL

PRICE COMPONENT (PRICE/RATE/SPENDING VARIANCE)

- The difference between the actual cost of inputs and cost expected to be paid for inputs.

QUANTITY COMPONENT (QUANTITY/USAGE/EFFICIENCY VARIANCE)

- It shows the efficiency of results or the relationship of input to output.
 DIRECT MATERIAL VARIANCES – QAAS PASS – 4 Line Template
The template provided below is considered the 4 – Line Template, the purpose of this is to guide us
in computing the price and quantity variances when the Actual Quantity Purchased is not equal to
the Actual Quantity Used.

Q – Quantity
P – Price _________________________
A – Actual
S – Standard

Price/Rate/Spending Variance

SQ
Quantity/Usage/Efficiency Variance
= Actual production x
Standard quantity per
unit

TAKE NOTE:

The first two lines in the template are also considered as the Price Variance, but remember the
Actual Quantity Purchased must be used in computing the variance, this is in conformance of the
basic concept that Price variance must be computed at the time of purchased of materials or
inventories.

On the other hand, the third and fourth line will be resulted to the Quantity Variance, in which the
Actual Quantity Used serves as the basis in computing the variance.

This concept is highlighted in computing the Direct Material Variances, because in actual operation,
the entity purchased materials for future production.
 DIRECT LABOR VARIANCES – HAAS RASS

H – Hours
R – Rate _________________________
A – Actual
S – Standard

Price/Rate/Spending Variance

SQ
= Actual production x
Standard hours per Quantity/Usage/Efficiency Variance
unit

EXPLANATION:

As you noticed, based on the template provided for the Direct labor variances that it is almost the
same with the 3 –line Template for Direct material variances, just the terms quantity and price was
replaced by hours and rate.

Also, always remember that the 4 – line template provided for the direct material variances is not
applicable in computing the Direct labor variances, because the entity will not hire people if they
have no purpose or uses in the business operation.

Take note also, that the terms provided for the variances are all interchangeable this is serves as
your future reference when you encounter some of the terms from other authors, specifically foreign
authors.
BASIC PROBLEMS:

Q P V
A 11,200 S 4 44800
S 12,000 S 4 48000 -3200 favorable

SQ = 6000 x 2

H R V
A 4,000 A 12.8 51200
A 4,000 S 12 48000 3200 unfavorable
S 4,800 S 12 57600 -9600 favorable
-6400 favorable
SQ = 2,400 x 2

H R V
A 4,000 A 4.9 19600
A 4,000 S 5 20000 -400 favorable
BASIC PROBLEMS:

H R V
A 8,400 A 19 159,600
A 8,400 S 18 151200 8,400 unfavorable

MV LV OV TV
4,000 4,000 2,000 10,000

Q P V
A 3,150 S 6 18900
S 3,000 S 6 18000 900 unfavorable

Shortcut: 900/150 = 6
BASIC PROBLEMS:

Q P V
A 40,000 A 9 360000
A 40,000 S 11 440,000 -80,000 favorable

Q P V
A 2,000 A 6.6 13200
A 2,000 S 6 12000 1,200 U 12
S 1,800 S 6 10800 1200 U 13
2,400 U 14
 Q P V
A 4,200 A 2.4 10,080
A 4,200 S 2.5 10500 -420 F

Click the links for additional quizzers:

https://www.harpercollege.edu/academic-support/tutoring/subjects/Chapter%2011%20Questions.pdf

https://www.accountingcoach.com/standard-costing/quiz

https://dokumen.tips/documents/chapter-11-quiz-informations.html
MIX AND YIELD VARIANCES

Mixed and yield variance occur when the company used two or more types of raw materials.

MIX
QUANTITY / EFFECIENCY
VARIANCE
YIELD

The mix and yield variances (output variance) are the sub-variances of quantity variances if direct
materials and efficiency variance if direct labor. Remember, that this is also an application of the
concept of Management by Exception, because you are investigating further the reason behind the
difference in quantity and hours.

TEMPLATE – MIX AND YIELD VARIANCE

Q – Quantity
P – Price
A – Actual _________________________
S – Standard
WAS – Weighted
Average Standard Price/Rate/Spending Variance

Mix Variance
SQ
= Actual production
x Standard hours per Yield /Output/Production Variance
unit

TAKE NOTE:
Mix Variance + Yield Variance = Quantity/ Efficiency Variance
 PROBLEM 1:
Samson Candle Co. manufactures candles in various shapes, sizes, colors and scents.
Depending on the orders received, not all candles require the same amount of color, dye or
scent materials. Yields also vary, depending upon the usage of beeswax or synthetic wax.
Standard ingredients for 1,000 pounds of candles are:
________________________________________________________________________
Input: Standard Mix Standard Cost Per Pound
Beeswax 200 lbs. 1.00
Synthetic wax 840 lbs. 0.20
Colors 7 lbs. 2.00
Scents 3 lbs. 6.00
Totals 1,050 lbs. 9.20
________________________________________________________________________
Standard Output 1,000 lbs.

