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Chapter 10:
Standard Costing and Performance Measures
for Today’s Manufacturing Environment
Standard Costing
Direct-material price and quantity variances
Material purchase price variances and material usage variances
Direct-labor rate and efficiency variances
Standard Costing and Variances
Standard Costing:
a predetermined cost for the production of goods or services,
which serve as a benchmark against which to compare the actual
Cost Variance:
difference between actual and standard cost.
Favorable Variance:
when the variance between standard and actual costs are good for
the company.
Unfavorable Variance: when the variance between standard and actual costs are not good
for the company.
Variance Analysis:
1- from a product costing perspective, to understand what is
causing the variances.
2- from a managerial control and responsibility perspective to
provide the proper incentive for managers
Standard Costing and Variances
Standard Direct
Material Quantity:
total amount of material normally required
to produce a finished product (including
allowances for waste and inefficiency.
Standard Direct
Material Price:
total delivered cost, after subtracting any
purchase discounts.
Standard Direct
Labor Quantity:
number of hours normally needed to
manufacture one unit or product
Standard Direct
Labor Rate:
total hourly cost of compensation, including
fringe benefits.
Standard Costing and Variances: Definitions
SP =
Standard price of input
SQ = Standard quantity input units/outputs (e.g. four tires/car)
SQA = Standard quantity allowed for acutal units produced
(SQ*units produced)
AQP = Actual quantity purchased
AQU = Actual quantity used (produced)
AP =
Actual price
Direct Material Price Variance = (AP-SP) * AQP
Direct Material Quantity Variance = (AQU-SQA)*SP
Direct Materials Budget Variance = Price variance - Quantity Variance
(These formulas apply similarly for direct labor)
Variance Analysis for Managerial Control
Total Costs are broken down for Analysis
Direct Materials
Direct Labor
Variable Overhead
Fixed Overhead
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