Price variances are charged off at the time of purchase. During January, the company was
busy manufacturing red candles for Valentines Day. Actual production then was:

Input: In pounds:
Beeswax 4,100
Synthetic wax 13,800
Colors 2,200
Scents 60
Totals 20,160
Standard Output 18,500

Q P Total VARIANCE
Individual A A
Computation A S 11,620
3,940 (UF)Mixed Variance
A 20,160 WAS 0.381 7,680
S S 7,400 280 (UF) Yield Variance

AQ x SP = Individual Computation
AQ SP
Beeswax 4,100 1.00 4,100.00
Synthetic wax 13,800 0.20 2,760.00
Colors 2,200 2.00 4,400.00
Scents 60 6.00 360.00
20,160 11,620.00

Weighted Average Standard Price = Total Standard Cost Per Unit / Total Standard Quantity
Remember:
Total standard quantity = Standard Mix
Total standard cost per unit = Quantity standards x Price standard or simply:
(Standard Mix x Standard cost per pound)
 Application:

Standard Standard Cost Total Standard

I nput:
Mix Per Pound Cost per unit

Beeswax 200 1 200

Synthetic wax 840 0.2 168
Colors 7 2 14
Scents 3 6 18
1050 400

Yield Variance = Total standard cost / Standard yield x Actual Yield

400 / 1000 x 18500 = 7,400

OVERHEAD VARIANCES

Approaches:
FOUR-WAY

ONE-WAY TWO-WAY THREE-WAY

Fixed Overhead
(ConVo) (SEV)
Under/Over Spending Variance
Applied Controllable Spending
Overhead Variable Overhead
Spending Variance
Volume Efficiency
Efficiency
Volume
Volume

-First - It involves the - The controllable - The spending variance

variance analysis of the two variance is separated is separated into two,
into two, namely; namely; fixed and
analysis for variances namely; spending and efficiency variable overhead
overhead. controllable variance in which the spending variance in
-The variance and management can which the management
comparison volume variance properly identify the can properly identify
between the considered as the reason for the the reason for the
variances. variances.
actual capacity variance - Either the management
overhead that depends on are overspending in
cost and customer demands terms of amounts as
applied or through market well as large amounts
standard conditions, so that of working hours were
used as cost driver.
overhead it is least And, in terms of
cost. controllable capacity.
variance.
OVERHEAD VARIANCES

Are the different approaches in determining overhead variances are interconnected to each
other?
- Yes, they are interconnected to each other, in such it created different types of variances in
order to investigate further the reasons for the variance and not an independent computation.

What is the main purpose of the different approaches or analysis in identifying the overhead
variances?
- The main purpose of the different approaches is to properly investigate the reasons of the
variances.

TWO-WAY ANALYSIS

Actual OH ( Variable + Fixed Overhead) xxx

BASH: (Budgeted Allowance at Standard Hours Controllable
Budg. FOH xxx
(Standard hours x Std. VOH Rate) xxx xxx
Volume
Applied (Standard hours x Standard Rate) xxx

Standard Rate = V + F Overhead

THREE-WAY ANALYSIS

Actual OH ( Variable + Fixed Overhead) xxx

BAAH: (Budgeted Allowance at Actual Hours) Spending

Budg. FOH xxx
(Actual Hours x Std. VOH Rate) xxx xxx

BASH: (Budgeted Allowance at Standard Hours Efficiency

Budg. FOH xxx
(Standard hours x Std. VOH Rate) xxx xxx
Volume
Applied (Standard hours x Standard Rate) xxx

Standard Rate = V + F Overhead

FOUR-WAY ANALYSIS

VARIABLE OVERHEAD

AH x AR = xxx
Spending
AH x SR = xxx
Efficiency
SH x SR = xxx

FIXED OVERHEAD

Actual FOH xxx

Spending
Budg. FOH (NC x SR) xxx
Volume
Applied FOH (SH x SR) xxx

FRAMEWORK:

A. If the problem is silent, use the four-way analysis, because among the 3 approaches, this is
the most detailed approach in computing overhead variances.

But it involves limitation:

1. If the overhead cost are non-separable into variable and fixed, automatic you
cannot use the four-way analysis, you can use either of the two available approaches.